Final answer:
The practice being described is known as resale price maintenance, which occurs when a manufacturer collaborates with wholesalers or retailers to maintain certain retail prices. This form of price fixing is generally illegal as it restricts competition and is against antitrust laws designed to prevent collusion and cartel behavior.
Step-by-step explanation:
The issue described occurs when a manufacturer conspires with wholesalers or retailers to maintain certain prices at the retail level. This practice is known as resale price maintenance (RPM) or, more broadly, price fixing, and it is typically deemed illegal because it disrupts free market competition.
In retail markets, if a product manufacturer suggests a minimum price for its products and penalizes dealers who sell below that threshold, it is engaging in a practice that can be seen as an indirect form of resale price maintenance. While suggesting minimum prices are legally allowed, demanding dealers to follow them under a minimum resale price maintenance agreement is illegal. This is because it infringes on the ability of dealers to compete, potentially leading to higher prices for consumers and a reduction in consumer welfare. Antitrust laws are put in place to prevent such practices, ensuring fair competition among businesses and prohibiting actions like collusion and the formation of cartels. Collusion between firms, especially in oligopolistic markets, involves companies working together to control prices, which can lead to artificially high prices and reduced output, similar to the effects of a monopoly.