Price Fixing and Cartels in the Free Market

[Darryl_P]

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Boro, excellent read

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nh

[bobman0330]

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You're just saying "agreed upon prices are bad because they're illegal." That begs the question.


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In fact, I'm not saying that. I'm pointing out how "extensive bureaucratic involvement" in price-setting decisions isn't necessary because the issue can be and is collapsed into a relatively straightforward factual inquiry.

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In the short run, sure. The point is that even if consumers pay some small amount more in the short term, creating some corruption prone agency to violently prevent companies from communicating and charging what they want for their products is unwarranted, and will harm consumers in the long run by lowering supply.

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Are you suggesting that the Federal Trade Commission and the Antitrust Division of the DOJ are corrupt? That's laughable. And why do you assume that more supply is always a good thing? Just set a price floor at a million dollars and you'll have a ton of supply. It's not that simple. The appropriate level of supply is determined by competition. When competition is free, investment should be distributed amongst alternative uses in a way that maximizes consumer satisfaction. Just because a change (in this case, artificially high prices) results in more or less supply in a single industry, that doesn't by itself make it good or bad for consumers. As you're so fond of pointing out, there are no free ponies. Oversupplying one industry to break a cartel is going to result in losses elsewhere. You're the free-market zealot... why don't you get this?

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I think "too much investment" can be identified in the same manner as the "misallocation of scarce resources" you discuss above.

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Are you claiming that capping prices does not cause misallocation of resources and shortages? Because every economist in the world acknowledges this. It's econ 101. It's not like it's some crazy Austrian theory.

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Did you read what I wrote? I did not claim that price capping does not have deleterious effects. I believe (and I've reproduced my statement from above) that I claimed that "too much investment" was a similar concept to "misallocation of resources." I stand by that statement, and I agree that both are familiar concepts from economics 101. The only remaining question is why you find "too much investment" such a fanciful construct.

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Define "artificial." If all parties are acting voluntarily, how can the prive be "artificial"? Besides, so what? If the cartel "artificially" raises prices, that invites competition to increase the supply. Wasn't it you that said cartels lowers supply? The market takes care of this all by itself.


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First of all, note that I said that cartels reduce the amount of a good supplied, not that they reduce supply itself. I define "artificial" as being anything determined other than by free competition. See my comments to hmk on how the market's ability to redress cartelization is arguably inadequate.

Honestly, I think your anti-government zealotry is leading you astray. The basic economics are simple. A freely competitive market delivers efficient prices and efficient distribution of resources. ANY external distortion of prices, through government or through a cartel, introduces inefficiencies. That much is essentially unassailable, and I'm convinced that the only reason you disagree is your belief that government is the fount of all evil. If you want to argue about administrative costs or the size of the problem, it would make a little more sense than attacking the notion that cartels reduce economic efficiency.

[andyfox]

"it is incontrovertible that the higher the cartel attempts to fix the price, the more incentive there exists for each cartel member to break with the cartel by lowering its price to capture market share."

-Couldn't it be the case that the higher they fix the price, the less incentive to break with the cartel because the profits derived therefrom are greater than they would be at a lower price? Better to have a 20% share at $10.00 than a 25% share at $5.00, no?

"The more the cartel attempts to jack up prices (and hence profits), the more it A) incentivizes competition to enter and occupy its markets, and B) incentivizes consumers to choose alternatives to its products and services"

-In a world of perfect information, I would think yes. But if a cartel is able to jack up prices at it's whim, it would probably be because it also had a near monopoly on information and also used its power to stifle would-be competitors from actually competing (by, for example, buying up new technologies, or creating roadblocks for would-be start-ups), as well as to keep information from its customers that would keep them from making informed choices about alternative products and services.

In other words, if a cartel was powerful enough to be getting very high prices, wouldn't it be powerful enough to control other facets of the economic environment to the detriment of the free market?

[bobman0330]

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This is extremely subjective. In the absence of the ability to calculate this, one could just as well say that you overestimate it; especially since this, like most of the nitpicky things statists like to cite to attack ACism that are low on our priority list, is something that I would have no intention of implementing until after things of greater priority have taken place, at which point I believe the availability of resources will have increased in a manner that renders any calculation of this at present impossible.

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It's not entirely unmeasurable. A lower bound on cartel harms is the amoutn of excess profits they make. (Actual harms are higher because of deadweight loss). These kind of figures are hard to find, but I imagine a more determined researcher than I could have some luck. The few sources I found on google about the lysine and vitamin cartels suggest that just those two cartels could have cost $10 billion or more.

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Could you elaborate please?

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Sure. One of the big problems in maintaining a cartel is defection. If cartels are OK, just have all the cartel-members sign a binding agreement setting their quantities produced and the price. If they break the agreement, sue them. Then the only problem is entry.

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The identity of the business is arbitrary. Let's say two businesses, A and B, each have 5% of the market share of a particular industry. A and B merge, and with their cooperation manage so take up a full 10% of the market share. Are they cartelling? Should this be stopped? What if they each had 45% of the market share? If they merge and take up 90%, isn't that the same problem? Clearly something should be done, as this, functionally, is a cartel.

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This is a vastly more complicated question. Mergers are of course a means of price fixing. If mergers were just sneaky means of creating cartels, then they should all be illegal. But that's not all they are. Most mergers introduce cost-saving efficiencies in addition to creating mini-cartels. The result of these two effects is usually depicted in something called the williamson diagram, which you should be able to find on google. Often the result is a plus for the consumer.

Sometimes it's not though, which is why a lot of mergers are enjoined in US or EU courts. It's still not arbitrary, it's just very complicated. Courts and agencies examine the affected industry in exhaustive detail to determine what the probable impact on competition is going to be.

[CollegeKid]

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It's econ 101. It's not like it's some crazy Austrian theory.

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Borodog, are you trying to say that all Austrian theories are crazy? Can you define like and crazy for me too? That would be great.

[ShakeZula06]

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It's econ 101. It's not like it's some crazy Austrian theory.

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Borodog, are you trying to say that all Austrian theories are crazy? Can you define like and crazy for me too? That would be great.

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He's joking. Austrian economics backs up (defines?) his beliefs in anarchocapitalism. Statists that disagree with him say austrian theory is crazy.

[hmkpoker]

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The few sources I found on google about the lysine and vitamin cartels suggest that just those two cartels could have cost $10 billion or more.

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I apologize for doing this to you, but I feel the best way to explain my counter-argument is with the generic anarchist one-liner counter question technique:

How much did the government that saved them all this money cost the consumer?

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Sure. One of the big problems in maintaining a cartel is defection. If cartels are OK, just have all the cartel-members sign a binding agreement setting their quantities produced and the price. If they break the agreement, sue them. Then the only problem is entry.

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That's some straight up Jennifer Government [censored]. I think you underestimate the problem.

[bobman0330]

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That's some straight up Jennifer Government [censored]. I think you underestimate the problem.

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How so?

[Boris]

Borodog - The empirical evidence seems to indicate that cartels can be somewhat effective with 3 members and very effective with 2. With 4 or more members they seem to be ineffective in restricting supply.

Bobman - Do you really go to jail for price fixing? I thought the punishment was simply triple the economic damages.

[hmkpoker]

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That's some straight up Jennifer Government [censored]. I think you underestimate the problem.

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How so?

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A legally binding agreement that punishes profitable defection is going to create a disincentive to cartelling. Not only that, but since this rather large economic matter will inevitably leak out, it stands to royally piss of the customers and, consequentially, the stockholders (or non-corporate equivalents).

Any consumers that are paying attention are going to get very angry if the existing cartels are genuinely [penetrating] them. If this doesn't result in boycotts, protests or violence, it will at very least drive up the demand for competition.

Cartels by their very nature are unstable, and as resources expand with time must become more unstable.