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There is absolutely no more reason to keep prices low if you've made a profit independently on futures than if you haven't. Your marginal cost goes up in both
by ikeboy 7y ago
There is absolutely no more reason to keep prices low if you've made a profit independently on futures than if you haven't.
Your marginal cost goes up in both cases. If you're optimising profits, you should make the same decision in both cases regardless of if you bought futures.
- refurb 7y agoYour marginal costs don't go up in both cases. If you have futures to buy diesel at $2.50/gal and the diesel price skyrockets to $4.00/gal, you can keep your prices the same. If you didn't have futures you couldn't without taking a loss.
- ikeboy 7y agoThis is incorrect. If you have futures, your marginal cost is still $4, since now you're using an additional gallon instead of selling it at market price at $4.
- refurb 7y agoThat's an opportunity cost, not an actual accounting cost.
- ikeboy 7y agoAccounting wise, the fact you made a profit on futures is unrelated to your current costs buying in the physical market. Most likely the futures in question aren't being physically settled. Regardless, the economic cost is what determines incentives to raise price for a rational actor. For my claim above to be wrong, Walmart and co would have to be irrational.