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In Defense of Allowing Collusion

In my latest column for AIER I make the admittedly radical case for legalizing collusion among economic competitors (as long as government erects no barriers to entry into the industries in which these competitors operate). (I say “radical,” and of course it is. But it’s not unheard of. The emphatically not radical Columbia University economist Donald Dewey made a similar argument in the late 1970s. Other scholars who have made similar arguments are John Lopatka and Dom Armentano. George Bittlingmayer might also be included in this group.) Two slices from my column:

In modern liberal society if a seller of some output – say, yo-yos – retires or switches his commercial efforts from the selling of yo-yos to the selling of yogurt, no one regards this businessperson as having committed a moral or legal offense. Yet if this same businessperson were instead to collude with other yo-yo sellers to restrict output and (hence) to raise the price of yo-yos, he would be regarded by nearly everyone in modern liberal society as being not only unethical, but a criminal. Indeed, in the United States, a conviction for such collusion can be punished by imprisonment.

This harsh treatment of collusion is odd. After all, sellers who collude only restrict the quantities of output they make available for sale, while sellers who quit the industry stop producing those outputs altogether. Why punish the former action while thinking nothing of the latter?

Every mainstream economist would answer the above question with a recitation of the textbook demonstration that the gains reaped by colluders are less than is the cost of collusion borne by consumers. Upon completing this recitation – one that would likely include a nicely drawn “deadweight-loss triangle” – the mainstream economist would be confident that he has proven far beyond a reasonable doubt that the prohibition of collusion well and truly serves the public interest.

But if you press the mainstream economist to explain why, if collusion is so terrible, a seller’s quitting the industry is perfectly acceptable, that economist will stumble. He won’t know what to say because he almost certainly hasn’t even thought to compare collusion with quitting the industry altogether.

And thus we encounter one of the great inconsistencies of mainstream economics. An economist working in this venerable tradition (and, for the most part, it is truly venerable) understands that a seller who dies or retires or otherwise exits the industry does no harm to consumers because other suppliers will quickly fill the output gap left by the seller’s exit. More specifically, this economist will quite correctly explain that if the outputs that the departed seller is no longer supplying are valuable enough to consumers to justify their continued production, other sellers will expand their production or new sellers will enter the industry to replace the now-departed seller. Easy-peasy.

But this economist mysteriously fails to apply this same understanding to collusion. Assuming that there are no government-erected barriers to entry into the yo-yo industry, if two or more yo-yo sellers collude to raise prices, these higher prices will prompt yo-yo sellers who aren’t party to the collusion to expand their yo-yo outputs, or they will attract new producers into the yo-yo industry.

There is simply no good reason to worry that, in markets unprotected by government-erected barriers to entry, reduced output caused by collusion will create any more consumer harm than is created whenever producers voluntarily leave the industry.


It’s tempting to dismiss the above analysis as ivory-tower speculation. But the real ivory-tower speculators are those who insist that all collusion among competitors should be prohibited by law. It is these persons who pretend to know in the abstract that a particular voluntary method of setting prices is always so certain to have no potential upsides that it should be outlawed. In contrast, those relatively few of us who advocate allowing market participants to make whatever peaceful, voluntary agreements they wish – including agreements to fix prices – are not confident that we can know in the abstract just what are, and what aren’t, in each of countless particular cases the best methods of serving consumers. We understand that if markets are to serve consumers as well as possible, entrepreneurs and investors must enjoy wide freedom to experiment with different organizational and contractual arrangements. They won’t always get it right, but because they spend their own money – and because they can’t force anyone to do business with them – over time the results of free competition and open market experimentation will serve consumers far better than will politicians, bureaucrats, and courts who arrogantly presume to know better than actual market entrepreneurs, investors, and managers how to survive and thrive in competitive markets.

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