Firms in oligopolies have a strong incentive to collude to reduce production, raise price, and increase profit. The great 18th-century economist Adam Smith was well aware of this potential market failure. In The Wealth of Nations he wrote.People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public, or in some diversion to raise prices.

To see a modem example of Smith’s observation, consider the following excerpt of a phone
conversation between two airline executives in the early 1980s. The call was reported in The New York Times on February 24, 1983. Robert Crandall was president of American Airlines, and Howard Putnam was president of Braniff Airways.

CRANDALL: I think it’s dumb as hell … to sit here and pound the @#$% out of each other and neither one of us making a #$%& dime.

PuTNAM: Do you have a suggestion for me?

CRANDALL: Yes, I have a suggestion for you. Raise your $%*& fares 20 percent. I’ll raise mine the next morning.

PUTNAM: Robert, we .

CRANDALL: You’ll make more money, and I will, too.

PUTNAM: We can’t talk about pricing!

CRANDALL: Oh @#$%, Howard. We can talk about any &*#@ thing we want to talk about.

Putnam Was right: The Sherman Antitrust Act .prohibits competing executives from even talking about fixing prices. When Putnam gave a tape of this conversation to the Department of Justice, it filed suit against Crandall.

Two years later, Crandall and the Department of Justice reached a settlement in which Crandall agreed to various restrictions on his business activities, including his contacts with officials at other airlines. The Department of Justice said that the terms of settlement would “protect competition in the airline industry, by preventing American and Crandall from any further attempts to monopolize passenger airline service on any route through discussions with competitors about the prices of airline services.

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