32.1 Price fixing button

32.1 Price fixing button

Courtesy of American Airlines;

In the 1980s American Airlines and now-defunct Braniff Airlines engaged in a fierce price war that eroded profits of both carriers. (1) In the midst of the battle, Robert Crandall, the president of American, made a telephone call to Howard Putman, the president of Braniff. Unbeknownst to Crandall, the phone call was being taped. The conversation went as follows: Mr. Crandall: I think it’s dumb as hell for [blank] sake, all right, to sit here and pound the [blank] out of each other and neither one of us making a [blank] dime. Mr. Putman: Well… Mr. Crandall: I mean, you know, [blank] what the hell is the point of it? Mr. Putman: But if you’re going to overlay every route of American on top of every route that Braniff has—I can’t just sit here and allow you to bury us without giving our best effort. Mr. Crandall: Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years. Mr. Putman: Do you have any suggestions for me? Mr. Crandall: Yes, I have a suggestion for you. Raise your [blank] fares 20 percent. I’ll raise mine the next morning. Mr. Putman: Robert, we… Mr. Crandall: You’ll make more money and I will, too. Mr. Putman: We can’t talk about pricing! Mr. Crandall: Oh [blank], Howard. We can talk about any [blank] thing we want to talk about. (2) The taped conversation found its way to the U.S. Justice Department. Ironically, Mr. Crandall’s suggestion to raise prices did not violate Section 1 of the Sherman Act because Mr. Putman rejected the proposal. A conspiracy to fix prices requires two or more conspirators! Nevertheless, the Justice Department reminded American Airlines that its behavior could be interpreted as an attempt to monopolize a market, which would be a violation of Section 2 of the Sherman Act. American agreed to "cease and desist" from any further discussions of prices with competitors. This anecdote is drawn from Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics (New York: Macmillan, 1989), p. 368–389. New York Times, February 24, 1983.