Price fixing represents an attempt by suppliers within a market to control supply and fix price at a level close to the level we would expect from a monopoly.
In recent years we have seen the effective collapse of several high profile price-fixing agreements. Good examples to draw on would include the following:
The OPEC oil cartel (this is still in existence but there have been frequent tensions within the cartel - particularly when oil prices have been heading lower and leading oil producers have seen a slump in their oil export revenues and tax receipts)
The Net Book Agreement (this cartel between publishers and retailers ended in 1995)
The Coffee Export Cartel (this export-retention agreement between members of the Association of Coffee producers collapsed in April 2001 - leading in part to a further collapse in world coffee prices throughout most of 2001)
The cartel in 'Over the counter' pharmaceutical products (This ended May 2001 and was given much media coverage at the time as it was the last legal price-fixing agreement in the UK economy)
The End of Price Fixing in Over-The-Counter Pharmaceuticals
Britain's last bit of government-sanctioned price-fixing was ruled illegal on May 15th, 2001. The Restrictive Practices Court decided that makers of over-the-counter remedies could no longer set minimum retail prices for their products. The Office of Fair Trading (OFT) brought the suit because of big gaps between prices for branded and unbranded drugs. In countries without price-fixing, such as America, prices for equivalent products are lower. Supermarkets such as Asda, Sainsbury and Tesco announced responded immediately by cutting prices by as much as 50% for popular medicines. Small pharmacists argued that the end of the cartel was potentially a disaster for them. They cannot compete on price with the supermarkets that exploit economies of size to negotiate big discounts from the manufacturers. The pharmacists say that consumers will suffer too, because those who do not live within easy reach of a big supermarket will find it hard to buy medicines. Small pharmacies may have to change to survive. Even if small pharmacies do disappear, that matters less to consumers than it might have a few years ago.
To fix prices, the producers in the market must be able to exert control over supply. In the diagram above a producer cartel is assumed to fix the cartel price at the joint profit maximising output Qm and price Pm. This price is agreed among the members of the cartel and market supply is allocated on the basis of a quota system. Although the cartel as a whole is maximising profits, the individual firm's output quota is unlikely to be at their profit maximising point. This is shown in the left hand side of the diagram above. For this firm, expanding output and selling at a price that undercuts the cartel price can achieve extra profits. Unfortunately if one firm does this, it is in each firm's interests to do the same.
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