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Case Study An Illegal Phone Call. (N.D.) - Retrieved From Economics Key Website

1. Robert Crandall, president of American Airlines, calls Howard Putnam, president of Braniff Airways, and suggests they collude to raise prices. Crandall proposes that Braniff raise its fares 20% and that American will raise its fares the next morning, allowing both airlines to increase profits. 2. Putnam informs Crandall they cannot discuss pricing and gives a recording of the call to the Department of Justice, who files an antitrust suit against Crandall. Crandall later settles with restrictions on business activities and contact with other airlines to protect competition in the industry.

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248 views1 page

Case Study An Illegal Phone Call. (N.D.) - Retrieved From Economics Key Website

1. Robert Crandall, president of American Airlines, calls Howard Putnam, president of Braniff Airways, and suggests they collude to raise prices. Crandall proposes that Braniff raise its fares 20% and that American will raise its fares the next morning, allowing both airlines to increase profits. 2. Putnam informs Crandall they cannot discuss pricing and gives a recording of the call to the Department of Justice, who files an antitrust suit against Crandall. Crandall later settles with restrictions on business activities and contact with other airlines to protect competition in the industry.

Uploaded by

Mary lord Aclan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BM1704

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 it’s dumb as hell… 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”.

REFERENCE:
Case Study An Illegal Phone Call. (n.d.). Retrieved from Economics Key Website:
https://economicskey.com/case-study-16-6357/

Questions: (2 items x 10 points)

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?

10 Handout 2 *Property of STI


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