The price is wrong; matching your competitors' prices could be illegal

Entrepreneur, May, 1996 by Steven C. Bahls, Jane Easter Bahls

Marching your competitors' prices could be illegal.

How do you set your prices? Cost plus profit? Maybe. Chances are, though, that you also keep an eye on the prices at your competitor's business down the street. Whether you're hoping to offer lower prices or just to keep even, you want to know what your competitors are doing so you can adjust your prices if needed.

But if you're thinking about calling a few of your competitors on the phone and finding out what prices they're planning, you'd better not. While checking out the competition and adjusting prices accordingly may be fine in itself, watch your step or you could violate the Sherman Antitrust Act.

Adopted by Congress in 1890, the Sherman Act was designed to encourage healthy competition and keep any one company from monopolizing an industry. While its grandest achievement was the breakup of AT&T, the law forbids competing companies of any size from entering "contracts, combinations or conspiracies" in restraint of trade. That means it's illegal to make deals with your competitors about what price you'll charge or what services you'll offer.

Consider a recent U.S. District Court case concerning gasoline prices in Dothan, Alabama, a town of 50,000. Consumers noticed a persistent pattern: Prices at most of the gas stations in town would stay the same for weeks, then suddenly they would all change. There was no price difference between major brand dealers and others, but prices in Dothan were consistently higher than in surrounding communities. This pattern in itself doesn't necessarily reveal illegal price fixing because gas stations normally post prices on big signs out front and can easily keep in step with the competitor across the street.

In this case, though, people suspected a conspiracy. Four consumers filed a class-action lawsuit against a dozen gasoline retailers, charging violation of federal antitrust laws. Two retailers settled, one case was dismissed by the court, and four were cleared of the charges. After a month-long trial, a jury found the others had engaged in illegal price fixing.

How? Various gas station employees testified about conversations and telephone calls they'd overheard, with Owner A calling Owner B to say that "everyone" in Dothan was about to increase prices and asking them to "go along." Those who didn't sometimes received angry visits from the others.

The defendants received only a nominal fine and an injunction not to do it again. They were lucky. Violation of the Sherman Act is a felony, subject to fines of up to $1 million and jail terms of up to three years. Customers or competitors who've been injured may sue and recover up to three times the dollar amount of their damages. Bad publicity from a price fixing case can last a long time, and attorneys' fees in these complex cases can easily reach $50,000 or more.

Parallel Pricing

So you've vowed never to cut a deal with a competitor about prices and services. That's easy enough to stick to, but what about scoping out the competition's prices to make sure you're not undersold? It's a common practice that makes business sense. After all, if the industry leader lowers prices, its 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 again. This practice leads to similar prices for similar goods and services.

The U.S. Supreme Court ruled in 1954 that businesses deciding independently to match each other's prices isn't illegal because it's not a "contract, combination or conspiracy." The problem lies in determining whether parallel prices stem from unilateral decisions or from an illegal agreement--and an agreement doesn't have to be written to be illegal. Courts have inferred an agreement even in cases where no written contract was found and the owners claimed their prices were set independently.

For instance, in one landmark case, four competing manufacturers of fire extinguishers had nearly identical prices. Although they claimed there was no express agreement, the U.S. Ninth Circuit Court of Appeals didn't believe them. The court noted that the manufacturers regularly communicated information and made identical bids on public contracts. There was "overwhelming circumstantial evidence" of illegal price collusion.

In other cases, businesses with identical prices have been able to convince the court that the reason was the identical price of materials or services, response to the same competitive pressures, or everyone following manufacturers' suggested retail prices.

How to protect yourself? One rule of thumb: Never discuss prices with your competitors, and avoid frequent communications with them. Although discussion isn't illegal, it can be used as evidence against you. For instance, in one Utah case, egg distributors who set the same price were convicted of price fixing. Although they denied agreeing on prices, the jury believed their frequent meetings at a local cafe and their constant telephone calls to each other implicated them in price fixing.