1.Why is price fixing an offense?
Price fixing my cause market failures and distortions as it harms competition in a free market. This in turn adversely affects economic efficiency and consumer welfare. In India, price fixing and other such activities that have an adverse effect on competition are offense under Competition Act,2002. In US, price fixing can be prosecuted as a criminal federal offense under section 1 of Sherman Antitrust Act.
2.What are the implications of price fixing?
Price fixing has various implications:-
•Elimination or narrowing of competitive products.
•Consumers are forced to pay more.
•Consumers are confronted with deflated product lines in narrow price range. •Without competition and diverse product lines, a stagnant market place smothers retailer’s ability to offer strategic promotions and incentives to the market. •When the price of one commodity is established, it becomes imperative that the price of other related commodities be adjusted, triggering a chain reaction. 3. How does it affects producers and consumers?
There are two major effects:
There is a transfer of wealth from consumers to producers. A portion of consumer surplus is shifted to producer surplus and also creates a deadweight loss. When prices increase from p0 to p1 due to price fixing, rectangle A, from consumer surplus gets shifted to producer surplus. At the same time there is also a deadweight loss of triangles B and C. The quantity that could be produced is reduced from Q0 to Q1.