Blogs & Comment

Price fixing is not 'just doing business': Chris MacDonald

A bitter deal on chocolate.

Yeah, that's not really working out.(Photo: Dan Taylor/Flickr)

Yeah, that’s not really working out.(Photo: Dan Taylor/Flickr)

Canada’s Competition Bureau has charged several candy companies with price fixing. Nestle Canada, Mars Canada, and wholesale distributors network ITWAL stand accused of conspiring to manipulate the price of chocolate here in Canada. According to a press release from the Bureau, charges have also been laid against several individuals, including Robert Leonidas, former President of Nestlé Canada; Sandra Martinez, former President of Confectionery for Nestlé Canada; and David Glenn Stevens, President and CEO of ITWAL.

It’s interesting to note that price fixing is one of the few pricing-related topics that comes up with any frequency in business ethics. For the most part, pricing simply isn’t discussed as an ethical issue, probably because most companies are seen as having so little choice to exercise in the matter.

But price—fixing—attempts by erstwhile competitors to arrange not to compete on price—is a serious ethical as well as legal issue. It is also the subject of considerable cynicism. Many people seem to take for granted the idea that certain kinds of companies—gas companies come to mind, for instance—collude in an attempt to squeeze more money from consumers.

Another kind of cynic will see price fixing as not just common, but justified. After all, it’s just business, right? A manager’s job is to make a profit. And so if price-fixing is a route to profit, wouldn’t that just be part of a manager’s job?

But there is of course a good reason why price fixing cannot be thought of as just part of doing business. And you don’t need to have a particularly warm-and-fuzzy view of business in order to see it.

But first it’s important to see that the reason why price fixing is wrong is not just the bare fact that it hurts consumers. In market economies, there is no general prohibition against doing things that hurt other market participants. Markets are supposed to be win-win, but only in the big picture. There’s nothing unethical, for example, about developing a new and better product, one so good that it drives competitors out of business and hence leaves some people unemployed. Likewise, there’s nothing wrong with raising your prices in response to rising costs of production, even if that leaves some people unable to afford your product.

So the reason why price fixing is illegal, and also unethical, is not that it hurts consumers. The key reason is that it violates one of the basic requirements for markets to work efficiently. In order for markets to function with anything approaching efficiency—never mind fairness—several conditions must obtain: for starters, there must be sufficient information in the hands of both buyer and seller, and the costs of transactions must be borne by the participants, rather than spilling over onto bystanders. But most important for the present case, markets can only be efficient if buyers have real options—that is, if no seller has the power to bully the market. Behaviour aimed at letting one seller, or a group of sellers, bully the market is contrary to the requirements of efficient markets.

And when markets don’t operate efficiently, they lose much of their fundamental ethical justification. So when companies engage in price fixing, then, they’re not just acting unethically. They’re acting as bad capitalists.

Chris MacDonald is Director of the Jim Pattison Ethical Leadership Education & Research Program at the Ted Rogers School of Management