What kind of game (according to outcome and sequence) is Crandall proposing to Putnam? 2. If Putnam agreed with Crandall’s proposal, how will this decision affect the buyers?
What kind of game (according to outcome and sequence) is Crandall proposing to Putnam? 2. If Putnam agreed with Crandall’s proposal, how will this decision affect the buyers?
Chapter15: Oligopoly And Strategic Behavior
Section: Chapter Questions
Problem 7P
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Questions:
1. What kind of game (according to outcome and sequence) is Crandall proposing to Putnam?
2. If Putnam agreed with Crandall’s proposal, how will this decision affect the buyers?
![AN ILLEGAL PHONE CALL
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 itť's dumb as hel. to sit here and compete with 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 anything we want to talk about.
Putnam was right: The Sherman Antitrust Act of the US 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 (2) 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".](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F2f30c874-9ab9-49f1-8078-5930ad484b58%2F3cba37a9-e345-4582-aea6-91c305542c19%2Fhtsy1fd_processed.png&w=3840&q=75)
Transcribed Image Text:AN ILLEGAL PHONE CALL
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 itť's dumb as hel. to sit here and compete with 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 anything we want to talk about.
Putnam was right: The Sherman Antitrust Act of the US 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 (2) 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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