A Price-Fixing Attempt
Link: http://www.econ.ucsb.edu/~tedb/eep/news/monoair.html
Article text:
A Price-Fixing Attempt
A Wall Street Journal Story titled “Branson Starts Aerial War by Embarrassing Crandall” reports that “The battle over American Airlines proposed alliance with British Airways took an ugly turn yesterday, when the phone call that may forever haunt Robert Crandall, American’s chairman and chief executive, surfaced publicly once again.”
According to the story, Mr. Branson took out a series of ads that reprinted a transcript made by the U.S. Justice Department of a 1982 conversation in which Mr. Crandall is reported as saying to the president of the now-defunct Braniff International Airlines: “Raise your g—– fares 20%. I’ll raise mine the next morning. You’ll make more money and I will too.”
The WSJ reports that this conversation came from a phone call that was secretly tape-recorded by Mr. Crandall’s attorney and turned over to the Justice Department, which subsequently filed a price-fixing conspiracy charge against Mr. Crandall.
According to the WSJ story, an American Airlines executive is quoted as saying that Mr. Crandall is “terribly sad about this dirty trick by Branson”.
The story does not report Mr. Crandall’s feelings about his former attorney.
Article Discussion:
I remembered this particular article from an economics class discussion that I had last year at Cornell. The article is from the Economics department of UCSB and discusses the apparent attempt of Mr. Crandall, the chairman and chief executive of American Airlines at the time, to collude on prices with the president of Braniff International Airlines. He suggests that both of the parties simultaneously raise their prices by 20%.
This article relates directly to the prisoner’s dilemma discussion that took place in our class. Consider this situation with arbitrarily numbers. Two airline companies can choose to either sell tickets at a high or a low price. Both of them selling at the low price would result in each of them making $10M profit, both of them selling at a high price would result in each of them making $20M and if one sells at a high price and the other at the low price, the lower price company makes $30M and the other makes $0M. In this situation, the Nash equilibrium is for both companies to choose the low price. However, this isn’t optimal for the companies as they could both be making $20M by both selling at the high price. The double high price strategy, however, isn’t a Nash equilibrium as either of the companies have $10M to gain by switching to low prices while the other company stays at high prices. The only way to get to the double high price situation is to get the two companies to cooperate or collude, which can be assumed to be what the American Airlines executive is trying to do in the article.