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Price Fixing

PRICE FIXING

Price fixing is a conspiracy to artificially set prices for goods or services above or below the normal market rate. The U.S. Justice Department and the Federal Trade Commission (FTC) are the regulatory bodies responsible for determining whether companies are involved in price-fixing tactics. Both bodies have the ability to impose heavy fines on those companies found to be conspiring to fix prices.

The health-care industry has been scrutinized many times for price fixing, especially companies that manufacture vitamins. In 1995 the Justice Department fined three vitamin manufacturers a total of $750 million dollars for conspiring to fix vitamin prices. In addition, three vitamin distributors were also found guilty of price fixing that same year; their fines totaled $137 million for fixing the prices for a handful of popular vitamins, and they had to pay just over $1 billion to 1,000 corporate buyers of bulk vitamins, an amount reflecting overcharges during the years of the conspiracy.

Roche Holdings AG, which held 40 percent of the global vitamins market, agreed to pay a fine of $500 million and as of 1999 was the object of class-action lawsuits and investigation by the European Commission. Because of the various price-fixing scandals, Roche and other vitamin manufacturers could experience trouble when raising prices, or even stabilizing them. The price-fixing conspiracy lasted from 1990 through 1999 and affected vitamins A, B2, B5, C, E, and beta carotene. It also included vitamin premixes, which are added to breakfast cereals and other processed foods. The Justice Department's probe of price fixing continued as the government attempted to build cases against other vitamin manufacturers.

In 1996 the FTC and the Justice Department issued a revised Statement of Antitrust Enforcement Policy in Health Care. Under this new enforcement policy, the FTC and the Justice Department do not necessarily view joint agreements on price between previously competing providers as unlawful price fixing if the integrated delivery system is sufficiently integrated. The enforcement statement does not, however, provide solid guidance on what constitutes integration sufficient to permit joint negotiations. But, it does offer rules of thumb that will allow those involved in integrated delivery systems to better assess whether their joint pricing activities will raise antitrust concerns.

The securities industry was also closely scrutinized in the 1990s for price-fixing tactics. Investigations of the National Association of Securities Dealers and the NASDAQ market by the Department of Justice and the Securities and Exchange Commission during the latter part of the 1990s suggested that market makers colluded to fix prices and widen bid-ask spreads in attempts to increase dealers' profits at the expense of investors. At a minimum, market makers appeared to have adopted a quoting convention that could be viewed as anticompetitive behavior.

In understanding the experience of the U.S. securities market, it is important to consider what sorts of behavior are deemed anticompetitive. U.S. law on overt price fixing is clear: such behavior is illegal. In many cases, however, there is no explicit agreement to fix prices. Based on the Sherman Antitrust Act of 1890, U.S. courts developed the doctrine of conscious parallelism, which means, according to the U.S. Supreme Court, that no formal agreement is necessary to constitute an unlawful conspiracy.

Prior to 1996, market makers were allegedly engaged in many price-fixing scandals. In the late 1990s, the Justice Department found evidence that this practice was still occurring. For example, price quotes on Instinet, a private electronic market, differed from NASDAQ quotes for the same stocks.

In 1999 a California appeals court unanimously ruled that Arco and eight other oil companies were entitled to summary judgment in a price-fixing suit because there was no evidence of an agreement among them to fix prices or limit the supply of the cleaner-burning gasoline mandated by California. The appeals court agreed with the trial court's original conclusion that the evidence provided by the plaintiffs suggested not a complex tangled web, but nine defendants using all available information sources to determine capacity, supply, and pricing decisions. The court ruled that the companies involved made these pricing decisions because they wanted to maximize their own individual profits and were not concerned about the profits of their competitors.

Because price fixing occurs when companies conspire to set an artificially high price for a product, the nature of the food-additive industry makes it easy to create price-fixing cartels. Because of the small number of companies that are involved in the additive industry, it is easier for them to organize and maintain a price-fixing conspiracy. Price fixing of food additives is also easy because a small number of companies means that prices are negotiated via individual contracts, instead of in an open market.

The establishment in the 1990s of international trade associations, which are facilitated by the European Union, is another major cause of price fixing. These trade associations provide data about their industry to association members, including information on the exact size of the market and the growth rate of the industry. That information can lead to establishment of a cartel, because the companies can extrapolate pricing information.

Archer Daniels Midland was prosecuted in 1996 for illegally fixing the prices of lysine (which is used as a nutritional additive in livestock feed) and citric acid. During the time of the conspiracy, Archer Daniels Midland produced 54 percent of the lysine used in the United States and 95 percent of the world's. Annual sales of lysine were $330 million in the United States and $600 million worldwide.

The company pleaded guilty to fixing the price of lysine from 1992 to 1996, and the Justice Department fined it $70 million. The higher prices of animal feed resulted in lost income for hog and poultry farmers, as well as feed companies.

The Department of Justice's Antitrust Division reformed legislation in 2003 by introducing the Antitrust Criminal Penalty Enhancement and Reform Act. This legislation increases the statutory maximum penalty under the Sherman Antitrust Act from $10 million to $100 million. A formula is used to determining price-fixing fines. The multipliers for the formula are set by such factors as the company's antitrust history, its cooperation with investigators, the degree of involvement of senior management, and the existence of an effective compliance program.

see also Antitrust Legislation ; Monopoly

bibliography

Ackert, Lucy, and Church, Bryan (1998). Competitiveness and price setting in dealer market. Economic Review, 83 (3), 4.

Calderwood, James (1995). Antitrust warning. Transportation and Distribution, 36 (12), 72.

Scheffey, Thomas (2000). Westlaw, Lexis hit with price-fixing claim. The Connecticut Law Tribune, 20 (5), 1.

Smith, Tefft, and Mutchnik, James (2003, December 12). Finding the right price. Legal Times, p. 32.

Patricia A. Spirou

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