One of the things that it’s terribly, terribly, hard to explain to the hard of thinking is that prices in an entirely free and competitive market will look exactly like those in a producer operated oligopoly or manipulated market. This is what leads to Scott Sumner continually telling us that we can never reason from a price change. Jacinda Ardern is finding this out in New Zealand with some nonsense about how BP sets petrol prices there.
What’s being missed is that sure, of course every producer attempts to rig the market, screw the consumer. The difference between having market power, that monopoly or oligopoly – even heaven forfend collusion – and a competitive market is whether you can in fact rig the market, screw the consumer. The freer the market the more your attempts are unavailing, the harder you fail.
The story starts at Stuff (not by chance, my favourite NZ site, they’ve been known to quote me, as I said, not by chance my favourite NZ site – the only other one was, I think, The Canterbury Times (??) who quoted me one time I said “fuck”) who found a BP manager arguing that if prices were lower in one area, why not raise them to, well, why not raise them?
After years of confusion and spin, a single internal email exposes the petrol industry’s pricing behaviour.
A directive from a mid-level manager in BP’s Auckland headquarters to lower North Island petrol stations spelled out a plan to stem sales losses in Ōtaki, where petrol prices are up to 20 cents a litre more expensive than in Levin, just 19km north.
But instead of cutting prices in Ōtaki, BP pricing manager Suzanne Lucas outlined a novel tactical plan: raise prices in the whole area, and hope that BP’s major rivals responded by doing the same thing.
OK. Why not try it? Maybe everyone else will follow suit and greater profits will be made! The consumer will be screwed! HaHaHa says the capitalist as he splutters his cigar smoke into his top hat. That’s what Darling Jacinda seems to think happens:
New Zealanders are right to feel they are being unfairly treated after revelations about how BP sets its petrol prices, Prime Minister Jacinda Ardern says.
“Certainly what’s been revealed today probably wouldn’t surprise some motorists,” Ardern said at her weekly press conference this afternoon.
“But to hear so blatantly that pricing decisions are being made that sit outside of the price of crude oil, that sit outside the exchange rate, or that sit outside operating costs will no doubt be raising eyebrows with consumers.
“It certainly raised eyebrows with our minister, which is why she called them in for a meeting.”
No love, that’s not how it works at all. Market prices are not based upon cost plus issues. No one does think, hmm, this costs me x to make, I’ll charge y, which is x plus 10%. Well, no one in a free market economy does at least.
Instead everyone charges absolutely the maximum they think they can get away with and bugger the production cost. That means that some people make a loss of course. Farmers make a career of this, complaining that what people are willing to pay for lamb tails isn’t worth the cost of the ram’s afternoon out. Facebook charges us the maximum it thinks we’ll pay, that nothing, and makes a fortune. That’s actually rather the point of this free market thing. Every producer does charge absolutely the maximum they think we’ll pay.
The trick in it all is that someone else is, if there’s a decent profit there, going to charge a penny less. And so another will charge a penny less again and so on. It’s the competition that limits the capitalist greed for profit, nowt else.
“We’ve got 21 different fuel retailers in New Zealand and many of them are low-cost brands because they operate unmanned service stations. It’s just pay at the pump, there’s no shop, no staff, so their costs are lower. And they’re passing those lower costs onto motorists in the form of lower pricing.”
No, that’s not quite it. They can charge that succession of pennies less and not go bust and exit the market because they’ve those lower costs.
But back to Jacinda’s confusion. BP, or any other producer, has attempted to raise prices beyond their own input costs? Yup, that’s the way everyone tries it. The difference between a free competitive market and one that isn’t is that the attempt won’t work in that free market one. Unless everyone else’s costs have also gone up. BP can try sticking up prices in the region all it wants. Whether it can do so depends upon whether there are enough people competing with it.
You know, just like all us free market people keep insisting? The system depends upon competition?
Or, of course the producers are trying to bloody rook us, what the hell do you think we’ve been saying all these centuries? It’s the market and the competition in it that stops them, nothing else.