price fixing

Examples of price fixing in the following topics:

• Collusion and Competition

  • As a result, price will be higher than the market-clearing price, and output is likely to be lower.
  • First, price-fixing is illegal in the United States, and antitrust laws exist to prevent collusion between firms.
  • In contrast to price-fixing, price leadership is a type of informal collusion which is generally legal.
  • Price leadership, which is also sometimes called parallel pricing, occurs when the dominant competitor publishes its price ahead of other firms in the market, and the other firms then match the announced price.
  • The leader will typically set the price to maximize its profits, which may not be the price that maximized other firms' profits.

• Arguments for and Against Government Price Controls

  • Well designed price controls can do three things.
  • Finally, when shortages occur, price controls can prevent producers from gouging their customers on price.
  • By keeping prices artificially low through price ceilings, consumers demand a higher quantity than producers are willing to supply, leading to a shortage in the controlled product.
  • During the depression the US government fixed prices on basic staples, such as food, to ensure people would be able to obtain their basic necessities.
  • Justify the use of price controls when certain conditions are met

• Costs and Production in the Short-Run

  • If the short-run production function (Q =f(L) given fixed input and technology) and the prices of the inputs are known, all the short-run costs can be calculated.
  • Fixed Cost (FC) is the quantity of the fixed input times the price of the fixed input.
  • FC is total fixed cost and may be referred to as TFC.
  • AFC is fixed cost per Q.
  • Variable Cost (VC) is the quantity of the variable input times the price of the variable input.

• The Slope of the Short-Run Aggregate Supply Curve

  • In the short-run, the nominal wage rate is fixed.
  • An alternate model explains that the AS curve increases because some nominal input prices are fixed in the short-run and as output rises, more production processes encounter bottlenecks.
  • At low levels of demand, large numbers of production processes do not make full use of their fixed capital equipment.
  • Likewise, when demand is high, there are few production processes that have unemployed fixed outputs.
  • In the short-run, firms possess fixed factors of production, including prices, wages, and capital.

• Moving from Short-Run to Long-Run

  • In the short-run, the price level of the economy is sticky or fixed; in the long-run, the price level for the economy is completely flexible.
  • During the short-run, firms possess one fixed factor of production (usually capital).
  • In the short-run, there is a positive relationship between the price level and the output .
  • In the short-run, the price level of the economy is sticky or fixed depending on changes in aggregate supply.
  • The aggregate supply moves from short-run to long-run when enough time passes such that no factors are fixed.

• Production Outputs

  • Fixed costs are those expenses that remain constant regardless of the amount of good that is produced.
  • Normal Profit: The average total cost equals the price at the profit-maximizing output.
  • If the manufacturer stopped production, it would sustain all the fixed costs as a loss.
  • Shutdown: The price is below average variable cost at the profit-maximizing output.
  • The revenue gained from sales of these products do not offset variable and fixed costs.

• Supply Schedules and Supply Curves

  • Plotting the summation of individual quantities per each price will produce an aggregate supply curve.
  • In theory, in the long run the aggregate supply curve will not be upward sloping but will instead be vertical, consistent with a fixed supply level.
  • This is due to the underlying assumption that in the long run, supply of a good only depends on the fixed level of capital, technology, and natural resources available.
  • The supply curve provides one side of the price-to-quantity relationship that ensures a functional market.
  • Explain the price to quantity relationship exhibited in the supply curve

• Fixed Exchange Rates

  • A fixed exchange rate is a type of exchange rate regime where a currency's value is fixed to a measure of value, such as gold or another currency.
  • A fixed exchange rate regime should be viewed as a tool in capital control.
  • This places greater demand on the market and pushes up the price of the currency.
  • China is well-known for its fixed exchange rate.
  • Explain the mechanisms by which a country maintains a fixed exchange rate

• Characteristics of Pure Competition

  • The sellers in a purely competitive market are price takers.
  • The market set the price and each seller react to that price by altering the variable input and output in the short run.
  • In the long rung they can alter the scale of plant (size of the fixed input in each short run period).
  • Sellers cannot charge a price above the market price because sellers see all other goods in the market as perfect substitutes.
  • They can buy those goods at the market price.

• Duopoly Example

  • If Firm B is setting the price below marginal cost, Firm A will set the price at marginal cost.
  • If Firm B is setting the price above marginal cost but below monopoly price, then Firm A will set the price just below that of Firm B.
  • If Firm B sets the price above monopoly price, Firm A will set the price at monopoly level.
  • When Firm 2 prices above MC but below monopoly prices, Firm 1 prices just below Firm 2.
  • When Firm 2 prices above monopoly price (PM), Firm 1 prices at monopoly level (P1=PM).