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Business and “Price Fixing”

“As soon as two businessmen get together, they start discussing how to fix prices”

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.

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