Page 621 - Encyclopedia of Business and Finance

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Pricing

doctrine of conscious parallelism, which means, according The Department of Justice’s Antitrust Division
to the U.S. Supreme Court, that no formal agreement is reformed legislation in 2003 by introducing the Antitrust
necessary to constitute an unlawful conspiracy. Criminal Penalty Enhancement and Reform Act. This leg-
Prior to 1996, market makers were allegedly engaged islation increases the statutory maximum penalty under
in many price-fixing scandals. In the late 1990s, the Jus- the Sherman Antitrust Act from $10 million to $100 mil-
tice Department found evidence that this practice was still lion. A formula is used to determining price-fixing fines.
occurring. For example, price quotes on Instinet, a private The multipliers for the formula are set by such factors as
electronic market, differed from NASDAQ quotes for the the company’s antitrust history, its cooperation with
same stocks. investigators, the degree of involvement of senior manage-
In 1999 a California appeals court unanimously ruled ment, and the existence of an effective compliance pro-
that Arco and eight other oil companies were entitled to gram.
summary judgment in a price-fixing suit because there SEE ALSO Antitrust Legislation; Monopoly
was no evidence of an agreement among them to fix prices
or limit the supply of the cleaner-burning gasoline man-
BIBLIOGRAPHY
dated by California. The appeals court agreed with the
Ackert, Lucy, and Church, Bryan (1998). Competitiveness and
trial court’s original conclusion that the evidence provided price setting in dealer market. Economic Review, 83(3), 4.
by the plaintiffs suggested not a complex tangled web, but
Calderwood, James (1995). Antitrust warning. Transportation
nine defendants using all available information sources to and Distribution, 36(12), 72.
determine capacity, supply, and pricing decisions. The
Scheffey, Thomas (2000). Westlaw, Lexis hit with price-fixing
court ruled that the companies involved made these pric- claim. The Connecticut Law Tribune, 20(5), 1.
ing decisions because they wanted to maximize their own
Smith, Tefft, and Mutchnik, James (2003, December 12). Find-
individual profits and were not concerned about the prof- ing the right price. Legal Times, p. 32.
its of their competitors.
Because price fixing occurs when companies conspire
Patricia A. Spirou
to set an artificially high price for a product, the nature of
the food-additive industry makes it easy to create price-
fixing cartels. Because of the small number of companies
that are involved in the additive industry, it is easier for
them to organize and maintain a price-fixing conspiracy. PRICING
Price fixing of food additives is also easy because a small Price is perhaps the most important of the four Ps (prod-
number of companies means that prices are negotiated via uct, promotion, and place being the others) of marketing
individual contracts, instead of in an open market. since it is the only one that generates revenue for a com-
The establishment in the 1990s of international trade pany. Price is most simply described as the value exchange
associations, which are facilitated by the European Union, that occurs for a product or service. Broadly, price is the
is another major cause of price fixing. These trade associ- total of all values exchanged for a product or service. Price
ations provide data about their industry to association is dynamic. When establishing a price for a product or
members, including information on the exact size of the service, a company must first assess several factors regard-
market and the growth rate of the industry. That informa- ing its potential impact. Commonly reviewed factors
tion can lead to establishment of a cartel, because the include legal and regulatory guidelines, pricing objectives,
companies can extrapolate pricing information. pricing strategies, and options for increasing sales.
Advances in Internet technology have resulted in the
Archer Daniels Midland was prosecuted in 1996 for
illegally fixing the prices of lysine (which is used as a nutri- increased use of dynamic pricing by some sellers.
tional additive in livestock feed) and citric acid. During
the time of the conspiracy, Archer Daniels Midland pro- LEGAL AND REGULATORY
duced 54 percent of the lysine used in the United States GUIDELINES
and 95 percent of the world’s. Annual sales of lysine were The first major law influencing the price of a company’s
$330 million in the United States and $600 million product was the Sherman Antitrust Act of 1890, passed by
worldwide. the U.S. Congress to prevent a company from becoming
The company pleaded guilty to fixing the price of a monopoly. A monopoly occurs when one company has
lysine from 1992 to 1996, and the Justice Department total control in the production and distribution of a prod-
fined it $70 million. The higher prices of animal feed uct or service. As a monopoly, a company can charge
resulted in lost income for hog and poultry farmers, as higher than normal prices for its product or service, since
well as feed companies. no significant competition exists. The Sherman Antitrust

598 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION