How to spot the gas crook

[justin]

Hi, Kay -- oligopoly is only one aspect of the situation. Maybe the beer market is an oligopoly, too. Let's suppose so. However, others aspects of the situation mentioned in my post include "essential commodity" and "near-zero elasticity of demand wrt price." Let me propose a thought experiment: case (1) -- all gasoline is cut off in the USA for one year, vs (2) all beer is cut off for one year. Case (1) probably results in significant breakdown of the society, whereas case (2) is an inconvenience for some people. Beer drinkers switch to bourbon, or stop drinking, or brew their own beer (I've done it myself -- low barrier to entry in the beer market). Same kind of thing with bottled water. Use municipal water or well water instead (I've done both myself). My conclusion is that a rational society will be more likely to intervene in the gasoline market than in the beer market. That's why some people complain to the gummit about gasoline prices, but hardly anyone goes this route with beer or bottled water prices.

I think you're ignoring Econ 101. High profit margin induces new market entrants to seek high profits. Supply increases, market equilibrium prices go down. I concede there is a huge barrier to entry for the fuel refinery market. However, if your allegation of oligopolistic price fixing is true and there is a sufficiently high profit margin in the refinery industry, we'll eventually have new market participants. Or existing market participants who are allegedly part of your alleged oligopoly will seek to increase their production to capture slightly lower profits on a higher volume of product sales.

 

[bogart]

Hi, Justin -- according to my dictionary, an oligopoly is just a market wherein there are only a few major sellers. This, in fact, is the condition of the petrolium industry. It's not my allegation, it's just the way that things are, as a matter of fact. There are only a few suppliers. Further, there is no requirement that providers engage in price fixing to constitute an oligopoly. They may, or they may not. Given the necessity of petrolium, and the associated elasticity of demand, this is a different situation than the beer or bottled water market. As for new entrants anytime soon . . . profits are now huge, and yet we see fewer players as, for example, Exxon merges with Mobil. As for eventual new entrants -- as Keynes said, in the long run we are all dead. Thus, these guys may need to be treated a little differently than my beer brewer.

 

[justin]

Bogart - Our country has anti-trust laws in effect to deal with anti-competitive behavior that you seem to be saying is occuring. I assume you are alleging some sort of anti-competitive behavior because you think these oil/gas companies should be "treated differently" than beer or water producers. There are in fact many many market participants at the crude extraction/production level and the refining level in the international marketplace. Sure, the major names in oil and gas control the bulk of the market. But the smaller market participants can easily gain market share if the big names start acting oligolopolistically (by that I mean extracting huge profits).

I don't want the gov't to step in and control prices of gas. I'm pretty certain we would have shortages.

 

[SteveR]

I guess I see it this way.
Beer is a heavily taxed restricted liquid used for recreational use by individuals who can afford to buy it and are old enough to meet the government restrictions of age to purchase and consume it.

Gasoline is a heavlily taxed restricted liqued used for commercial and recreational use by individuals who can afford to buy it and are old enough to meet the government restrictions (driver's license) to purchase and use it.

Both operate in a free market economy where demand and supply (and taxes) determine cost.

If there were a beer shortage announced...what do you think would happen to the supply on store shelves and the price? It is the same for most other things (other than monoply controlled services). When a snow storm is announced...try to find bread, milk or batteries on the shelves. A hurricane? Plywood, screws, food, water and batteries.

I do believe there may be some manipulation of the market by Big Oil to keep prices up but mostly I believe the market is driven by the "expectation" of shortages and the resultant media blitz and the public fears that a shortage might happen. This expectation causes (pigmalian (sp?) principal) a shortage to become very possilble and the price of the commodity (gas or your choice of item) to go up. Eventually, the price will stabilize when fact catches up with fear but the damage is done and a new "accepted" price for a commodity is now allowed by the consumer. They are thankful the shortage did not happen and the prices went down (but not to the levels before the artificial shortage happened).

I make my own beer....now need to get that car to run on it!

Just my $3.00 (a gallon) worth.

 

[bogart]

Justin -- the word oligopoly comes from the Greek words oligos and polein, meaning something like "few sellers." That's all it means. I believe that most economists agree that an oligopoly situation exists when the top four producers have more than 20% of the market. This does not imply illegal behavior, price fixing, or the acts of evil people. Rather, it impies a market that lies somewhere between a free market as envisioned by Adam Smith, wherein producers are "price takers," and a monopoly, wherein the producer is a" price fixer." Sometimes, an oligopoly arises necessarily due to economy of scale. Yet, by definition, an oligopoly is not a free market. Hence, in my opinion, it is not illogical to think that a different set of rules might be applied to regulating an oligopoly. I am not advocating state takeover, price caps, or anything of the sort. On the other hand, these guys have to power to really hurt us. So, they need to be watched carefully, without much implicit trust.

 

[bogart]

SteveR -- I think that the point is exactly that the oil market is not a free market -- rather, it is an oligopoly. This is not necessarily evil; it's just the way that things are today . . .

 

[justin]

What industry or sector doesn't have the "top four controlling 20% of the market"? Walmart alone makes many industries or sectors oligopolies by your definition. Is it your position that any market burdened by a statistical oligopoly (by your definition) should be "watched carefully, without much implicit trust"? You must not have much faith in our free market capitalist economy. We have overzealous antitrust regulators in place already. What more do we need?

 

[Mr._johngalt]

What industry or sector doesn't have the "top four controlling 20% of the market"?  Walmart alone makes many industries or sectors oligopolies by your definition.  Is it your position that any market burdened by a statistical oligopoly (by your definition)  should be "watched carefully, without much implicit trust"?  You must not have much faith in our free market capitalist economy.  We have overzealous antitrust regulators in place already.  What more do we need? 

We don't need "more". In fact we'd be much better off with less. BTW,
my prediction for today................. Katrina will eventually result in a large
expansion in government and bureaucracy, which will prove to be a bigger
disaster than Katrina, by far.

JG

 

[bogart]

Examples of industries that are not oligopolies include commercial printing, sheet metal work, milk, clothing, furs, and so forth.  The 20% thing is not my rule -- I believe that it is a standard definition among economists.  Regarding my confidence in a free market --  I don't understand your point.  What difference does my confidence or supposed lack thereof make?  I'm not an especially important person.  Regarding watching these guys, "eternal vigilance is the price of liberty."  Regarding regulators -- Our regulators are people trying to do their jobs, just like a lot of other people.  Their mandates come, in principal, from duely elected legislatures at the various levels of government.  They're not villans.  Also, their missions change over time.  For example, the FCC seems to me to have just about given up any attempt at regulation in several of its jurisdictions (maybe this is the will of the people).  

 

[moghopper]

The 20% thing is not my rule -- I believe that it is a standard definition among economists.

It's worked so well for GM.

I welcome the high prices. I believe it is one of the few things that will force sorely needed change among consumers.

 

[justin]

Examples of industries that are not oligopolies include commercial printing, sheet metal work, milk, clothing, furs, and so forth. The 20% thing is not my rule -- I believe that it is a standard definition among economists.

Not sure about all those industries you mentioned. I did research milk production. There are a few milk coops that produce the great majority of milk in the US. California Dairies, Land O Lakes, and Dairy Farmers of America. DFA alone produces 33% of US milk production.

Clothing manufacture may be diversified. Didn't research it. Clothing retailing is not. Walmart's market share is around 20% of clothing sales. Add in the number 2, 3, and 4 clothing retailers, and you have a large proportion of clothing sales coming from the top four retailers. I don't feel like researching the other industries you mentioned. I'm sure industries exist that don't have oligopolies, but I'd guess they were small industries and have low barriers to entry.

 

[bogart]

Hi, Justin -- thanks for your research. Apparently, my source re milk was incorrect (or maybe not, and then again it may depend on what you call a producer). Your general point, however, is quite correct -- there is enormous economic concentration at this time. My source claims that three-quarters of all manufacturing industries have more than 20% concentration. To me, that is simply a fact (presuming that it is correct), which is neither good, nor bad, nor ugly. To you, if I may speculate, it seems to convey something more, although I don't have a clear idea of just what that may be. That we have a free market economy is firmly entrenched in our national mythology. Again, there is no implication by mainstream economists that oligopoly is either good or bad. So, if you believe that the kind of economic concentration now evident represents a free market system rather than an oligopoly system, it's OK with me. However, this view is incorrect, according to the standard definition of oligopoly. Apropos, I was trying to clarify the definition of an oligopoly, and believe that I have done so.

 

[HFWR]

Breaking news: cows attempt to corner the dairy market. News at eleven...

 

[bogart]

a mooligopoly in the making?

 

[bogart]

Hi, HaveFunds.  You tricked me.  Holy cow!  I stayed up late last night, way past my usual bedtime, to catch the story.  Nothing herd.  How cheesey.  Sounds like mostly bull anyway.  Well, I guess this topic has been milked dry.  To continue would be udder nonsense.  So, last post from me on the oligopoly/mooligopoly topic (I promise).

 

[justin]

So, last post from me on the oligopoly/mooligopoly topic (I promise).

Same here. Now off to enjoy some mooligopoly milk.

 

[HFWR]

No. 1 with a bull-et...