Which of the following involves agreement between retailers that are in direct competition with each other to set the same prices?

price-fixing, any agreement between business competitors (“horizontal”) or between manufacturers, wholesalers, and retailers (“vertical”) to raise, fix, or otherwise maintain prices. Many, though not all, price-fixing agreements are illegal under antitrust or competition law. Illegal actions may be prosecuted by government criminal or civil enforcement officials or by private parties who have suffered economic damages as a result of the conduct.

Horizontal price-fixing

Examples of horizontal price-fixing agreements include agreements to adhere to a price schedule or range; to set minimum or maximum prices; to advertise prices cooperatively or to restrict price advertising; to standardize terms of sale such as credits, markups, trade-ins, rebates, or discounts; and to standardize the package of goods and services included in a given price. All such agreements are per se illegal under United States antitrust law; that is, the court will assume that any such agreement is anticompetitive and will not hear arguments to the effect that the agreement actually enhances quality, competition, or consumer welfare in a particular case. Horizontal price-fixing agreements are also illegal under European Union (EU) competition law, where they are similarly subject to so-called hard-core restrictions.

There is nothing illegal about competitors actually setting the same prices or even about them doing so consciously. Indeed, in a perfectly competitive market, one would expect retailers to sell their goods at the same prices. The offense lies in their setting (or raising or maintaining) prices by entering into an agreement with one another. (Section 1 of the U.S. Sherman Antitrust Act [1890], for example, prohibits any “contract, combination or conspiracy” that restrains trade.) The agreement, to be a violation, need not set a particular price. Rather, the law frowns on any agreement that interferes with competitors’ ability to set their own prices with complete freedom. Thus, agreements that set price ranges, establish formulae for rates of change in prices, or provide guidelines for competitors’ responses to changes in their cost structures are all violations, even though they neither establish a precise common price nor eliminate all possible price competition. Not every competitor in the market needs to participate in the agreement. Even an agreement between two tiny competitors in an enormous, busy, and otherwise competitive market would be a violation.

Analysis of horizontal price-fixing

Economists generally agree that horizontal price-fixing agreements are bad for consumers. Competition normally drives prices down, as competitors seek to lure away one another’s customers. In a competitive market, therefore, the consumer realizes the greatest possible amount of consumer surplus—the value to the consumer of the good in excess of what the consumer actually has to pay for it. Price-fixing agreements, since they reduce competitors’ ability to respond freely and swiftly to one another’s prices, diminish consumer surplus by interfering with the competitive marketplace’s ability to keep prices low. More important, horizontal agreements among competitors may facilitate their joint acquisition of market power—the ability to sustain higher prices than free competition would allow, without losing customers. A wide-enough agreement could permit competitors to act as de facto monopolists, raising prices and cutting back on production to the detriment of consumer welfare. Moreover, they could do that without gaining any of the efficiency benefits of an actual merger or consolidation.

There are some critics of horizontal price-fixing prohibition, however. Some conservative economists argue that it is scarcely worth policing horizontal price-fixing arrangements, since they are economically unstable. Each member of a horizontal price-fixing agreement has a strong incentive to defect, secretly offering lower prices to attract a greater share of customers. In addition, any market with inflated prices induced by a horizontal agreement will rapidly attract new entrants, and they can easily restore prices to the competitive level. Finally, many economists are skeptical of courts’ and prosecutors’ abilities to distinguish real price-fixing arrangements from other complex arrangements with legitimate pro-competitive purposes.

In addition, there have been some concerns about the per se prohibition of horizontal price-fixing agreements in contexts in which it is difficult for consumers to judge the quality of goods or services on their own. In the case of medical care, for example, patients are often unable to judge for themselves whether the care they receive is of high or low quality. (High-quality care does not guarantee good outcomes, and patients who have received care of poor quality may nonetheless get better.) If high-quality care is both expensive to provide and hard for consumers to detect, the argument goes, then vigorous price competition will drive high-quality care out of the market. Patients will not pay more for a difference in care that they cannot detect or verify. On the other hand, if price competition is minimized through horizontal agreements, then the pressure to cut costs by cutting quality will be reduced.

Get a Britannica Premium subscription and gain access to exclusive content. Subscribe Now

A third argument against the prohibition of horizontal price-fixing agreements involves the social desirability of cross-subsidization of services for the poor. Physicians, lawyers, and institutional health care providers have frequently argued that a reduction in price competition among them can give them the cushion necessary to supply necessary services at a reduced price or at no cost to poorer consumers. (Another, perhaps more-intuitive, way to put this is that vigorous price competition reduces profit margins, and reduced margins result in cutbacks in charity care and pro bono work.)

While competition law has not accepted those arguments, a number of state and local legislatures and regulators have created schemes under which competing health care providers, for example, can apply for permission to fix their prices under close state supervision in order to subsidize low-cost care for the poor. Those schemes shield the providers from prosecution by extending the state’s immunity from antitrust enforcement to cover their private actions.