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One Entrepreneur's Brush With Price-Fixing—And Ideas On How To Stop It

How Tower Paddle Boards CEO Stephen Aarstol went against the current, and battled industry forces with innovation.

A couple years ago, I found myself in Thailand, trying to visit Cobra International, the mammoth factory that supplied stand up paddle boards (think kayaks you stand on) to all the major players in the industry. Collectively, their partner companies controlled the lion’s share of the emerging stand up paddle board market. A year earlier, Cobra had conveyed interested in working with us, but they mysteriously stopped replying to my emails.

Buoyed by a recent investment from Mark Cuban on ABC’s Shark Tank, I informed my contact that I would be at the factory on a certain day. We met in the lobby, where we had our meeting right out in the open.

She quickly realized I wouldn’t leave without knowing why the company wouldn’t work with me. She gave me few answers, but I concluded that no one in the business liked that I would be selling boards at a lower price; if Cobra produced for me, it might upset the bigger brands it provided the manufacturing for.

The Wrong Kind of Secret Sauce

Price-fixing happens when competitors agree to set similar prices on products or services. When a major company does this, it establishes a virtual monopoly, keeping prices high and the market closed to newcomers.

Customers ultimately foot the bill for price-fixing. It’s one thing to have a healthy market in which people are willing to pay $600 for an iPhone when there’s a $100 alternative. It’s another thing when companies act anti-competitively to maintain a price that doesn’t reflect true supply and demand.

It’s unethical and illegal, but some companies see plenty of benefits to the risk. They can shore up their status as "industry giants" and make newcomers less threatening. They can control their profit margins, flooding the market with undifferentiated products and centralized pricing decisions.

Tech and Potato Farmer Cartels

Of course, you know price-fixing happens in other arenas besides the stand up paddle board market.

Between 1996 and 2006, several big-name tech brands worked together to control the supply of TVs and color monitors for desktops. It was the most overt kind of price-fixing, even including "burn after reading" memos. When the EU anti-trust regulator found out, the brands were slapped with a $1.96 billion fine.

Not all price-fixing deals are this hush-hush. A decade ago, Idaho potato farmers banded together to set prices on their crops that ensured better profits for everyone. Possibly not realizing their strategy was illegal, a formal presentation was given to a farmers’ assembly, receiving a standing ovation. Now, the grocery industry is crying foul and likening them to foreign oil cartels.

More recently, Penguin Books, along with four other major publishers, was accused of fixing prices on e-books in collusion with Apple. All publishers have settled out of court, leading to a total payout of $164 million.

Companies that feel they have to engage in price-fixing should take a good look within. Why would they need that option? What competitive advantages do they need to beef up to avoid taking illegal routes? Price-fixing is essentially conspiring to hurt customers—not the best strategy for long-term loyalty.

Stand Up to Price-Fixing

I walked away from Cobra that day down, but not out. I took Cuban’s money and adapted to the emerging inflatable paddle board market. Cobra didn’t even produce those boards. We innovated, creating a newer design that proved popular. We closed out 2012 with $1.7 million in sales and did so without raising our prices higher than we wanted to.

It’s not easy to be a newcomer in an industry fraught with price-fixing—but it’s possible. Here are some things entrepreneurs can do to compete.

Innovate and compete where others cannot. Some economists believe government intervention isn’t even needed in cases of price-fixing because the system itself is so unstable. In today’s connected world, there is more transparency, and customers won’t stand for price-fixing for long. Eventually, someone will have to break ranks or a disrupter will break through to establish real competition.

Contact the businesses involved. It doesn’t hurt to handle this head-on sometimes. Reason with them and explain what you’ll do if the price-fixing doesn’t stop. The practice isn’t illegal in every country, but the court of public opinion is more brutal, anyway.

Spread the word. Let the public know about price-fixing and how it hurts the system. If competitors are price-fixing, let customers know and call them out by name. American consumers should benefit from truly free and open markets.

Call the cops. The Anti-Trust Division of the U.S. Department of Justice won’t actually step in except in extreme cases, but the threat of legal action is as powerful as legal action itself. Often, price-fixing is forced upon smaller companies along the supply chain by major players. When the scapegoat is government regulation, these companies have more leverage to insist upon doing the right thing.

Price-fixing is a terrible strategy from all angles. Entrepreneurs, customers, and the market itself are all hurt when a few companies work together to set high prices. As we learned at Tower, there are ways around an unjust system for the entrepreneur brave enough to take them.

Stephan Aarstol is the CEO and founder of Tower Paddle Boards, an online, manufacturer-direct brand in stand up paddle boarding. Follow him on Twitter @StephanAarstol.

[Image: Flickr user Visit St. Pete/Clearwater]