When a few large firms dominate an industry it is called oligopoly.  Examples are car manufacturing, breakfast cereals, airlines, long distance phone service, and car tires.   Economists worry about the possibility of price fixing in oligopoly.  Price fixing is a form of collusion in which several firms get together and agree not to compete and instead establish some kind of price coordination.  This collusion is illegal in most cases, but that does not mean it can not occur.  The "kinked demand curve" model shows us the difficulty encountered when firms in oligopoly act independently (do not coordinate or collude in any way).  Distrust, price warfare and attempts to gain at the expense of the other firm are all promoted by the interdependence between firms in oligopoly.   Collusion may be the way out. 

Electrical Equipment
One famous case involved a carefully planned collusive scheme in the electrical equipment manufacturing industry.  Major firms, including General Electric (GE) and Westinghouse were ultimately prosecuted, and high level executive ended up in jail.  It worked like this.  When a power company, such as Con Edison in NY, was planning to build a new facility they solicited bids from the equipment makers.  The said, in effect, ‘submit a sealed bid saying how much will you charge us for the following list of equipment’ (generators, etc.).  They then chose the lowest bidder.  But the suppliers got together and formed a ‘bidding ring", whereby they met and decided by a complex random process who would be the "low" bidder on a particular job.   The idea was to share the business "fairly" over the long haul.  The low bidder would actually submit a high bid, but would inform the others of their bid, and they would agree to bid even higher.  Profits were greatly enhanced and the problem of competition was eliminated.  They were very careful to cover their tracks, using pay phone for communication between the firms and holding their meetings in out of the way places where they wouldn’t be seen.  They got caught when company records revealed that people from each company had put in expense claims for their trips to these out of the way places.  The coincidence was too much and that blew the lid off.  When the case was tried in court the country was incensed (in the end, it was the power consumers who were being ripped off) and the companies were disgraced and suffered major penalties.

Airlines
More recently, in the 1980s, a collusive scheme that never got off the ground showed another, simpler, means of price coordination.  At a time when airlines were literally killing each other with aggressive price cutting tactics, the President of American Airlines got sick of it all and decided to take the bull by the horns.  He called up his then major rival, the President of Braniff Airlines (Braniff ultimately went out of business) and made a proposal.  Here’s the conversation that was later revealed in a tape recording.

Robert Crandall (American): I think it’s dumb as hell … to sit here and pound the (expletive deleted) out of each other and neither one of  us making a (expletive deleted) dime … We can both live here … and there’s no reason that I can see, all right, to put both companies out of business.

Howard Putnam (Braniff):  Do you have a suggestion for me?

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

Putnam:  We can’t talk about pricing.

Crandall: Oh (expletive deleted), Howard.  We can talk about any goddamn thing we want to talk about.

In this case, because Putnam did not accept the proposal, and because of technical issues involving Crandall’s exact wording, the government could not prove a case of collusion against American, and Crandall and his airline escaped penalties.
 

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