Why price fixing is bad

If a company manages to develop special mechanical packaging systems, special graphic design abilities, or some other means of differentiation, salesmen must be given the knowledge needed to sell these features.

Well-trained salesmen can often find ways to compete in terms of special delivery services, inventory aids, and design suggestions. Another tool of general management is the evaluation and rewards system. The companies that were least involved in the price-fixing conspiracy compensate their sales forces on straight salary and evaluate on the basis of volume rather than of price level or profit.

Several companies convicted of price fixing have now adopted this method and are in the process of learning to evaluate people along broader dimensions. One of the factors contributing to price fixing we cited previously was the practice in some of the companies studied of allowing specific price decisions to be influenced by salespeople and others below the general management level.

In effect, because of bonus and commission arrangements, junior people were acting almost as profit center managers. Some managers in the companies we studied have been reviewing their practices in this regard and making tighter definitions of who can legitimately take part in pricing decisions.

It takes careful analysis of the multiple sources of relevant information concerning prices as well as an explicit commitment procedure to make such rules both workable and prudent. Attempts to move beyond top-level role modeling have led some executives to prepare codes of ethics on company business practices. In some companies this document circulates only at top levels and, again, the word seems to have trouble getting down the line.

Even those documents that were sent to all employees seemed to have been broadly written, toothless versions of the golden rule.

One company tried to get more commitment by requiring employees to sign and return a pledge. A senior vice president in this company complained that even though a copy of the law is also sent along:.

An employee convicted of price fixing agreed with these comments and questioned the view that price fixers can be helped by ethical statements:. I thought I had morals. I still think I do. What might to me be an ethical practice might have been interpreted differently by a legal scholar.

The golden rule might be consistent with both views. For codes to really work, substantial specificity is important. To really make it meaningful, you have to get past the stage of endorsing motherhood and deal with the specific problems of policy in the different functional areas.

We wrote up 20 pages on just purchasing issues. Once these more specific codes of business conduct are distributed, top managers may want more than a signed statement in return. Individuals can be held responsible if they have been informed on how to act in certain gray areas. The company can show its commitment to the code by checking to see that it is respected and by then disciplining violators. Several companies are developing ways to implement internal policing.

Some executives think that audits could hold people responsible for unusual pricing successes as well as for failures. High variations could be investigated. One division vice president also plans to audit expense accounts to see that competitor contact is minimized. As we noted earlier, executives in the convicted paper companies acknowledge that the lack of contact between them and company lawyers makes it hard to apply the law.

Direct contact between operating managers and members of the legal staff seemed to be less frequent in the companies that were more heavily involved in the conspiracy. There are at least three barriers that the legal division must overcome in order to take this more anticipatory stance.

The first barrier is a negative image. As advisers, lawyers must accept being seen as holier-than-thou naysayers. One general manager complained:. Most corporate counsel is negative on any level of risk. They tell us not to sue, when we should. This statement indicates how important it is for operating managers to understand the legal constraints on their plans and for the lawyers to be sensitive to the pressures of operating managers.

Senior management must take the initiative to legitimize both perspectives. The second barrier, limited interaction, is a problem for lawyers when they play the detective role, which they must at times. In one convicted company we often heard comments such as:. We could really use a lot more of a missionary effort from the legal department with more frequent visits.

Lawyers also complain that meeting people at infrequent lectures and formal visits rarely gives them the information that they seek.

Part of this problem is owing not only to the frequency of the visit, but also to the level of the people visited. At many companies lawyers often meet with only top-level managers who are expected to spread the word through the organization.

Unfortunately, the word rarely reaches the people in an organization who are the most vulnerable and who need to hear it most. One convicted sales manager explained:. I was never asked to attend any of the lectures our legal division gave. I guess only the general managers did. You can bet that, at the least, I would have begun to ask some questions.

The third barrier, boredom, stems from the educator role that the corporate counsel must assume. Some companies have developed successful legal programs by fostering very close contact between the general managers and the legal division.

In one such program there are two lawyers who specialize in traveling around and meeting the general managers. The chief legal counsel added:. This style of communication is essential in getting the point across.

We try to be serious and sincere. Also the approach is important. A lot of smart legal departments used to start off with the first line of vice presidents and work up in their education program. Thus even a successful program has problems of its own. If it works, people may not believe it was needed in the first place.

Executives in another company, which was not involved in the conspiracy, agree with the need to tailor a program to the danger line of the organization. Outside counsel is extensively involved on two levels. First, attorneys meet with each salesman on a one-on-one basis. The lawyer digs up expense reports and other files and grills the salesman. This same procedure is then repeated at group and general manager meetings. At the general manager and vice president levels, the legal staff puts on a simulated grand jury inquiry.

In these dramatizations even the president sits on the witness stand to defend himself on the basis of documents prepared by his vice presidents.

There is a great deal of tension surrounding these mock trials. The president of this company cited this trial as:. We identify several hundred people with point-of-sales exposure and talk to a large percentage of that group. This confessional situation is a very intensive experience. This procedure helps management spot problems so it can clear up misunderstandings before they become more serious.

The possible interpretations of employee words and actions are made very clear. The president said that this sort of investigation on top of the usual lectures is needed to bring the message across:.

Our experiences in other parts of the company convinced us that this thoroughness is vital. Several members of this same company told us that they feel more comfortable discussing these issues with outside counsel, as this plan provides.

They prefer speaking to someone who represents broader legal expertise and who is not immediately tied in with the corporate hierarchy and internal pressure.

The interrogation by a fresh outsider seems to bring more reality to the investigation. Most of the managers in the company believe that communication with counsel is protected by attorney-client privilege, but recent court decisions suggest that should the interests of the corporation differ from those of any executives, it is the corporation, in the name of the shareholders, not management, which really has the right of attorney-client privilege.

Unless shareholders abdicate this right, management cannot be categorically protected in such communication. Many industries share the exposures to price fixing we have highlighted. And the problems of ensuring compliance increase in complexity as the list of contributing factors grows.

Our review of the specific compliance methods that are being used in the forest products companies with the better records provides a good start toward the development of a fail-safe approach.

In our interviews we were also searching for a promising general approach—perhaps a philosophy of management—that could infuse a company and serve as an antibody to thoughts of price collusion.

We believe we did find such a condition in one company. The evidence we saw was largely indirect, but it can probably best be characterized as professional pride. This company is one of the handful that is largely successful in developing a differentiated set of products.

It is no accident. It is literally unthinkable for them to want to make money the latter way. They have too much self-esteem. Although executives and salespeople in this company widely share the strong code of behavior, it is not clear exactly how it has been disseminated throughout the organization. The best evidence is that when top managers emphasize professional pride and the distinction between clean and dirty profits, the commitment to achieve profits through legal means is clearly driven down the line.

United States v. Park U. Timothy D. The belief is that as the number of companies increases, the probability of mutual understanding and anticompetitive agreement will decrease. The recent acquisition spree may exacerbate this problem.

Marshall B. Here it is explained that structural factors are major contributing elements to criminal behavior. Executives who were uncooperative with price-fixing training were transferred by the company. Short, Jr. The Law of Duty. No man, I affirm, will serve his fellow-beings so effectually, so fervently, as he who is not their slave; as he who, casting off every other yoke, subjects himself to the law of duty in his own mind….

Individuality or moral self-subsistence is the surest foundation of an all-comprehending love. No man so multiplies his bonds with the community as he who watches most jealously over his own perfection. Dominick T.

Please, enable JavaScript and reload the page to enjoy our modern features. This work is licensed under a Creative Commons Attribution 4. Please do not edit the piece, ensure that you attribute the author and mention that this article was originally published on FEE. The FTC found concrete evidence that the largest music companies in the U. In a sign of things to come, it then settled the case for zero dollars in fines and an agreement that the industry would stop.

More recently, 44 U. What are they arguing, and why does it matter? Price fixing is when participants in a market band together to artificially set the price, supply or other market value of some good or service.

The most common form is when companies agree not to sell their product for less than a specific amount. This, for example, is what the plaintiffs have alleged in their generic drug lawsuit. According to the complaint, approximately 20 manufacturers have agreed to collectively raise the prices on certain generic drugs and not to undercut each other.

As long as no company breaks ranks, consumers have no choice but to accept the higher prices. This is a form of monopolistic behavior. Price fixing can also happen on the demand side of a market. In this case, participants agree not to buy something for more than a certain amount. For example, suppose every car company were to agree not to buy steel for more than 15 cents a pound. With their market dominance they could try to force steel mills to accept this very low offer.

As with supply-side price fixing, as long as no company breaks ranks, suppliers would have no choice but to accept these lower prices if they want to continue selling their product. This is a form of what's called "monopsonistic" behavior. Despite its name, price fixing does not have to deal strictly with prices.

Any form of agreed-upon, anticompetitive market control is considered price fixing. This can include agreements among competitors on consumer identity, promotions, shipping and even future development plans.

This occurs when competitors across a market agree not to compete over a given product. For example, when every music label agreed not to reduce their prices on compact discs in the s, this was a form of horizontal price fixing. Horizontal price fixing can apply to any terms of a product, not just prices, as long as all of the participants agree not to compete with each other. For example, if a group of online retailers agreed not to offer free shipping, this would be considered a form of horizontal price fixing.

This occurs when all of the participants in a supply chain make an agreement to fix the terms of a given product. Typically, it occurs between a manufacturer and the retailer who sells its products. A company that makes widgets, then reaches an agreement with the store to set the price of those widgets, would engage in vertical price fixing.

Or suppose a regional landlord reached an agreement with a real estate developer not to build any new apartments. This would be illegal vertical price fixing, as the landlord would be hoping to keep the supply of apartments low and its rents therefore high. Companies can publish suggested prices, such as the list price printed on each book you purchase, but they cannot reach an agreement with a retailer to set those prices. That said, while companies cannot reach an explicit price agreement with a retailer, they can legally refuse to do business with retailers which sell on terms with which the company is unhappy.

This often makes vertical price fixing more of a paper tiger than anything else.