Question

Why is price fixing (collusion) among firms so bad? Give an example using a case, highlighting what happened, how it was discovered, and the remedies that were applied by the court. Ensure that you discuss and analyse the case using the economic concepts you have learned thus far.

Answer 1

Price fixing among firms is bad because the firms get to set an artificial supply of output at a particular price wherein demand is more than the supply and consumers are exploited by making them pay a higher price for a good. If the price fixed is very low, this prevents other firms from entering the market as they are not able to increase profits.

Real life examples are in the case of Royal bank of Scotland and Barclays wherein both the banks colluded to determine the loan price arrangements being provided to professionals who were employed in the finance and law industry.

The banks shared the price information between themselves so that both the banks would gain from the deal and none will be the loser. This led to limited availability of differentiated loan products being available to consumers, which made them opt for such plans, as they had limited availability of choice.

Barclays bank employees blew the whistle as they received the information from RBS and conveyed it to the law agencies. The court fined a severe amount to RBS in light of the breach and this proves that collusive power is harmful for the society as it was a form of formal collusion between employees of the banks, if it was tacit which does not have communication source, then it would have proved difficult to report.