The following story, offered with tongue in cheek, illustrates a localized market that exhibits some characteristics of oligopoly, including strategic behavior. Tracy Martinez’s Native American Arts and Crafts store is located in the center of a small tourist town that borders on a national park. In its early days, Tracy had a mini-monopoly. Business was brisk and prices and profits were high. To Tracy’s chagrin, two "copy-cat" shops opened adjacent to her store, one on either side of her shop. Worse yet, the competitors named their shops to take advantage of Tracy’s advertising. One was "Native Arts and Crafts," the other, "Indian Arts and Crafts." These new sellers drew business away from Tracy’s store, forcing her to lower her prices. The three side-by-side stores in the small, isolated town constituted a localized oligopoly for Native American arts and crafts. Tracy began to think strategically about ways to boost profit. She decided to distinguish her shop from those on either side by offering a greater mix of high quality, expensive products and a lesser mix of inexpensive "souvenir" items. The tactic worked for a while, but the other stores eventually imitated her product mix. Then, one of the competitors next door escalated the rivalry by hanging up a large sign proclaiming "We Sell for Less!" Shortly thereafter, the other shop put up a large sign stating "We Won’t Be Undersold!" Not to be outdone, Tracy painted a colorful sign of her own and hung it above her door. It read "Main Entrance."

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12.2 Collusion

One of the most famous cases of collusion in the United States involved some very unusual methods of conspiracy. In 1960 an extensive price-fixing and market-sharing scheme involving heavy electrical equipment such as transformers, turbines, circuit breakers, and switch gear was uncovered. Such participants as General Electric, Westinghouse, and Allis-Chalmers had developed elaborate covert schemes to rig prices and divide the market. Consider switch gear equipment: At . . . periodic meetings, a scheme or formula for quoting nearly identical prices to electric utility companies, private industrial corporations and contractors was used by defendant corporations, designated by their representatives as a "phase of the moon" or "light of the moon" formula. Through cyclic rotating positioning inherent in the formula one defendant corporation would quote the low price, others would quote intermediate prices and another would quote the high price; these positions would be periodically rotated among the defendant corporations … This formula was designed to permit each defendant corporation to know the exact price it and every other defendant corporation would quote on each prospective sale. At these periodic meetings, a cumulative list of sealed bid business secured by all of the defendant corporations was also circulated and the representatives present would compare the relative standing of each corporation according to its agreed upon percentage of the total sales pursuant to sealed bids. The representatives present would then discuss particular future bid invitations and designate which defendant corporation should submit the lowest bid therefore, the amount of such bid, and the amounts of the bid to be submitted by others. (1) 1. Jules Backman, The Economics of the Electrical Equipment Industry (New York: New York University Press, 1962), pp. 135-138, abridged. Reprinted by permission.

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