Monday, September 05, 2005

Capping Profits/RoguePundit

This is in response to questions raised by Rogue Pundit. Let me first say that I am a strong supporter of free markets and not necessarily contrary to the ideas of laisser faire. But to be honest this is not a free market that we have. While it is not a monopoly, it could be refered to as an oligopoly. Where there are a few firms that face little possiblity of other firms coming into the market. An ustated goal of oligopolies is to get the "monopoly rent" (the amount a monopoly overcharges for having market control). Derived from economic game theory, oligopolies are very stable in pricing with little possibility of price wars in the long run. While monopolies recieve monopoly rents this does not imply that monopolies charge more than a complete free market. Economies of scale (the cost to produce one more dollar of output) will give the monopoly or in this case oligopoly greater efficiency than free markets. As in Microsoft their monopoly is derived from intellectual property rights (patents) as well as economies of scale. It is advantagious for the market to have one stable platform to build upon. Can you imagine every job you went to having a different computer opperating system and having to relearn all new codes or procedures? Thusly monopolies and to a lesser extent oligopolies can be a benefit to consumers in the short and long run. One advantage that oligopolies do have is that each firm wants to differentiate their product from other competitors. The differences can be small, but if one of the members of the oligopoly can create a new market for itself it can price a higher premium (monopoly rent).
Capping prices will never work in the long run but may be beneficial in a short run that squizes the profits out(even create negative profits for a short term duration). But adverse affects are possible in the short run if the firms are not sure what the regulations will be and how they will be implemented. In Anchorage they were going to have a permit process for cutting trees on your private land. The result was that many landowners cut down any tree that they were planning on doing latter rather than go through a permit process (increasing the cost of transaction as well as increasing uncertainty). As a matter of fact one report showed gas in Hawaii jump 30 cents.
As far as "zoning" or redlining or Geographical Pricing, these seem to be business decisions that are shortcuts to calculating the cost to do business in rural or outlying areas.While I understand the reasoning for using this cost structure, I think it is sloppy and shows poor management not to calculate the actual costs associated with individual outlets and locations.
If rural or outlying areas (outside WV) have the same fixed cost (ie regulations and requirements) without significant lower land costs (shortage of land just off I5 and zoning restrictions), then whatever marginal costs per unit of product will be higher in outlying areas. These marginal costs being employee labor to pump gas or costs added with additional stops that may not need complete truck loads. Of course I do not have enough information about the microeconomics to say for certain.
Another microeconomics issue to look at is that gas prices at the pump reflect futures prices and not what the price was paid for when delivery was made. We can look at is a replacement costs and not initial costs of items. When a business does not want to have idle cash or borrow every time the input product prices rise, then the business will charge higher for current stock to help pay for future stock prices. Most business can not do this (regulation as far as I know) and the manufacturer may cover some of this cost. But since the gasoline market is an oligopoly, prices tend to be "sticky" especially in the downward direction. The information for refinery prices are readily known so price increases happen almost immediately since no one wants to be left behind, but in the downwar direction of prices oligopolies do not want to get into a price war and thus will be reluctant to lower prices.
Thusly, this does not look to be a "price gouge". I am sure that price gouging has occured in the states hit hard by the hurricane. There seems to be some controversy about this issue but I tend to let the market determine the prices. Extra high prices tell producers and suppliers to get in gear and supply this area while the profits are good. But I see that lack of information by the victims may cause rational consumers to behave in ways that are not in their economic best interests. The refugees had no idea how long before they would be rescued and as such behaved in a short sighted and destructive ways.
So I am sorry that there is no easy ways to solve these problems. Some solutions to the market inperfections are: less regulation on who and how suppliers of gas can be implemented (local farmers that have high demands during peak production could supply the infrastructure to supply gas locally), alternative forms of energy (electric or bio-fuels), or arbitrage (people puchasing at the lower price locations and transporting to the higher price locations). While the differential of 13.5 cents seems high, the fact that the market has not found a solution in the short run may mean that this is not enough for a profitable endeavor.
But then again I could be wrong.


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