Case Study An Illegal Phone Call

Firms in oligopolies have a strong incentive to collude in order to reduce production, raise price, and increase profit. The great eighteenth-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 modern 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 Cran-dall 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.

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