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Most definitions of perfect free markets include some element of perfect competition. The math essentially assumes there are an infinite number of saudis produc

Most 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 ago
  Pricing 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
  - clairity 7y ago
    no, economists and policymakers agree with your usage of monopoly power. monopolies aren't simply a function of number of market participants. semantic digressions like these are non-sequiturs and should be ignored.
    - vikramkr 7y ago
      I agree, and I'm basically trying to appease the hn crowd with the semantics. I didn't think my statement was controversial or incorrect enough to be hit with that many downvotes (I am an econ major - trying to balance layperson definitions with hyper technical ones) but clearly that ended up not being the case.
    - thaumasiotes 7y ago
      > economists and policymakers agree with your usage of monopoly power Policymakers may; they'll agree with most definitions of a Bad Thing. Economists have to be more careful. Saying Saudi Arabia has monopoly power in the oil market because it produces oil at a lower cost than other suppliers is crazy. What power they have to manipulate the market doesn't come from what they're already doing -- it comes from what they could do. They have a marginal cost of production which is below the current market price. The fact that their average cost of production is below the current market price is not relevant. Consider a world where Arabia, Canada, Russia, and Venezuela all produce oil and sell it at the world price of $50 / barrel. In this world, Arabia's strategy is "pump all the oil we can sell at a profit". They have a marginal cost of production of $70 / barrel, above the market price, and an average cost of production of $20 / barrel, well below the market price. They're making money hand over fist. No one considers them to have monopoly power here. What would it mean? How would they exercise it? See e.g. The Concept of Monopoly and the Measurement of Monopoly Power ( https://sci-hub.tw/https://link.springer.com/chapter/10.1007/978-1-349-24002-9_4 https://sci-hub.tw/https://link.springer.com/chapter/10.1007... ), which would define Arabia's monopoly power in the hypothetical I've described as, on a scale from 0 to 1, negative 0.4. But again, profits are determined by average cost, not marginal cost. There is no reason to expect average cost to equal marginal cost.
bryanlarsen 7y ago
Marginal cost isn't a useful term if you assume infinites. If you have infinite number producing at the same price you can just say "cost" instead of "marginal cost". Marginal cost is only a useful term if each product has a different cost.
- vikramkr 7y ago
  Marginal cost is the amount it costs to produce additional unit of a good, cost overall would include fixed costs. Price is different from cost as well, since that's what people pay, not how much it costs (though in perfect competition price will equal marginal cost - but not the case in monopolies). These are nitpicky technical things but they do give you different answers when you do out the math.

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 ago
Pricing 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
- clairity 7y ago
  no, economists and policymakers agree with your usage of monopoly power. monopolies aren't simply a function of number of market participants. semantic digressions like these are non-sequiturs and should be ignored.
  - vikramkr 7y ago
    I agree, and I'm basically trying to appease the hn crowd with the semantics. I didn't think my statement was controversial or incorrect enough to be hit with that many downvotes (I am an econ major - trying to balance layperson definitions with hyper technical ones) but clearly that ended up not being the case.
  - thaumasiotes 7y ago
    > economists and policymakers agree with your usage of monopoly power Policymakers may; they'll agree with most definitions of a Bad Thing. Economists have to be more careful. Saying Saudi Arabia has monopoly power in the oil market because it produces oil at a lower cost than other suppliers is crazy. What power they have to manipulate the market doesn't come from what they're already doing -- it comes from what they could do. They have a marginal cost of production which is below the current market price. The fact that their average cost of production is below the current market price is not relevant. Consider a world where Arabia, Canada, Russia, and Venezuela all produce oil and sell it at the world price of $50 / barrel. In this world, Arabia's strategy is "pump all the oil we can sell at a profit". They have a marginal cost of production of $70 / barrel, above the market price, and an average cost of production of $20 / barrel, well below the market price. They're making money hand over fist. No one considers them to have monopoly power here. What would it mean? How would they exercise it? See e.g. The Concept of Monopoly and the Measurement of Monopoly Power ( https://sci-hub.tw/https://link.springer.com/chapter/10.1007/978-1-349-24002-9_4 https://sci-hub.tw/https://link.springer.com/chapter/10.1007... ), which would define Arabia's monopoly power in the hypothetical I've described as, on a scale from 0 to 1, negative 0.4. But again, profits are determined by average cost, not marginal cost. There is no reason to expect average cost to equal marginal cost.

bryanlarsen 7y ago

Marginal cost isn't a useful term if you assume infinites. If you have infinite number producing at the same price you can just say "cost" instead of "marginal cost". Marginal cost is only a useful term if each product has a different cost.

vikramkr 7y ago
Marginal cost is the amount it costs to produce additional unit of a good, cost overall would include fixed costs. Price is different from cost as well, since that's what people pay, not how much it costs (though in perfect competition price will equal marginal cost - but not the case in monopolies). These are nitpicky technical things but they do give you different answers when you do out the math.