Price fixing is when competitors adjust the price of their products or services to make a new price the marketplace norm.
Real estate professionals who take part in price fixing agreements are forced to pay millions of dollars or even spend time in jail. To avoid this fate, you’ll need to learn about this antitrust violation from real estate experts who know what they’re talking about.
In this article, we’ll define price fixing, give examples of it in real estate, and review the laws that strictly prohibit its practice.
What Is Price Fixing?
Price fixing is the practice of setting the price of a good or service to make a specific price a standard.
When competitors conspire to change their prices at the same time or maintain the current price to manipulate supply and demand, this is an example of price fixing.
Any agreement, even if implied with other brokerages to set a standard commission rate, violates the antitrust laws.
But it’s important to note that price fixing relates to more than just prices; the Federal Trade Commission tells us that it can also involve
- Credit terms
- Shipping fees
- Discount programs
- Financing rates
Two types of price fixing schemes compromise a free market and fair housing, including
- Vertical price fixing
- Horizontal price fixing
What Is Vertical Price Fixing?
Vertical price fixing is when members within a supply chain agree to raise, lower, or fix prices to create a standard.
A company setting a minimum resale price increases costs and lowers consumer demand. When a company sets a maximum price, this reduces costs but increases consumer demand.
While vertical price fixing is illegal in all cases, courts are generally more flexible with maximum price fixing, whereas they come down much harder on minimum price fixing.
Examples of Vertical Price Fixing
If a manufacturer forces retailers to sell their product at a certain raised price with no discounts, this is an example of vertical price fixing.
Why? The supply chain members determined that they would fix the price to ensure maximum profit for the company and increase the market price of the good.
What Is Horizontal Price Fixing?
Horizontal price fixing is when market competitors agree to raise, lower, or fix prices to create a standard. The aim of horizontal price fixing is typically to increase consumer prices by making a new higher price the norm.
Examples of Horizontal Price Fixing
If every competing tire shop within a region conspired to raise their rates by 10%, this would be an example of horizontal price fixing.
Because all tire shops now offer the same higher price, there is no competition, creating a new standard rate and forcing consumers to pay more for their tires.
Examples of Price Fixing in Real Estate
You may think, “Okay, what does a price fixing scheme look like in the real estate world?”
Good question! One example would be if competing real estate firms meet up and agree to set standard prices for their services and commission rates. This particular price fixing scheme is an example of horizontal price fixing, as it’s happening across an entire marketplace.
Another example would be if brokers within a real estate firm agreed to adjust their prices to create a new standard. This is an example of vertical price fixing, as it takes place within one supply chain instead of the general marketplace.
Why Is Price Fixing Illegal?
There are two main reasons that price fixing agreements are against the law. These schemes
- Eliminate fair competition
- Raise prices for consumers
Competition is essential in a free marketplace. If consumers only have one option regarding real estate services, this gives the real estate company all the market power. This is an issue because the company can charge significantly higher prices, and consumers have no choice but to pay.
But thanks to government interference, the United States operates under antitrust laws that benefit consumers and give them back their power.
What Are Antitrust Laws?
Antitrust laws are a collection of federal and state government laws that regulate business corporations and their practices. These laws promote a free market and help to stabilize prices.
The three antitrust laws that prohibit price fixing schemes are
- The Sherman Antitrust Act
- The Clayton Act
- The Federal Trade Commission Act
The Sherman Antitrust Act
The Sherman Act was the first federal antitrust law to prohibit anticompetitive behaviors such as price fixing. This act, which passed in 1890, set an important precedent but fell short in terms of its power and enforceability.
The Clayton Act
In 1914, the Clayton Act was passed to strengthen and reinforce the Sherman Act. This new and improved antitrust law explicitly listed business practices that interfere with a free market, leaving nothing open to interpretation.
The Federal Trade Commission Act
The Federal Trade Commission Act, also passed in 1914, declares that the monopolistic practices listed in the Clayton Act are all illegal. The Federal Trade Commission (FTC) is the federal agency that enforces these antitrust laws and protects American consumers.
What Are the Penalties for Price Fixing?
According to the Federal Trade Commission, real estate professionals engaging in price fixing can be fined $1 million and spend up to 10 years in prison. Real estate companies participating in this housing market scheme can be fined up to $100 million, or twice the gain or loss from their violation.
Examples of Famous Price Fixing Cases
To better understand the seriousness of this issue, it will be helpful to look at some real-world price fixing cases.
Tyson Foods Price Fixing Case
Have you ever heard of Tyson Foods, the self-proclaimed progressive food company specializing in poultry? Well, this big business engaged in a price fixing scheme and had to pay a $10.5 million settlement. Guilty of fixing prices and rigging contracts, Tyson Foods is a clear example of why it’s crucial to follow antitrust law.
DVD and Blu-Ray Disc Price Fixing Case
Two individuals and four companies selling DVDs and Blu-Ray Discs on Amazon Marketplace were recently caught engaging in price fixing conspiracies. While it’s still an ongoing investigation, law enforcement has clarified that they will persecute the perpetrators and uphold antitrust law.
So in case you were wondering if these laws are being properly enforced, the answer is a resounding yes!
Why Do Companies Participate in Price Fixing?
Now that we know all the risks of price fixing agreements, you may wonder, “Why would any company partake in illegal price fixing?”
According to Harvard Business Review, there are a few reasons, including
- Crowded markets
- The sale of nonunique products
- Company culture
- Personnel practices
- Decentralized price-setting mechanisms
In these cases, it’s important for management to step up in price-fixing-prone industries and instruct their employees not to engage in anticompetitive practices.
How to Spot Price Fixing
There are a few telltale signs to look for, including
- Competitors have identical prices for an extended period of time
- Competitors announce price increases at the same time
- A company’s prices have increased or never drop
- Higher prices make no sense considering the raw cost of materials or services
- Competitors explain rate changes using similar verbiage
While none of these examples guarantee that illegal price fixing is happening, they indicate that it may be time for an investigation by the FTC.
When Is It Not Price Fixing?
You may notice that every coffee shop in your area raised its prices at the same time and think, “How is this not price fixing?”
Well, the coffee industry may just be responding to changing market conditions and making price changes accordingly. For example, if a war or pandemic is making it more difficult for the United States to access coffee beans, then the price of coffee will inflate. Coffee shop owners need to raise their own prices to account for this change and maintain a profitable business.
Other Examples of Antitrust Law Violations
Price-fixing schemes are among the most common antitrust law violations, but they aren’t the only ones. Other examples of illegal business practices include
- Group boycotts
- Market allocation
- Tie in arrangements
- Bid rigging
But what do these violations have to do with price fixing? Let’s take a closer look at each!
Group boycotting is when two or more competitors conspire against another competitor by no longer supporting or working with them.
If two real estate brokers agree never to conduct business with a third broker, this violates the Sherman and Clayton Act. After a group boycott successfully drives off competition, brokers generally engage in price fixing by setting a higher standard rate for their services.
Market allocation is when real estate brokers divide the market amongst themselves to eliminate competition. Once the housing market is divided, brokers can engage in price fixing by demanding higher prices for their services.
One example of market allocation would be if brokers designated a special realtor for different spots within a region. This means they are no longer competitors, and each broker can engage in price fixing by increasing their rates.
A tie-in arrangement is when a seller requires the purchase of a tied good for the sale of the first.
One example of a tying arrangement would be if a realtor only agrees to sell a property to a couple if they also buy another property for sale.
Bid rigging is a practice where competitors agree in advance on who will win the bid on a property. This scheme creates higher pricing than what would have occurred under a free housing market.
If two real estate brokers conspire to take turns being the lower biddest to increase a property’s sale price, then they have violated antitrust laws.
What to Know for the Real Estate Exam
Price fixing is a vital concept to understand before going into the real estate exam. This illegal business practice is best for real estate professionals to avoid, as it compromises a free and competitive real estate market.
Now that you have a better understanding of what price-fixing is and why it violates antitrust law, you’re that much closer to passing your test and making your loved ones proud!
Are you interested in learning more about real estate terms before the big exam? No problem! Brush up on your knowledge with our helpful Real Estate Vocabulary Flashcards!