Is it considered price fixing if a company does not allow their product to be sold for less than the retail price they set?

Answer 1

No. Price fixing is colusion with another retailer to set a minimum price in an area. A good example of price fixing is the price of Gasoline. The price of a gallon of gasoline does not vary more than $0.10 in a geographical area. Yet the fiscal states of the various companies selling gasoline vary greatly. The various companies avoid charges under the RICO act because they look at one anothers billboard prices rather than talking to one another. This is called price leadership, but has the same outcome of non-competitive pricing.

Price leadership causes prices to go down, not up.

Gasoline is an example, because it's a commodity--a product sold primarily on price. Most gasoline customers buy either on price or convenience. We'll set up a corner with a Texaco and an Exxon on it. In general, a car will go equally well if you put either brand of gas in it. If the Texaco charges the same for gas as Exxon, people will usually go to the one that's on the side of the street they're on. There are some extrinsic items that could affect this--the Exxon sells Pizza, people like the cashiers at Texaco, cigarettes are cheaper at Exxon...something. But if all the customer wants is gas and the gas is the same price, they'll go to the most convenient station.

Now let's say the Exxon owner wants to increase his sales of fountain sodas. The biggest profit margin in all retail is fountain sodas--80 to 85 percent. Gasoline, OTOH, has a profit margin of about a nickel a gallon if you're lucky; at $2.50 per gallon that's two percent. The Exxon owner knows that if he displays large attractive signage he can convince at least half his customers to buy sodas. The problem, of course, is getting people through the doors--which he does by lowering the price of gas by three cents a gallon. The plan backfires if soda sales don't increase, but they almost always do. People will cross the street to save three cents per gallon on gasoline--it's the only product that has this effect. To get back the traffic, the Texaco owner will lower his prices too.

It used to be you could set your price almost to whatever you wanted, and justify it in another way. You could charge 35 cents per gallon when the guy down the street wanted 32, and people would come to your station because you checked the customers' oil and topped it off free if they needed that. You could charge 38 cents per gallon and give away free glasses with every fill-up and people would come in. Now that most places are self-serve only, gas is bought solely on price.

As to the fiscal state of the various companies...there is little correlation between price and profit margin anymore. A megachain like Tractor Supply, a small chain like Southern States and an independent like Frank's Feed and Farm (I just pulled Frank out of thin air) could all sell Purina Dog Chow for $19.95 per 50-pound bag--Tractor Supply because they use their buying power to order 25 truckloads a day, Southern States to try to compete with TSC and Frank because he doesn't like to be undersold on little stuff like dog food. At the same time, the TSC manager has to price his dog food below what the market would bear because the Walmart manager is attempting to put TSC, Southern States and Frank out of the dog food business. The answer is a little bit more complicated. Manufacturers have what are called the 'Colgate' rights with respect to their products meaning that they can maintain an 'MSRP' and refuse to sell to non-conforming retailers. However, they must enforce this policy fairly and without prejudice. There can be a thin line between enforcing your Colgate rights and price-fixing.