You own a baseball team during the 1930s. Your customers are facing declining incomes. In addition, the consumer price index is falling. In the words of the old American Express ads, “What will you do?” Before you decide, consider that you also possess both price-setting (monopoly) power for your product and single-employer (monopsony) bargaining power over your primary labor input. How will these powers affect your decisions?
You have these powers because Major League Baseball is a cartel. A cartel is a group of firms that band together to make some decisions jointly for the group’s mutual benefit. Members may see greater profits as the cartel tries to establish monopoly prices, although individual firms may find it advantageous to cheat on the cartel agreement. The American League and National League gained an explicit exemption from antitrust laws in a Supreme Court case dating from the struggle with the Federal League in 1914–15 Because the cartel gives you territorial protection against other teams moving into your city, you have price-setting power. You have single-employer power thanks to the reserve clause that binds players to just one team.
Economists and the general public are keenly interested in cartels. Since antiquity, people have suspected conspiracies that injured the public interest by fixing prices and other shenanigans. Since the enactment of the Sherman Antitrust Act (1890) and the Clayton Antitrust