Definition of price manipulation


What is price rigging?

Price manipulation occurs when parties conspire to fix or inflate prices to achieve higher profits at the expense of the consumer. Also known as “price fixing” or “collusion”, price manipulation can take place in any industry and is often illegal.

As a term, “price manipulation” is more commonly used in British English, while “pricing” is more common in North America.

Key takeaways

  • Price manipulation, also known as price fixing or collusion, is a form of market manipulation and is not limited to one type of industry.
  • As a term, “price manipulation” is more commonly used in British English, while “pricing” is more common in North America.
  • In the United States, the Sherman Antitrust Act prohibits price manipulation.

Understanding price manipulation

Price manipulation is a form of market manipulation. Price manipulation cases can be prosecuted under the antitrust laws of several different countries, as they go against natural market forces (such as supply and demand). It has the effect of slowing down competition, which negatively affects consumers, as competition tends to provide greater variety and lower prices.

While most price manipulation cases involve a conspiracy to keep prices as high as possible, it can also be used to keep prices stable, fix or discount them.

Price manipulation can take many forms: manufacturers and sellers may seek to set minimum prices, agree to a common minimum price or book price, limit discounts or margins, agree to impose or limit similar surcharges, or divide territories or customer bases to limit sales. competition within them.

Price manipulation is tolerated in certain companies and places.

Examples of price manipulation

Price manipulation can be found in a variety of industries, although it is not always illegal. Airline ticket prices and oil prices are set by the International Air Transport Association (IATA) and the Organization of the Petroleum Exporting Countries (OPEC), respectively, for example.

Historical examples of illegal price manipulation include:

  • Music companies were found to have engaged in illegal practices (such as advertised minimum prices) to inflate or fix the prices of compact discs in 1995-2000 to fight discount retailers.
  • In the 1950s, manufacturers General Electric and Westinghouse conspired to fix prices for industrial products in a case that involved both price manipulation and bid rigging, as well as secret meetings to choose the winning and losing order bids. in which the winners rotated according to the Moon phases.

Traders can also use price manipulation to artificially inflate a stock’s price to attract more investors. As new investors buy into stocks, stock prices rise in value until the manipulators liquidate, causing stock prices to crash. OTC Bulletin Board stocks, also known as penny stocks, are especially vulnerable to price manipulation.

Rigging and price regulation

In the United States, price manipulation is defined and prohibited in the Sherman Antitrust Act (from 1890) as a federal crime. The Federal Trade Commission (FTC) has jurisdiction over civil pricing cases, and some states also prosecute price manipulation antitrust cases, but most of the regulation is overseen by the United States Department of Justice ( DOJ).

In Canada, price manipulation is a criminal act under Section 45 of the Competition Act. Meanwhile, in the UK, cartels and price manipulation are regulated by various financial regulators. The leading force is the Competition and Markets Authority (CMA), although anticompetitive activity can also be reported to the regulator that governs the sector where price manipulation is taking place.

www.investopedia.com

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Mark Holland

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