Over the last decade, the toy aisles of American retailers have been the scene of cutthroat competition. The 2011 Christmas shopping season saw Elmo at the center of a price-slashing competition when Target priced the latest Elmo doll at 89 cents less than Walmart (for those with a coupon), and $6 less than Toys “R” Us. The competition has been so extreme that three toy retailers—KB Toys, FAO Schwarz, and Zany Brainy—have been forced into bankruptcy since 2003. Due to aggressive price-cutting by Walmart, the market share of Toys “R” Us has fallen from first to second.

What is happening? The turmoil can be traced back to trouble in the toy industry itself as well as to changes in toy retailing. Every year for several years now, overall toy sales have fallen a few percentage points as children increasingly turn to video games and the internet.

The result is much like a story of tacit collusion sustained by repeated interaction run in reverse: because the overall industry has been in a state of decline and there are new entrants, the future payoff from collusion is shrinking. The predictable outcome is a price war.

Since retailers depend on holiday sales for nearly half of their annual sales, the holidays are a time of particularly intense price-cutting. Traditionally, the biggest shopping day of the year has been “Black Friday,” the day after Thanksgiving. But in an effort to expand sales and undercut rivals, retailers begin their price-cutting earlier in the fall, typically in early November, well before Thanksgiving.

And with each passing year, the holiday price-war competition becomes more intense. In 2013, Amazon slashed its toy prices 16% in early November, followed by Walmart, Target, and Best Buy who also slashed prices. In addition, five of the eight major toy retailers offered to match their competitors’ prices during the holiday season. According to Brian Sozzi, head of a retail research firm, “Amazon launched deals before the holiday that forced the others to follow. This wave is happening before promotions are supposed to happen…. things are looking kind of irrational.”

With toy retailers forced to cut prices to keep pace with their rivals or lose sales, we have a phenomenon known as “creeping Christmas”: the price wars of Christmas arrive earlier each year.

Solutions appear at back of book.

The United Kingdom is home to two long-haul airline carriers (carriers that fly between continents): British Airways and its rival, Virgin Atlantic. Although British Airways is the dominant company, with a market share generally between 50% and 100% on routes between London and various American cities, Virgin has been a tenacious competitor.

The rivalry between the two has ranged from relatively peaceable to openly hostile over the years. In the 1990s, British Airways lost a court case alleging it had engaged in “dirty tricks” to drive Virgin out of business. In April 2010, however, British Airways may well have wondered if the tables had been turned.

It all began in mid-July 2004, when oil prices were rising. British prosecutors alleged that the two airlines had plotted to levy fuel surcharges on passengers. For the next two years, according to the prosecutors, the rivals had established a cartel through which they coordinated increases in surcharges. British Airways first introduced a £5 ($8.25) surcharge on long-haul flights when a barrel of oil traded at about $38. It increased the surcharge six times, so that by 2006, when oil was trading at about $69 a barrel, the surcharge was £70 ($115). At the same time, Virgin Atlantic also levied a £70 fee. These surcharges increased within days of each other.

Eventually, three Virgin executives decided to blow the whistle in exchange for immunity from prosecution. British Airways immediately suspended its executives under suspicion and paid fines of nearly $500 million to U.S. and U.K. authorities. And in 2010 four British Airways executives were prosecuted by British authorities for their alleged role in the conspiracy.

The lawyers for the executives argued that although the two airlines had swapped information, this was not proof of a criminal conspiracy. In fact, they argued, Virgin was so fearful of American regulators that it had admitted to criminal behavior before confirming that it had indeed committed an offense. One of the defense lawyers, Clare Montgomery, argued that because U.S. laws against anti-competitive behavior are much tougher than those in the United Kingdom, companies may be compelled to blow the whistle to avoid investigation. “It’s a race,” she said. “If you don’t get to them and confess first, you can’t get immunity. The only way to protect yourself is to go to the authorities, even if you haven’t [done anything].” The result was that the Virgin executives were given immunity in both the United States and the United Kingdom, but the British Airways executives were subject to prosecution (and possible multiyear jail terms) in both countries.

In late 2011 the case came to a shocking end for Virgin Atlantic and U.K. authorities. Citing e-mails that Virgin was forced to turn over by the court, the judge found insufficient evidence that there was ever a conspiracy between the two airlines. The court was incensed enough to threaten to rescind the immunity granted to the three Virgin executives.

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