Price Fixing

Posted in Finance, Accounting and Economics Terms, Total Reads: 173

Definition: Price Fixing

Price Fixing refers to the practice of setting the price arbitrarily of a commodity or good. This is in contravention of free market forces that determine the price of a good, and hence fixing can be interpreted as an unethical or illegal practice. Although generally illegal, if performed by the government, fixing, takes a legitimate form, where a price floor or a price ceiling is set.

An alternate definition (of price fixing) would be the practice of establishing the price of a good/product/commodity/service artificially as against the price being determined naturally through free-market forces.

Fixing, is not limited to the price of goods or a commodity, but also it can be extended to input costs as well as quantity. For instance, regimes can stipulate the quantity of certain type of goods to be produced in a region, this is fixing through quantity control. It is to be noted that there is no legal protection against fixing(in any form) by the government. Anti-trust legislation makes it illegal for businesses to fix prices for their goods and services.

Fixing in a market can arise due to distrust amongst companies in a close-knit industry. Price fixing, is however liable to break down in certain sectors due to buying power of customers. In the long run, fixing and price fixing lead to market distortion and large scale inefficiencies.

Example of Fixing: OPEC (Organization of Petroleum Exporting Countries) had artificially inflated the price of crude oil, in the 1970s, leading to the Oil Shock. Another common example of fixing, is through cartels such as the OPEC, diamond, commodity cartels, which exist for fixing the price of goods they produce.

Fixing and price fixing should be distinguished from the act of ‘gold-fix’ where gold prices are set. This is a separate and distinct process in no relation to the manipulative practice of fixing.



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