In A Fix

You can fix your car. You can fix your cat. But you can't fix your prices.

The frustrating part of setting prices for goods and services is figuring out what competitors are going to charge. Will your price be so low that you attract customers but can't make a decent profit? Will you be the only place in town charging so much for the item? How can you find out what your competitors are charging so you can adjust your prices slightly higher or lower?

The traditional method is to read your competitors' sale ads or send someone over to scope out their prices. Wonder why you can't save the hassle and just pick up the phone to chat with your competitors about it? Because that would be a direct violation of the Sherman Antitrust Act, a federal law adopted in 1890. The Sherman Act was designed to encourage healthy competition and keep any one company from monopolizing a whole industry. It's the law under which the Justice Department is pursuing Microsoft, but it can apply to even the smallest store. The law forbids competing companies of any size from entering "contracts, combinations or conspiracies" in restraint of trade.

That's what got a group of gas station owners in trouble in Dothan, Alabama. Motorists noticed a pattern: After prices at most gas stations in this town of 50,000 had remained the same for weeks, suddenly they would all change. Major brand dealers charged the same as independents, consistently higher than in surrounding communities. Of course, it's easy for gas station owners to keep tabs on what the competition is charging, since current prices are typically posted on large signs out front. Still, in this town, the sudden changes looked suspicious.

Four consumers filed a class-action lawsuit under the Sherman Act against a dozen gasoline retailers and their owners. During the trial, employees testified that they had overheard conversations and phone calls in which one owner asked another to "go along" because "everyone" in Dothan was about to increase prices. Those who refused sometimes received angry visits from competitors. The jury concluded that five of the station owners had engaged in illegal price fixing.

Violation of the Sherman Act is a felony, subject to fines of up to $1 million and jail terms of up to three years. Injured competitors or customers may sue and recover up to three times the dollar amount of their damages. Just defending such a lawsuit can easily cost $50,000 in attorneys' fees, and bad publicity from a price-fixing case can last a lifetime. But the defendants in Dothan lucked out; the court only assessed a nominal fine and issued an injunction not to do it again.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

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This article was originally published in the May 2000 print edition of Entrepreneur with the headline: In A Fix.

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