The general public conceives of price-raising and price-fixing agreements to be as easy as a whispered conversation over cocktails at the club. They are, however, extremely difficult to arrange and even harder to maintain. For prices have been driven low by the competition of supply and production; in order to raise prices successfully, the firms will also have to agree to cut production. And there is the sticking point: for no business firm, no entrepreneur, and no manager likes to cut production. What they prefer to do is expand. And, if the businessman is to agree, grudgingly, to cut production, he has to make sure that his competitors will do the same. And then there will be interminable quarrels about how much production each firm is supposed to cut. Thus, if several firms are, collectively, producing 1 million tons of Metal X and selling it at $100 a ton, and the firms wish to agree to raise the price to $150 a ton, they will have to agree on how far below the million tons to cut production, and who should cut how much. And such agreements are at best very difficult to arrive at.
But this is only the beginning of the headaches in store for our cartelists. Generally, they will agree on quota production cuts under the output of a base year, usually the current year of operation. So, if the cartel is being formed in the year 1978, firms A, B, C, etc. may each agree to cut its output in 1979 20% below the previous year. But very quickly in the cartel agreement, and more and more as time goes on, human nature is such that each businessman and manager is thinking as follows: “Darn it, why am I stuck with the maximum production based on 1978 production? This is now 1979 (or 1980, etc.) and now we have installed such-and-such a new process, or we have such-and-such a hotshot product or salesman, that I know, if our company were all free to compete and to cut prices, we could sell more, pick up a larger share of the market, and make more profits, than we did that year.” As 1978 recedes more and more into the past, and 1978 conditions become more obsolete, each firm chafes increasingly at the bit, longing to be able to cut prices and compete once more. A firm might petition the cartel for an increased quota, but other firms, whose production would have to be cut, would protest bitterly and turn down the request.
Eventually, the internal pressures within the cartel become too great, and the cartel falls apart, prices tumbling once more. A characteristic pattern of cartel breaking is secret price-cutting. The restless firm, anxious to cut prices, decides to try to have its cake and eat it too. While its boobish fellow-producers keep sticking to the agreed cartel price of, say, $150 a ton, our hypothetical firm approaches a few customers whom it is anxious to keep, or others whom it is eager to acquire. “Look, because you’re such a great person and your firm is such a good one, I’m going to let you have our metal for $130 a ton. In return, I want you to keep quiet about it, so that your and our competitors won’t find out about the deal.” For a few months, this will work, and the firm will be reaping extra profits at its competitors’ expense. But, truth will get out, and eventually the word spreads to the firm’s other customers and competitors about the secret price-cut. Other customers will demand similar treatment, the competitors will self-righteously denounce our firm as a “rate-buster,” a “cheat,” and a traitor, and the cartel will dissolve in intensified competition, price-cutting, and intra- industry recriminations.
--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 56-58.
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