Principles of Microeconomics - Essay Example

Price fixation and cartel formation is illegal according to the U.S law. For example, there are three firms in an industry and they collude to form a cartel. They fix the prices they will charge from their customers and all the three firms charge the same price. Furthermore, firms may also fix prices to prevent new firms to enter the market. This is an example of horizontal price fixing and is illegal according to the US antitrust law. The US antitrust law discourages creation of monopoly and price fixing to stimulate competitiveness within an industry.

However, there are some exceptions to the illegality of cartels in the US. For instance, if the agreement between two companies is a tacit one, it is not considered as illegal. For example, Pepsi and Coca Cola do not have any formal price fixing agreement. However, they have a tacit agreement whereby both the companies charge similar price from their customers. They do not compete on the basis of price but instead involve in non price competition to increase their market