Bocce and the Economics of Collusion

Dr. Doti is Dean of School of Business and Management, Chapman College, Orange, California. The names of the characters in this article are fictitious.

Without government intervention, monopolistic agreements are inherently unstable.

It’s all in the wrist. That was my conclusion after learning the basic techniques of bocce from my Uncle Rocco (Si Rocco). The lessons consisted mainly of his shouting in my ear, “Don’t-a roll the ball; you pull-a the ball and-a throw, like-a this.”

The pull-throw served me well. After moving to Chicago’s “Little Italy” to attend a nearby university, I was recruited during my second summer in the neighborhood to play in the legendary Sons of Italy Bocce League. The four-man team I played on was called “The Undertakers,” which in addition to myself consisted of three local area morticians.

The importance of the bocce games was reflected by the team’s post-game meetings at the neighborhood conference center—Whitey’s Tavern. It was there under the backdrop of moving water scenes from the “land of sky-blue waters” and crudely patched plaster walls that many business decisions in the neighborhood were made. Even in the case of our post-game wrap-up which ostensibly took place to review our team’s performance, it turned out that the supply of local funeral services also hung in the balance.

After roundly attacking each other’s performance at bocce, the business part of our meeting would usually start with Nick Mortadella, owner of Mortadella and Sons Funeral Home, saying something like, “What are we gonna price the new fake bronze caskets at? We go too low; nobody’ll buy da real ones.”

It usually took a while before Vinnie and Sal Sallamagotta, owners of Sallamagotta Bros. Funeral Parlor, could change their thought processes from bocce to business.

“Well, did ya hear me? Whatta we price it at?”

Getting no response from the brothers, Vinnie suggested, “Listen, how ‘bout if we all agree that we don’t buy da fake one.”

We all looked over to the elder brother, Sal, who was busily engaged in examining a fennel seed on the pizza he was eating. When he realized a reply was in order, Sal gave a characteristic shrug of acceptance.

So it was that imitation bronze caskets never made inroads in Little Italy’s funeral parlors.

The harmony demonstrated by my team members’ ability to compromise and work in consort at their weekly meetings at Whitey’s turned out to be short-lived. War clouds were clearly evident one Friday evening when I noticed a milling of people outside Sallamagotta Bros. Funeral Parlor. Getting closer to investigate, I saw Nick Mortadella standing outside in the street staring daggers at the hubbub of people. When I asked Nick what was going on, he motioned for me to follow him.

Nick walked into his competitors’ funeral home and led me down into the basement where coffee and cookies were generally served to the mourners. But in place of the usual aluminum tray of store-bought cookies was a “sweet table” filled with a bountiful supply of the most luscious-looking Italian pastries that I have ever seen. People wandered with delight around the table as they ogled cannoli, pasticiotti, spugliatelli, and zeppoli. In fact, if it were not for the fact that we were in the basement of Sallamagotta Bros. Funeral Home, I would have thought we were at a first-class wedding reception. Indeed, except for Nick who still glowered, everyone seemed to be in a festive spirit. One mourner was heaping pastries on his platter when he nudged Nick and said, “Hey Nick, what are ya going to do to top this? Haw Haw.”

I was just about to select an especially delicious-looking cannoli from the table when Nick pulled me away and said we have to go and talk to Sal. Upstairs we found a stoic-looking Sal wearing a dandruff-flaked pinstripe suit and positioned in front of the main parlor greeting mourners. When he saw the austere expression on Nick’s face, he said to wait for him at his home. Since his home was attached to the funeral parlor, all we had to do was walk behind the curtain where some poor soul was “laid-out” to be at Sal’s back door.

Mrs. Sallamagotta, a portly woman whose cheerful personality be lied her association with the funeral business, greeted us warmly. After leading us into the living room, Mrs. Sallamagotta brought us coffee and cannoli, the familiarity of which intensified Nick’s anger.

When Sal finally arrived, he looked at the uneaten cannoli on Nick’s plate and said, “Whazza matter Nick, don’t-a you like-a the cannoli?”

Nick exploded with several rhetorical questions: “Forget da cannoli. Whatta ya think is going on here? Are we in da catering business or something?”

From here the argument quickly generated into the type of shouting match where the logical basis of an argument is far less important than the decibel level in which it is carried out.

The unresolved nature of the shouting match was obvious as Nick yelled a final insult at Sal and then indicated to me that we make a rapid exit. As we left, Mrs. Sallamagotta grabbed each of our hands and wrapped them around the strings that held a bakery box full of leftover pastries, an offering that Nick did not refuse.

Outside in the street, Nick was still seething. “Wait till he sees what I can do . . . he hasn’t seen da last of dis . . . two people can play his game.”

Pricing Agreements: Why Monopolies Are Unstable

In his monumental work, The Wealth of Nations, Adam Smith discusses the ease in which monopolistic pricing agreements among competitors can be made: “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.” (The Wealth of Nations, Modern Library edition, 1937, p. 128.)

The collusion that took place between funeral home owners during the post-game meetings at Whitey’s is the same type of collusion that has occurred at one time or another in every sector of an economic system.

During the 1950s, a conspiracy among electrical goods suppliers involving such industrial giants as General Electric and Westinghouse took place. Following a costly price war that occurred in the transformer and switchgear electrical goods industry in 1954-55, profits in that industry tumbled. As a result, pressure was placed on key executives to turn the profit picture around.

In an article that presents a detailed review of the electrical conspiracy, Richard Austin Smith explains how the collusion was facilitated over several rounds of golf:


At the Switchgear Division (General Electric), the pressure was so great that a lifelong believer in tough competition underwent a remarkable conversion. He called a department manager into his office and told him the old cartel was to be cranked up again . . . Shortly thereafter, they trotted off to mix in a little conspiracy with a little golf in Bedford Springs, Pennsylvania. Every month that year one company conspirator would initiate a memorandum to the others . . . listing every pending job whether sealed bid or open and stating what the calculated book price would be. Then the conspirators would reassemble and compare calculations to forestall any chiseling from the agreed-upon book. (Fortune, “The Incredible Electrical Conspiracy,” April, 1961, p. 172.)

The similarity of the electrical conspiracy with my experience in Chicago’s Little Italy should not be surprising. Rewards from evading competitive market forces can be substantial. This can be more clearly seen by considering a simple example.

Assume that a funeral home owner incurs 300 dollars of additional costs to produce funeral services worth 1,000 dollars of increased revenue. Each “customer” is therefore worth 700 dollars ($1,000 – $300) in additional profits to a funeral home owner.

The situation changes, however, if a new competitor enters a market. There is a greater likelihood that price-cutting will take place as each competitor strives to increase market share. Indeed, the collusion typified by the post-game meetings at Whitey’s Tavern and that among major electrical goods suppliers over a round of golf represent attempts by individuals to prevent competitive market forces from eating into monopolistic returns.

Unstable Agreements

Fortunately, monopolistic agreements among competitors tend to be highly unstable and short-lived. One need not look far to see the reason for such instability. In the numerical example presented above, each additional “customer” to a funeral home represents $700 of additional profits—certainly a healthy inducement to violate monopolistic pricing agreements. To avoid retaliation, the initial violations often involve giving customers hidden discounts or providing additional services rather than announcing actual price cuts. Hence, the initial violation in the funeral home business of Little Italy involved providing a bountiful sweet table in place of store-bought cookies. In the case of the electrical goods conspiracy, the initial violations involved under-the-table price cuts:

Westinghouse had proposed to Florida Power that it add all its circuit-breaker order (about a million dollars worth) to its order for Westinghouse transformers. In return, Westinghouse would take 4 per cent off circuit-breaker book and hide the discount in the transformer order . . . Retaliation was not long in coming. Westinghouse went to Baltimore Gas and Electric . . . and said they would give 5 per cent off on switchgear and circuit-breakers, and a week later Allis-Chalmers gave Potomac Electric 12 per cent off. A week after that, Westinghouse gave Atlantic City Electric 20 per cent off, and it went down to much worse . . . in the winter of 1957-58 prices were 60 per cent off book. That was the end of the cartel. (Fortune, p. 176)

Even if one were to unrealistically assume that the participants in collusion abide by iron-clad agreements and are successful in preventing violations, there is still to consider the likely entry of new competitors into the market. Of course, a new competitor could be asked to join the cartel, but that would generally mean that a given level of profits would be divided among more participants resulting in smaller profit shares for all. In addition, a greater number of participants in the cartel increases the likelihood that the agreements will be violated and therefore increases the enforcement costs of the cartel. The recent experience of the OPEC cartel is a case in point. The only way a cartel can become permanently entrenched is to elicit the aid of government by making competition illegal.

In retaliation to the Sallamagotta brothers’ sweet table, Nick Mortadella’s opening salvo was to distribute felt- backed holy cards at funerals instead of the cheaper and more ordinary paper ones. When this strategy failed in generating the interest he hoped for, Nick resorted to lowering his base-rate charges for funeral services.

Meanwhile, the Sallamagotta brothers found the additional number of mourners generated by their sumptuous sweet table getting out of hand. People were coming from as far as Gary, Indiana to partake in the goodies. When the Sallamagotta brothers finally put an end to the sweet table and followed Nick’s price cuts, a funeral home price war had begun.

It is difficult to imagine where events would have turned were it not for an unforeseen business development in the neighborhood. The change was evident during an unusually peaceful bocce game that was devoid of the acrimonious display of insults that had characterized recent play.

Something was definitely in the wind as we all agreed to meet together at Whitey’s. It was like old times sitting in our usual red vinyl booth. This time, though, we skipped the bocce talk as Nick moved immediately to the business at hand.

“OK, ya all know dat Frenchy is gonna open up a new funeral home in da neighborhood. Whatta we gonna do?”

Frenchy, a neighborhood local of questionable French ancestry, owned a funeral home in nearby Greektown. Evidently, Frenchy’s move to expand his market share was behind the team’s renewed spirit of cooperation.

“We’ve already dropped our prices,” said Nick diplomatically avoiding mention of the factors that led to this turn of events. The intensity of Nick’s feelings was evident when in a highly charged and emotional tone he said, “If we get anoder funeral home, we won’t feed our families.”

“I checked with da Alderman’s boys. We pay three grand; dey won’t give Frenchy a license—simple as dat,” said Nick in the self-satisfied manner of a person who had obviously done one’s homework. He added that the payoff would be made next week to Alderman Cooley’s local precinct captain after the bocce games.

“There’s one hitch,” cautioned Nick whose sly smile implied there was no hitch at all. “Da alderman is catching heat from Alderman Czebinski; I guess da funeral homes in his ward don’t much like our prices. We make peace and go back to our old prices, or Frenchy gets da license.”

A round of clinking beer steins suggested that peace and order was again restored in the funeral trade in Little Italy.

The following week, after a brilliant round of bocce with my pull-throw in top form, I looked forward with silent anticipation to celebrating our bocce victory. As we walked towards Whitey’s, Nick in an obviously embarrassed and self-conscious tone said, “Da precinct captain don’t want ya to be dare when we pay im da money. Meet us later at Sal’s.”

I understood. The precinct captain’s pull in City Hall was far more important than the bocce pull I learned from Uncle Rocco.

Even if one were to unrealistically assume that the participants in collusion abide by iron-clad agreements and are successful in preventing violations, there is still to consider the likely entry of new competitors into the market. Of course, a new competitor could be asked to join the cartel, but that would generally mean that a given level of profits would be divided among more participants resulting in smaller profit shares for all. In addition, a greater number of participants in the cartel increases the likelihood that the agreements will be violated and therefore increases the enforcement costs of the cartel. The recent experience of the OPEC cartel is a case in point. The only way a cartel can become permanently entrenched is to elicit the aid of government by making competition illegal. In retaliation to the Sallamagotta brothers’ sweet table, Nick Mortadella’s opening salvo was to distribute felt- backed holy cards at funerals instead of the cheaper and more ordinary paper ones. When this strategy failed in generating the interest he hoped for, Nick resorted to lowering his base-rate charges for funeral services. Meanwhile, the Sallamagotta brothers found the additional number of mourners generated by their sumptuous sweet table getting out of hand. People were coming from as far as Gary, Indiana to partake in the goodies. When the Sallamagotta brothers finally put an end to the sweet table and followed Nick’s price cuts, a funeral home price war had begun. It is difficult to imagine where events would have turned were it not for an unforeseen business development in the neighborhood. The change was evident during an unusually peaceful bocce game that was devoid of the acrimonious display of insults that had characterized recent play. Something was definitely in the wind as we all agreed to meet together at Whitey’s. It was like old times sitting in our usual red vinyl booth. This time, though, we skipped the bocce talk as Nick moved immediately to the business at hand. “OK, ya all know dat Frenchy is gonna open up a new funeral home in da neighborhood. Whatta we gonna do?” Frenchy, a neighborhood local of questionable French ancestry, owned a funeral home in nearby Greektown. Evidently, Frenchy’s move to expand his market share was behind the team’s renewed spirit of cooperation. “We’ve already dropped our prices,” said Nick diplomatically avoiding mention of the factors that led to this turn of events. The intensity of Nick’s feelings was evident when in a highly charged and emotional tone he said, “If we get anoder funeral home, we won’t feed our families.” “I checked with da Alderman’s boys. We pay three grand; dey won’t give Frenchy a license—simple as dat,” said Nick in the self-satisfied manner of a person who had obviously done one’s homework. He added that the payoff would be made next week to Alderman Cooley’s local precinct captain after the bocce games. “There’s one hitch,” cautioned Nick whose sly smile implied there was no hitch at all. “Da alderman is catching heat from Alderman Czebinski; I guess da funeral homes in his ward don’t much like our prices. We make peace and go back to our old prices, or Frenchy gets da license.” A round of clinking beer steins suggested that peace and order was again restored in the funeral trade in Little Italy. The following week, after a brilliant round of bocce with my pull-throw in top form, I looked forward with silent anticipation to celebrating our bocce victory. As we walked towards Whitey’s, Nick in an obviously embarrassed and self-conscious tone said, “Da precinct captain don’t want ya to be dare when we pay im da money. Meet us later at Sal’s.” I understood. The precinct captain’s pull in City Hall was far more important than the bocce pull I learned from Uncle Rocco.

Further Reading

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