In A Fix

What's Safe?

Does this mean you can't engage in "parallel pricing," adjusting prices to reflect those of your competitors? No. Courts recognize that when there's a limited number of companies competing in an industry, prices will tend to be the same. If the industry leader lowers prices, competitors will do the same if they want to survive. If the leader raises prices but the others don't follow suit, the leader's prices will soon drop. No firm will stay out of line for long. Courts have ruled that it's not illegal for businesses to keep their prices parallel as long as they don't consult with each other about it. There's no sense in outlawing a practice that's inevitable.

The problem is determining whether parallel prices stem from independent decisions or from owners cutting a deal. Merely asserting that your price decisions were independent probably won't persuade the jury if the evidence points the other way. In one Utah case, 14 distributors of eggs were accused of price fixing when they all offered egg farmers the same depressed price for their eggs. The distributors denied they'd agreed on prices, but the jury didn't believe them because company representatives met regularly at a cafe and constantly made phone calls to each other.

The Sherman Act also outlaws agreements between competitors on other matters besides pricing. For instance, you can't sit down with your competitors and agree to standardize your products, refuse certain credit cards or charge a standard interest rate on financing packages. You can't divide territories with your competitors or agree on who gets which customers. If an agreement tends to limit competition, it's illegal.

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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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