Gather around for some bedtime tales from the beautiful land of the free market. Here are four classical antitrust-collusion economic stories.

communication problems

Once upon a time, in February 1982, the CEO of American Airlines, Robert Crandall, found price competition too fierce in the airline industry. He called Howard Putnam, the CEO of Braniff Airlines, to share his thoughts. Little did he know that Putnam was recording the conversation:

Crandall: I think it’s dumb as hell for Christ’s sake, all right, to sit here and pound the **** out of each other and neither one of us making a ****ing dime.

Putnam: Do you have a suggestion for me?

Crandall: Yes. I have a suggestion for you. Raise your goddamn fares twenty percent. I’ll raise mine the next morning. You’ll make more money and I will too.

Putnam: We can’t talk about pricing.

Crandall: Oh bull ****, Howard. We can talk about any goddamn thing we want to talk about.

firms being inventive

In a land where auctions are as strategic as chess games, the German government auctioned ten blocks of frequency spectra for mobile telephone calls. The market, a duopoly, had two bidders: Mannesmann and T-Mobile.

Mannesman opened with a bid of 20 million deutsche mark per megahertz for blocks 1–5 and 18.18 million for blocks 6– 10. Why 18.18? A rule of the auction was that any subsequent bid had to be at least 10 percent higher than the prevailing bid. Given that 10 percent higher than 18.18 is 20, was Mannesman signaling to T-Mobile that it should follow up with a bid of 20 million on blocks 6–10, so that each would receive five blocks at this low price? Well, that is exactly what happened. T-Mobile bid 20 million on blocks 6–10, and there were no subsequent bids.

theory works well, theoretically

The standard Cournot model almost assumes symmetric firms making up the market. However, consider a would-be cartel among gasoline stations in Quebec:

  • One source of differences among these retailers was their per-unit cost of gasoline. Larger retailers, such as Bilodeau-Shell, negotiated lower wholesale prices; Ultramar, vertically integrated with its refinery, had lower costs.
  • Another asymmetry was that some stations sold complementary products, such as Loblaws (a supermarket chain) and Couche-Tard (a chain of convenience stores). Firms with lower costs or complementary products (where gasoline might be a loss leader) preferred a lower collusive price than others.

Consistent with significant heterogeneity in preferences, it took a lot of negotiation to settle on a price. Thanks to wiretapping of their phones by the competition authority, we know that agreeing to a price increase took about sixty-five phone calls.

in the hands of the dealers

The Nasdaq system, operates through a network of (human) market maker––dealers.

At least two market makers are associated with each Nasdaq stock. Each posts a bid price (to buy) and an ask price (to sell). The difference between the lowest ask price and the highest bid price forms the “inside spread,” the dealers’ return. For example, if the lowest ask price is $10⅜ and the highest bid price is $10, then the spread (gross revenue for the dealer) is ⅜.

Each dealer competes by posting lower ask prices and higher bid prices. More intense competition compresses spreads. Notably, prior to June 1997, Nasdaq required price fractions for bid and ask quotes to be multiples of ⅛.

A Chinese proverb says, “where there are people, there are delicate interactions.”

William Christie and Paul Schultz noticed something odd: many Nasdaq stocks were rarely quoted in odd eighths, like $10⅛. The scholars hypothesized that dealers had developed a collusive norm of avoiding odd-eighth quotes to impose a minimum inside spread of ¼.

Evidence consistent with this hypothesis emerged when the study was publicized in the Los Angeles Times on May 26, 1994. The next day, the number of market makers of Microsoft using even eighths exclusively dropped from forty-one to one.

And so, dear reader, we all know what’s going on. May these stories remind you that behind every price and every trade, there’s a tale. Goodnight, and may your dreams be filled with these intrigue and wonder of economic adventures.