The Economics of Price Fixing

This chapter offers a non-technical economic explanation of the causes and effects of price fixing, beginning with a description of how prices are formed in competitive markets and in the presence of a monopoly. These two analytical models of how prices and output evolve in markets are too unrealistic to fit natural markets, yet their contrasting results are useful because they bracket the price/quantity outcomes in real markets. That is, perfect competition and pure monopoly are the extreme points on a continuum of market environments, and the performance of real-world markets tends to be “in between” the two extremes.

These “in between” markets have a small number of sellers or buy ers. Small numbers raise the possibility of strategic behavior among sellers, of which price fixing is one type. Price fixing is more than just fixing prices, so an enumeration behaviors that constitute a broader notion of price fixing is provided. This is followed by an explanation of the economic factors that affect the formation and success of cartels. The chapter ends with a brief empirical analysis of the economic harm imposed on market participants by effective cartels and a brief historical survey of global cartels.