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Principles of Economics- Mankiw (5th) 357

Principles of Economics- Mankiw (5th) 357 - CHAPTER 16 O L...

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CHAPTER 16 OLIGOPOLY 367 CASE STUDY AN ILLEGAL PHONE CALL Firms in oligopolies have a strong incentive to collude in order to reduce pro- duction, raise price, and increase profit. The great eighteenth-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 con- versation ends in a conspiracy against the public, or in some diversion to raise prices.” To see a modern example of Smith’s observation, consider the following ex- cerpt 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 Cran- dall was president of American Airlines, and Howard Putnam was president of Braniff Airways. C RANDALL : I think it’s dumb as hell . . . to sit here and pound the @#$% out P
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