December 5, 1988
"Competing, Not Conspiring"
San Jose Mercury News
By Timothy Taylor
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JUST because you're paranoid doesn't mean they're not out to get you. But
if you tend to see economic conspiracies everywhere, it's wise to consider the
possibility that you are failing to understand how a market economy works.
The news and business pages have been full of economic conspiracy theories
lately, some explicit and some only hinted at.
For example, a recent front-of-the-business-section story argued that "close
observers of the industry" believe that the increases in airline fares before
Thanksgiving were "the first truly visible signs of a cartel at work."
The evidence appears to be that many airlines raised fares at roughly the same
Another example: Attorney General John Van de Kamp is claiming that auto insurance
companies may have been "conspiring to boycott, coerce, or intimidate"
the state. His evidence of a conspiracy is that in the days immediately after
the passage of Proposition 103, about two-thirds of the companies either withdrew
from the market or threatened to do so.
A third example: The OPEC oil ministers met in Vienna, in an explicit attempt
to hold down the supply of oil and push oil prices past $15 a barrel.
In most other examples, the economic conspiracy is hinted at rather than spelled
out. One front-page story began, "Major U.S. banks raised their prime lending
rates..." All the banks decided on the same day to increase interest rates
by half a percent? It's common to read about how the price of, say, gasoline is
increasing everywhere, or how all the Japanese computer companies changed their
prices at about the same time. Don't these stories hint at some sort of implicit
conspiracy between the banks, the oil companies, or the Japanese?
What all these cases have in common is a confusion over how to discern when
there is evidence of an economic conspiracy. It may seem obvious that if all the
companies in an industry change their prices together, they must be colluding.
But the seemingly obvious implication is wrong.
Here's why: In a market economy, all companies selling the same product have
to charge close to the same price. If a company charges too much, it will lose
customers. If a company charges less, and manages not to go broke, other companies
will be forced to match the lower price. The result is what economists sometimes
call "the law of one price"; in a free market, a single price tends
So when the price of airline tickets or insurance or gasoline or a mortgage
increases, there are always two possible explanations. The companies have formed
a cartel to push up the price, or supply or demand have changed in such a way
that a higher market price is now appropriate. The fact that all the companies
in an industry changed their prices at nearly the same time is of absolutely no
use in distinguishing between these two explanations!
For most price changes, including those named above, the market explanation
is a considerably more convincing reason for increased prices than the conspiracy
The greed of businessmen, you see, is a constant thing. As Adam Smith wrote
back in 1776: "People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the public, or
in some contrivance to raise prices."
But if greed and the desire for conspiracy is constant, both before prices
change and after they change, greed and conspiracy cannot explain why the change
in prices occurred. Instead, there must be some reason why greed managed to increase
prices on that particular day. The only way to prove a conspiracy is to show some
evidence of how that conspiracy was agreed upon and enforced.
In the airline industry, the most logical explanation for the price increase
is that airlines recognized that demand for travel is higher over the holidays,
because people are willing to pay more to visit family and friends. Two days after
the "cartel" story appeared, Continental and Eastern announced discount
fares to Florida and other vacation spots.
In the insurance industry, it should be obvious even to a political official
that when a law passes to cut insurance rates by at least 20 percent, no conspiracy
was needed for companies to realize they're about to have some financial trouble.
And in the case of OPEC, while it's clear that the organization is trying to
control the oil market, it's also been clear for a few years now that this conspiracy
cannot enforce its price and output decisions on its own members, much less on
the rest of the market.
Perhaps the real giveaway about these ill-considered accusations of economic
conspiracy, though, is how the imagined conspiracy comes and goes. When prices
go up, the reason always seems to be that companies are conspiring. But when prices
fall, no one gives the conspiracy any credit.
When is the last time you heard someone say, "Oh, those nice oil companies
just lowered the price of gasoline again." Companies don't act out of charity
when they lower their prices, and they generally aren't conspiring together when
their prices increase.
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