This is what I heard a leftist public radio talk show host say on Sunday morning. My ears naturally perked up upon hearing something that ludicrous. He said he was quoting some economist whose name I missed, in the context of interviewing a woman from the Competition Bureau of Canada, a government agency tasked to ensure business firms do not collude, fix prices, and rip off consumers.

Why is this statement about price fixing ludicrous? Because price fixing is not in a company’s self-interest, and it would not be among a rational CEO’s means of dealing with his competition. Of course it is possible (if illegal) for competing businesses to fix prices, in order to exploit customers, but only when the government regulations prevent new competitors from entering the markets—such as wireless telecommunication service providers in Canada.

However, price fixing is not in companies’ (their shareholders’) self-interest (assuming that the markets are at least semi-free); competition is. Why? Because the only way a company can achieve sustained growth and profitability is to create more value to its customers than its competitors do, either through lower prices or better quality (including service), or both. Competition provides a powerful incentive for firms to find ever better ways of creating value for their customers. If a company spends its time and resources on price-fixing arrangements with its competitors instead of creating value for its customers, it will be out-competed by those firms that focus on innovating new, superior products and services and more efficient processes. Price fixing leads to stagnant products and prices. It does not hurt just consumers—it harms the companies practicing it as well, particularly when markets liberalize and more innovative competitors take away the stagnant companies’ customers and market share.

6 COMMENTS

  1. A very interesting point! From a systems’ dynamics point of view, any advantage gained through price fixing, should have a limited “usefulness”, as when new information is known to the buyers, the advantage will be no more. The longer the lag, the greater the damage. The question is a greater damage to buyers or to the sellers?

  2. Thanks, Mahmood, for your comment and question. I would argue that the sellers attempting to fix prices suffer greater damage. While the buyers can suffer as a consequence, they can always seek better sellers elsewhere. But the sellers who resort to price fixing will suffer not only long-term reputational damage but also the damage that comes from their erroneous thinking. It will take them a long time to learn to compete with their reality-focused competitors who pursuing profits by innovating and creating value for their customers.

  3. Typical Marxist-based notion that people spout (exploitation theory, based on fixe-pie economic presumption and “drive to the bottom” view of human behaviour). I walk through the related monoploy question in http://www.keithsketchley.com/monopol3.htm. Northrop Buechner gave a lecture years ago rebutting dog-eat-dog capitalism, in which he states that there has only been one naturally occurring “monopoly” in Canada-US business history – Alcoa, who kept producing more for lower price, building plants ahead of demand to ensure customers would be able to buy the product : Dog Eat Dog Competition, Professor M. N. Buechner, Toronto March 1986

    • Thanks, Keith, for your comment and pointing out the Marxist foundation of the argument that business is exploitation–which clearly it cannot be, if it wants to have customers and investors!–Alcoa is a textbook example (one of the very few) of a natural monopoly which was based on its discovery of a particularly rich source of bauxite ore (the main ingredient in aluminum). That discovery allowed Alcoa to keep producing aluminum at a lower cost than its competitors. But contrary to the “exploitation” theorists, the price of aluminum during Alcoa’s monopoly kept going down–not up!–so the customers were not exploited but benefited. The story is different in the case of coercive monopolies where a company obtains a monopoly position by government decree (such as utility companies) and are thus insulated from competition.

  4. Jaana, the paraphrased quote that your article refers to is actually from Adam Smith’s capitalist opus ‘The Wealth of Nations’. The full quote is: “people of the same trade seldom meet together … but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. You may not agree with it but it’s hardly leftist or Marxist in origin.

    • Thank you for sourcing the quotation! As I said, I only heard it on the radio and did not know the source. Adam Smith had some great insights about division of labor and its benefits, but crediting him as the the father of capitalism is inaccurate. His philosophy was based on Christianity and altruism and not on the individual rights, which are the cornerstone of capitalism. (And Smith could have hardly been a Marxist, given that he lived much earlier than Marx 🙂 …). However, all leftist ideology has a lot in common with Christianity and altruism.

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