Sunday, June 24, 2007

Price Spikes Imply Competition, Not Monopoly

When gas prices spike sharply upward, economic illiterates everywhere are quick to see evidence of collusion or monopoly power among the oil companies. In fact, big gas price spikes are evidence of exactly the opposite. Colluders and monopolists don't have to wait for changes in supply and demand to hike their prices; they squeeze us up to the limit all year round. Sure, changes in demand and supply give them a little more leeway, so prices still fluctuate - but only a relatively small amount.

A monopolist always has price-sensitive consumers - because if they're not price sensitive, he'll keep raising his prices until they are. Therefore, even when market conditions change, a monopolist can rarely afford to prices very much. Big price fluctuations are evidence of competition, not monopoly.

~Economist Steven Landsburg, p. 137 in "More Sex is Safer Sex"

MP: In other words, we assume monopolists/colluders/cartels are greedy and will therefore always charge the "maximum price the market will bear." If the market for gas was able to bear a price of $3.25 per gallon when gas prices spiked about May 22, then that same market would have also been able to bear a price of $3.25 a month ago before that (instead of the actual price of $2.58), or 4 months before that when prices were at $2.18. That is, a true monopolist or cartel would have been able to charge $3.25 per gallon for the last several years, and they wouldn't have had to wait for some shock like refinery outages, hurricanes, political unrest, or rising demand in China and India as an excuse for raising prices.

And if the oil industry was truly a cartel/monopolist, why would they have lowered gas prices from $3.60 in Michigan a month ago on May 22, to prices as low as $2.62 in Michigan today, according to (see chart above). If the market was able to bear $3.60 a month ago, a true monopolist/cartel would NOT have lowered the price by $1 per gallon over the last month.


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