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This does indicate market inefficiencies, but such tactics -- flooding the market with cheap products to kill competition, then raising prices back -- is pretty
by ptero 7y ago
This does indicate market inefficiencies, but such tactics -- flooding the market with cheap products to kill competition, then raising prices back -- is pretty common. I have seen it everywhere from cell phone marketing to grocery stores. I have personally seen, twice, Stop and Shop moving in, dropping prices, driving a less-well-funded competitor out, then going back to business as usual.
I do not see that the current tussle of oil producers indicates that the market is broken. Suboptimal, sure, but not broken. My 2c.
- vikramkr 7y agoThat depends on what you define as a market that isn't broken. In a perfect free market the oil producers make zero profits and this is a move towards fixing the market
- wernercd 7y ago"in a perfect market producers make zero profits" In what world would any company make zero profits in a "perfect" sense? Companies exist to make profit...
- vikramkr 7y agoPerfect here refers to the mathematical model of a perfect market and perfect competition, not an external normative sense of the word as some societal ideal.
- Klinky 7y agoEven in the real world the idea that "companies exist to make profit" sounds wrong. Companies exist to ideally output goods or services, and profit is a tool to ensure they can continue making those goods or services. It can be hard for a company to exist without making a profit, but not the reason they exist.
- savanaly 7y agoYou're thinking of accounting profit, the person you're replying to was thinking of economic profit. https://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp https://www.investopedia.com/ask/answers/033015/what-differe...
- bryanlarsen 7y agoIn a perfect free market for a commodity price is the marginal cost: in other words if there is demand for N barrels of oil per day at the market price, that market price is the cost of production for the Nth most cheapest production cost. Anybody whose cost of production is cheaper makes money. For a long time that marginal cost was Canadian oil sands oil, which cost about $40 a bbl to extract and $10 to ship. The Saudis who can produce at $10 a bbl were making money hand over fist.
- vikramkr 7y agoMost definitions of perfect free markets include some element of perfect competition. The math essentially assumes there are an infinite number of saudis producing at $10 a barrel that compete with eachother down to marginal cost. Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods.
- thaumasiotes 7y ago> Obviously these aren't realistic assumptions and pretty much everyone has some form of monopoly power, such as the saudis in your case which have monopoly power coming from lower cost of goods. That's not what "monopoly" means. Monopoly power isn't just a fancier word for market power. Monopoly power is power derived from the fact that nobody else is selling what you're selling. Note that in this example, the Saudis can't raise the price of oil above $50 / barrel. Setting a price of $60 would send their sales to 0 rather than to whatever the level of demand is at $60. They can't do it because they don't have monopoly power. (If you expand the example a little, saying that world oil demand exceeds the amount Canada can produce, then you can claim that Saudi Arabia has monopoly power by virtue of being able to sell oil that Canada can't sell. But in the model where Canada can produce any amount of oil at $50 / barrel and Arabia can produce any amount at $20 / barrel, there is no monopoly power anywhere.)
- vikramkr 7y agoPricing power is a better word that monopoly power in this case then, should have been more precise in wording. They arent price takers is the point. They have price making power and a downward sloping demand curve until 50 bucks a barrel
- hutzlibu 7y ago" In a perfect free market the oil producers make zero profits" Where does this conclusion come from?
- eropple 7y agoFrom...economics? Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
- wcoenen 7y agoWouldn't you expect the rate of return to approach the risk free interest rate, rather than profit being zero?
- vikramkr 7y agoZero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.
- MR4D 7y agoThe risk free interest rate is zero. Heck, by the time you read this, it could go negative!
- 0xff00ffee 7y agoThis is exactly why "fair trade" products like coffee and chocolate exist. There is an agreement to have an absolute minimum purchase price to prevent a big corporation from clobbering the competition by taking a loss, then jacking up the price. See also: rideshare. VC pumps in billions so that Lyft & Uber can be cheaper than taxis at a HUGE loss -> taxis go out of business -> Lyft & Uber jack up their prices because they own the market.
- kortilla 7y agoThat’s called a cartel. See OPEC. If that’s all “fair trade” is, that’s an impressive marketing tactic.
- Mathnerd314 7y agoIt's also called product differentiation. Oil is a commodity, but there are grades of oil and the amount of sulfur varies, so there is "sour" oil, "light" oil, etc. similar to "fair trade" chocolate.
- AnthonyMouse 7y ago> See also: rideshare. VC pumps in billions so that Lyft & Uber can be cheaper than taxis at a HUGE loss -> taxis go out of business -> Lyft & Uber jack up their prices because they own the market. Did the rideshare companies actually jack up their prices at any point? How would they do that when they're still in competition with each other and the barrier to entry to the market remains low? Any attempt to raise prices would immediately result in more competitors. That was the whole thing with the taxi medallions. It was a cartel, because that market has very low barriers to entry and the taxi companies didn't want the competition. Uber didn't make prices artificially low, they just provided competition which stopped them from being artificially high. They're not losing money on rides, they're "losing money" on self-driving car R&D and things like that. And "fair trade" is a marketing device. People want to feel good about not exploiting people, so companies not exploiting people get to charge a premium for that. That doesn't mean companies who are paying suppliers less don't still exist or offer similar products for lower prices purchased by customers who don't care as much about that. Neither of these are examples of what you're describing.