In the news today is AT&T’s decision to sue a number of major producers of liquid crystal displays (LCDs). These ubiquitous displays are used in televisions, cell phones, and – most likely – the computer screen you’re using right now.

AT&T is alleging something called “price fixing” in the market to buy and sell these displays. So, why are they so upset about this?

For starters, price fixing is illegal in the US; breaking the law is almost always a good reason to get upset. However, regardless of legality, the higher prices it creates are bad for both big corporate consumers like AT&T, and individual consumers like you. Let’s look at an example.

Imagine there are two grocery stores in your hometown; Greg’s Groceries and Sheila’s Shop. Greg and Sheila compete for your business by researching each others prices, and then advertising sales that compare those prices – for instance, – “Buy Bananas at Sheila’s for 19 cents a pound! Compare to 29 cents per pound at Greg’s.” This is good for you, because each week you can shop at the store with the lowest banana price.

Now, let’s say Greg and Sheila get tired of receiving such a low price for bananas. So, they agree to both sell bananas at 49 cents a pound. This is price-fixing, and it’s bad for you because it means you’re paying more for bananas than you otherwise should be.

This brings us back to AT&T.

At some point, LCD panels likely fetched high prices; however, as the technology became less expensive, and more producers moved in to the market, prices decreased. LCD panel producers like Samsung and LG – our real-life Greg and Sheila – decided they didn’t like this one bit. In response, they allegedly decided to fix the price of LCDs, such that everyone who sells them would charge similarly high prices.

This didn’t sit well with AT&T, who had purchased 300 million mobile phone units with these pricey LCD displays. And it shouldn’t sit well with you, either, because the high price AT&T paid for the phones is eventually passed on to you.

As you might imagine, consumers rarely support higher fixed prices; who wants to pay more for anything? However, people will occasionally take leave of their common sense and support lower fixed prices. As we’ll see in a future blog post, these ideas may seem nice in theory, but they can have disastrous economic consequences.