Economic Crime: Antitrust Offenses

Among the actions that antitrust law suppresses, none is so definitely harmful and so plainly illegal as express cartel agreements to raise prices or to reduce output. Cartel pricing is the effort by a group of erstwhile competitors cooperatively to mimic the high price and restricted output that a single monopolist would establish in that market. Price theory provides useful background.

Competitive pricing differs fundamentally from monopoly pricing. To simplify, competitive prices are based on producer costs because consumers have choices under perfect competition and can simply go elsewhere if one producer raises prices above its costs (counting a normal return to capital as a producer cost). A monopoly price is not based only on costs, however, but also on what the traffic will bear. Consumers have no choice when facing a monopolist, so the monopolist can raise price to the level of consumers' willingness to pay. What consumers are willing to pay can be far greater than a competitive costbased price. That difference—consumer surplus—is the most definite benefit that competition delivers to consumers. It is the rationale for the Sherman Act's insistence on competition. Scholars debate the proper way precisely to define this rationale in the abstract, but this debate is of little practical consequence to the topic of criminal antitrust enforcement.

Cartelists can pursue their cooperative goal of high pricing in several ways. The simplest is the old-fashioned price fix. An immortal attempt was the telephone call between Howard Putnam, president of Braniff Airlines and Robert Crandall, president of competitor American Airlines:

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. PUTNAM: Robert, we—CRANDALL: 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.

Putnam did not raise Braniff's fares in response to Crandall's proposal; instead he presented the government with a tape recording of the conversation. (United States v. American Airlines, Inc., 743 F.2d 1114, 1116 (5th Cir. 1984), cert. dismissed, 474 U.S. 1001 (1985).)

Besides simple price fixing, other cartel techniques include market division (splitting territories between sellers), output quotas (setting production limits for each cartel member to reduce output and drive up price), customer allocation (assigning particular buyers to particular sellers) and bid rigging. Cartels may use some or all of these methods (U.S. Department of Justice (2001); International Competition Policy Advisory Committee [ICPAC], pp. 171–174; United States v. Andreas and Wilson, pp. 666–668).