Maximizing Profits: Price Fixing

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Table of Contents

Introduction
What is price fixing?
Examples of laws against price fixing
How a salesman can avoid charges of price fixing
Why salesmen should avoid price fixing
Conclusion
Works Cited

Introduction

The aim of every business enterprise is to maximize profits and this is best achieved by maximizing revenues and minimizing operating costs. To maximize profits, business enterprises usually deploy various strategies that contribute to the realization of their goal. These include creation of new customers and retention of existing ones, adapting technology and developing innovative solutions and efficiency in resource use.

Creation of new customers and retention of existing ones requires the business enterprise to offer competitive prices for their products compared to what other firms are offering. In a free and competitive market, goods are not highly differentiated in terms of the utility derived from their consumption and quality of the goods. In this scenario, it is price that eventually plays a key role in differentiating one good from another.

Adaptation of technology and developing innovative solutions often requires huge cost outlays. Most firms have a mandated Research and Development department that develops new products and improves existing ones. This is usually a long process since the product has to pass through stages of testing and quality assurance and finally approval by the relevant statutory safety and standards bodies. At the end of the process, the costs incurred are usually passed on to the consumer in form of higher prices (Kleinman and Monaghan 1).

Efficiency in resource use requires the business to achieve the highest returns possible from every dollar invested. Consequently, the Sales and Marketing department has to generate the highest revenues possible at the lowest costs. However macroeconomic factors like high inflation rates and microeconomic factors like inefficiency in production may render the sales mandate difficult to achieve

All these strategies create incentives for pursuing unethical business practices. A business seeking to lower prices to attract new customers may find this strategy untenable in the long run in the face of rising costs and may find it desirous to have market prices set at a certain point. A business that has a new product retailing at a higher price relative to competitor prices may not generate adequate sales if demand is price elastic.

The business may consequently find itself in a quandary, on one hand setting high prices for its product to recoup Research and Development costs and on the other hand generating low sales for its product due to lower competitor prices. A uniform market price will be optimum for such a firm. These scenarios may lead to an unethical business practice known as price fixing.

What is price fixing?

In efficient market dynamics, price is determined by the interaction between the demand and supply. The equilibrium price which is the socially optimum price is determined at the point of congruence between supply and demand. When demand is high and supply is constant, the price goes up.

Conversely, when supply is high and demand is constant, the price goes down. Price fixing occurs when market players collude to have the prices of commodities fixed at a certain point, hence circumventing the supply and demand dynamics of the market (Garner 1).

This is usually achieved through collusion when businesses form cartels that fix commodity prices either directly or indirectly. Direct price fixing occurs when cartels set the price of a particular commodity at a certain point, such as having all members of the cartel sell a liter of gasoline at three dollars.

Indirect price fixing occurs when cartels for example restrict the supply of a commodity into the market by imposing supply quotas on their member leading to high prices. A cartel made up of petrol pump stations may for instance restrict each pump station to sell no more than one thousand liters of gasoline per day. Price fixing is perverse when there are limited numbers of firms that supply a particular commodity in the market or in the case of a monopoly where there is only one firm in the market.

Examples of laws against price fixing

Price fixing is illegal and consequently, various countries have enshrined rules and regulations in their laws that prohibit price fixing. Collusions between businesses and cartels to fix prices are illegal in Australia under the Competition and Consumer Act 2010.

Similarly, the Competition Act 1998 prohibits businesses in the United Kingdom that have dominant market share against abusing their position by fixing prices (Tait 1). In the United States, the Sherman Antitrust Act states as illegal any attempts by firms in the market to collude and hinder competition (Albanesius 1).

How a salesman can avoid charges of price fixing

A salesman is usually the point of contact between a business and its customers. Once the marketing department has identified the target market and how to reach the customers, it is up to the salesman to make contact with the customers and complete the sale. In competitive markets with several salesmen from different firms offering the same commodity, there is an incentive to engage in price fixing. However, price fixing is illegal and carry’s serious consequence if one is found guilty.

There are various strategies that a salesman can deploy to avoid charges of price fixing. The nature of salesmen’s jobs requires them to compete for customers who should have the freedom to choose whether to purchase a particular product being offered by a salesman or not.

One form of price fixing occurs when salesmen agree amongst themselves not to sell to a rival salesman’s customers. Every salesman therefore, has a pool of customers and market territories that the other salesmen are not allowed to sell to. The customer is therefore, limited in his choice of products and becomes a price taker. A salesman should desist from such agreements since it constitutes price fixing and instead deploy other selling techniques.

Businesses usually employ distributors to sell their products and it is often within the salesman’s mandate to secure distributors who offer points of sale for their commodities. Salesmen’s engagement with distributors can however, lead to some form of price fixing. This can occur when the salesmen fix the prices of goods to distributors or collude amongst themselves not to poach distributors from each other.

This leads to higher distributor prices and denies them the opportunity to sell goods from other firms. The effect is that the retail prices that will eventually reach the consumer will be fixed (Competitionbureau 1). Such practices should also be avoided by a salesman since they constitute price fixing.

Another form of price fixing by salesmen is when they collude to form a consortium and apply for tenders. The objective is to secure the tender by eliminating the competition among themselves and subsequently share the work and tender proceeds. The effect is that the colluding firms usually quote a higher price than that which may have been quoted by competing firms. This is also a form of price fixing that should be avoided by salesmen.

Why salesmen should avoid price fixing

Firms are better off in a price fixing market than when they are in a competitive market. Firms, therefore, always have an incentive to fix prices with the objective of maximizing profits. However, the firms’ objectives and their desire to fix prices conflicts with the consumers’ welfare and freedom to choose among commodities in the market.

When market prices are fixed, consumers’ choices are limited since they cannot choose commodities on the basis of price. With fixed prices, all goods retail at the same price and consumers may pay more for a good that may have been cheaper in the absence of price fixing. Under price fixing, producers may also offer lower quality goods since all goods in the market retail at the same price, regardless of quality.

Price fixing can also lead to inefficient production among firms hence a waste of resources. Efficient firms incur lower costs and transfers the benefits to consumers in the form of lower prices which may drive higher sales for the firm. With fixed prices, there is no incentive for efficient production since commodities produced by both efficient and inefficient businesses retail at the same price (Amarillo.com 1).

Conclusion

While price fixing may be desirable for businesses, the legal consequences they face when found guilty and the costs to consumers and the society in general make price fixing an unethical practice. Regulations are in place to protect consumers against the effects of price fixing and it is the salesman who should always be the first enforcer of such regulations to protect the consumer. The monetary fines that come with a guilty price fixing verdict should act as a deterrent against engaging in any price fixing collusion.

Works Cited

Albanesius, Chloe. “Hannstar president indicated for LCD price fixing”. 2011. Web.

Amarillo.com. “BSA, feds settle price fixing charges”. 2011. Web.

Competitionbureau. “Competition bureau announces new price fixing charges on Quebec gasoline cartel”. 2010. Web.

Garner, David. “Airline giants face U.S. probe in price fixing scam”. 2011. Web.

Tait, Nikki. “EU charges cable layers with price fixing”. 2011. Web.

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