by Michael P.Wiersch
(Attorney-At-Law , Licensed to practice Law in California; United States Patent Attorney)
Now Ashida and Kimura Patent Attorneys, Tokyo, Japan
The fundamental characteristic of price fixing is any agreement between parties regarding price, whether expressed or implied. The most well known form of price fixing is to drive the price of a product as high as possible, with the intent to obtain higher profits. Other forms of price fixing are to fix, target, discount, or stabilize prices, which may lead to increased profits for the parties and reduced competition of the parties to the agreement.
Price fixing is prosecuted as a criminal violation.[1] Price fixing laws in the United States had legal bite as early as 1890 under the Sherman Antitrust Act (1890). Section 1 of the Sherman Act states, “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal.”
[2] The phrase “restraint of trade” was crafted to stop excessive monopolistic and anticompetitive activities of the past increasing industrial combinations and trusts. Specifically, it was meant to curtail anticompetitive behavior due to mega monopolies created through mergers and various price-fixing schemes and agreements.[3]
Courts have determined the legality of price fixing either as a per se violation or as a violation of the rule of reason. A per se violation such as price fixing, bid rigging, and territorial or customer allocation among competitors (commonly described as "horizontal agreements") requires no inquiry into the actual effect on the market or the intentions of the parties. While per se violations usually have signs of anticompetitive behavior, some business practices, however, encourage competition within the market.
For the later cases, the court uses a rule of reason approach and applies a totality of the circumstances test, which asks whether the challenged practice promotes or suppresses market competition.
[4] The Court, in Chicago Board of Trade v. United States, went on to say that the condition of the particular business, both before and after the imposition of restraints, must be examined and a determination of the actual and probable effect of the restraint realized.
Inherent in rule of reason cases is the ability of the violator to manipulate output or prices beyond the threshold that would be imposed naturally by the marketplace.[5] Besides abstaining from communications of prices, another way to a avoid price fixing violations would be to form a joint venture.
Joint ventures, a form of business association among competitors, are designed to further a business purpose, such as cooperative research and development where the costs may be individually prohibitive. Although courts will generally scrutinize a joint venture under the rule of reason, the joint venture must first overcome the reason that the joint venture was established.
The National Cooperative Research Act of 1984 [6], which permits and encourages competitors to engage in joint ventures that promote research and development of new technologies, provides guidelines on forming joint ventures.
As a rule of thumb, if you establish a price for a product or service, rather than allowing it to be determined naturally through free market forces, your actions will often be considered illegal. Thus, if you have enough influence in the market to change or affect a price and engage in dealings with competitors, you may be in violation of antitrust laws. However, if you are acting on your own and not in concert with any other, you are free to exercise any pricing strategy you desire, even including raising prices to the detriment of the public.
[1] http://www.justice.gov/usao/eousa/foia_reading_room/usam/title7/ant00006.htm, last accessed Apr 11, 2011
[2] The Sherman Anti-Trust Act of 1890 (15 U.S.C.A. §§ 1 et seq.)
[3] http://www.referenceforbusiness.com/encyclopedia/Res-Sec/Restraint-of-Trade.html, last accessed Apr 8, 2011
[4] http://topics.law.cornell.edu/wex/Antitrust, last accessed Apr 8, 2011
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