This article is an excerpt from the Shortform book guide to "Business Adventures" by John Brooks. Shortform has the world's best summaries and analyses of books you should be reading.
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What is price-fixing? Can it be successful? What companies have engaged in it?
Price-fixing happens when companies collude to increase their profits by agreeing on a price instead of competing for contracts. Despite the clearly stated laws prohibiting price-fixing, in 1961, 29 companies in the electrical manufacturing industry—most notably General Electric (GE)—were found guilty of repeatedly engaging in the practice for years.
Continue reading to learn more about price-fixing and this historic case.
The General Electric Case
Antitrust laws are unambiguous. Section 1 of the Sherman Act of 1890 explicitly states that any act restraining trade is considered illegal. One such act is price-fixing.
(Shortform note: Some argue that going after price-fixers is a waste of time because price-fixing is hardly ever successful anyway—the free market makes it unsustainable, the maneuvers to make it possible (such as getting foreign companies on board) are impractical, and competitors can’t trust and rely on each other in the long run.)
(Shortform note: GE was the biggest company to be indicted, but it was only one of many; price-fixing was a widespread practice in the industry. In The Art of Thinking Clearly, Rolf Dobelli says that this kind of group behavior stems from the human desire to fit in—you copy other people’s behavior and judge that behavior based on how many people are doing it. The more people do something, the more you’re likely to consider it to be acceptable behavior.)
To determine what led the companies astray, John Brooks reviewed the report on the Senate hearings about the conspiracy. According to Brooks, the testimonies of GE executives implied that price-fixing was a result of poor communication. While GE sought to comply with antitrust laws and had its own policies prohibiting price-fixing, some executives thought these policies weren’t meant to be taken seriously. Thus, they would go through the motions of reminding subordinates about the rules—and then give them a wink. Subordinates took this wink to mean that they should ignore the rules and meet with competitors to fix prices. Bosses and subordinates would also sometimes talk in code, which was prone to misinterpretation.
| How to Communicate With People From Different Cultures As G.E. has demonstrated, communication can be tricky in the workplace, which can lead to poor decision-making. This is especially true when people in a workplace come from different cultures that communicate in distinct ways. In The Culture Map, Erin Meyer describes how to navigate a cross-cultural work environment: 1) Low-Context Culture: In this type of environment, people communicate and receive messages at face value. Thus, the responsibility to clearly communicate rests with the speaker. When communicating with someone from a lower-context culture, Meyer says you should be clear and specific, ask questions instead of looking for subtext, and recap what you discussed—winking just won’t do. 2) High-Context Culture: In this environment, people don’t communicate at face value and thus have to read between the lines. In contrast with a low-context culture, the listener is responsible for interpreting the speaker’s message correctly. (GE would be considered to have a high-context culture, as managers and subordinates had a system of winking and talking in code.) When communicating with someone from a higher-context culture, Meyer says you should listen more, observe the speaker’s body language, and ask questions to clarify your understanding. |
The top executives at GE insisted that they knew nothing about the winking and the resulting illegal activities. Though the judge was skeptical about their ignorance, there was no proof tying them to the conspiracy; thus, only middle managers were penalized, with some receiving 30-day jail terms.
(Shortform note: The GE case didn’t deter other companies from price-fixing, and the U.S. government cracked down on a number of big conspiracies over the decades: In the 1990s, five companies were charged in a lysine price-fixing conspiracy and were fined $105 million; in the 2000s, 21 airlines colluded on the price of shipping international air cargo and were fined $2 billion; and in the 2010s, 26 companies were involved in the price-fixing of car parts and were fined over $3 billion.)
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Here's what you'll find in our full Business Adventures summary :
- A collection of essays about the unpredictability of corporations and Wall Street
- How businesses and economies can rise and fall based on people’s behavior
- A look at the major events that shaped the financial world as we know it
