Cartel Problems: Reply
Abstract
I enjoyed the story of the plumbing fixtures cartel being drained of its assets. But if I need a plumber's friend, David Mills and Kenneth Elzinga have failed me. With the possible exception of their second paragraph,' nothing in their comment convinces me to eliminate the offending material. I will try to explain why in paragraphs 1) and 2) below. Then I will comment briefly on the antitrust implications in paragraph 3). 1) Mills and Elzinga maintain that my resolution of the deterrence problem is either ineffectual or unnecessary. It is ineffectual in the absence of detection and unnecessary in its presence. They are right about the first. No deterrence is possible without detection. But who would think otherwise, or that I had claimed otherwise? As for the second, they appear to believe that deterrence follows immediately from detection. This belief is obviously mistaken-as our crowded jails prove. More direct proof is furnished by the experience of the International Air Transport Association (IA TA). For detection, this cartel depends on our Civil Aeronautics Board and Department of Justice and its own compliance department (consisting of some fifty investigators) to inspect tickets, receipts, and accounting records at offices of the 'members and their approved travel agents (see IATA Review). For deterrence, it relies on the fines determined by due process before its Breaches Commission or the federal courts. In 1974, the Breaches Commission levied fines of $1.9 million (see Aviation Week); in fiscal 1975, the Civil Aeronautics Board obtained judgments totaling $556,594 (see its Reports to Congress); in September of 1975 the Justice Department obtained fines totaling $655,000 (see Aviation Week). These fines measure IA TA's success at detection and its failure at deterrence. In the same way that lax enforcement of the criminal laws leads to jails full of prisoners, inadequate punishment of cartel breaches increases their expected payoff and stimulates both the breaches and the fines in which they result. The IA TA's penalties have been too small or too uncertain to be regarded as anything more than a normal cost of doing business. Deterrence does not follow from detection.2 2) Mills and Elzinga object to the minimum-variance criterion for choosing among several joint maximizing points. I will be glad to consider an alternative if Mills and Elzinga will offer one. Instead of suggesting a definite alternative or, even better, the principles which govern its choice, they declare in effect that it could be anything.3 If focal points really do depend on analogy, accident, casuistry, and the other things in the list quoted from Thomas Schelling, they are analytically useless: being consistent with everything they explain nothing. 3) Mills' and Elzinga's remarks about antitrust implications disquiet me. They themselves do not recommend that we go about prosecuting oligopolists for having stable market shares, but their remarks alert me to the danger that my analysis will *Federal Reserve Bank of Dallas. IThere they object to my mild chastisement of standard theory for its fascination with the prisoners' dilemma. But since they advance the objection in an incidental manner I will disregard it, pointing out, however, that standard theory consists of the unwritten as well as the written word. For a more detailed criticism of the prisoners' dilemma as a model of oligopoly, see my (1976) paper. 2For more on these problems, see my (l977a,b) papers. 3Concerning the two examples they give (the gasoline marketers and the firms separated by the MasonDixon line), it is impossible to say whether the assumed arrangements indicate the unique joint maximum or a choice from among many.
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