Capitalism and Freedom

by Milton Friedman

3. Private Collusion The final source of monopoly is private collusion. As Adam Smith says, “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.”3 Such collusion or private cartel arrangements are therefore constantly arising. However, they are generally unstable and of brief duration unless they can call government to their assistance. The establishment of the cartel, by raising prices, makes it more profitable for outsiders to enter the industry. Moreover, since the higher price can be established only by the participants’ restricting their output below the level that they would like to produce at the fixed price, there is an incentive for each one separately to undercut the price in order to expand output. Each one, of course, hopes that the others will abide by the agreement. It takes only one or at most a few “chiselers” who are indeed public benefactors—to break the cartel. In the absence of government assistance in enforcing the cartel, they are almost sure to succeed fairly promptly.