Tuesday, April 08, 2003

In Defense of Price Fixing?-In this Tech Central pieceBritish libertarian Sean Gabb is bashing British anti-trust law in this case where two British retailers were fined for fixing minimum prices on Hasbro toys. Yes, people don't have to buy Hasbro toys, but the collusion takes purchasing power away from consumers and grants it to the colluding companies. Gabb is correct that real-world market are not perfect
Since the death of socialism, hardly anyone of importance now believes that economic planning will make the world a richer place. If only at the pragmatic level, markets are universally accepted as the most effective means of reconciling the fact of unlimited human wants and scarcity of the means to satisfy them. But, this being so, the standard economics textbooks provide an utterly unrealistic defense of the market. They begin with the claim that markets are efficient, and then define efficiency as it does not and cannot exist. A perfectly efficient market, they agree, is one in which there are many buyers and sellers, in which there are no barriers to entry or exit, in which all products are of the same quality, and in which all players know everything about prices, costs and production methods. The closer a market approaches this ideal, the more efficient it is said to be. The further away it is, the greater the case is said to exist for the government to intervene to bring it closer to the ideal.
That's a fair assessment of a perfectly competitive market, but it makes for a good straw-man as well
But the ideal is false. Real markets are never efficient in this sense. Most are dominated by a few buyers or sellers. Getting into or out of most involves significant and often huge costs. Branding and other marketing tools differentiate even those products that are, considered purely in themselves, identical. As for information, this is never freely available: no business knows what its demand curve really looks like, and hardly any is able to know its marginal costs of output in advance. Markets should not be analyzed in terms of static equilibrium. Undoubtedly, they have a tendency to productive and allocative efficiency. But changing wants and technology and other facts always ensure that the theoretical point of equilibrium in any market - even could it be known - shifts unpredictably from moment to moment.
My micro class has that covered; things like monopolistic competition and oligopoly are concepts my undergrads could spit back at Mr. Gabb. I've told then that the static model is only a snapshot in time and that markets head towards equilibrium but, due to changing parameters, never quite get there. We can still use economic models even if real life isn't as clean cut as the graphs on the board.
The real problem of economics is not to know what equilibrium looks like once it has emerged, but to understand the process by which it is continually approached, and the value of that process. This is the view taken by the Austrian school of economists - von Mises, Hayek, Rothbard, Israel Kirzner, among many others. They see the economic value of markets as a discovery process, in which particles of knowledge dispersed among billions of individuals - knowledge about wants and costs and techniques, knowledge that would otherwise remain dispersed - are brought together into a rational structure of opportunities for exchange. Markets allow people to blunder around, or make intelligent guesses, and every so often to light on some previously unimagined way of making the world a better place. Now, real market outcomes will not necessarily look anything like a perfectly competitive equilibrium. There may be a single supplier in a market, which may earn very high profits in the short and long term. Or there may be general collusion among suppliers to fix prices. But, so long as there is no use of government force to close the market - as is the case with the British Post Office - this must be taken as an efficient outcome for the time that it endures. If an outcome is not efficient - if there are ways for someone else to come into a market and cut prices or raise quality while still making a profit - any position, no matter how apparently dominant, will crumble.
However, if suppliers collude, there can be outcomes that are efficient to the industry but not efficient to the economy as a whole. Our villains of the piece were colluding to make the markets inefficient by artificially raising the price of Hasbro toys, taking utility away from their customers by their collusion. In the US and Britain, we've outlawed certain types of anti-competitive collusion, of which price-fixing is one of them. Hard-core libertarians might want the right to collude, but those of us with a slightly-more communitarian streak will want to have the free market serve society as a whole. If we're looking to maximize the overall utility of society, the transference of wealth from the consumer to the colluders isn't proper. Wealth should be generated by making a good product at a good price, not by collusion.
In the case of the two companies fined last month, they are not the only suppliers of toys in the British market. At the very least, there is the Internet - which allows far greater competition throughout the world than has ever existed before, and which does push all markets closer in potential towards equilibrium. Even otherwise, there are always substitutes for the products covered by the price fixing agreement. If consumers are willing to pay the higher prices, that is because they prefer not to buy substitutes, or because they cannot be bothered to incur the possibly high costs of seeking the same products elsewhere at prices unknowable in advance.
Yes, there are substitutes, but that still doesn't address the transference of wealth from the collusion. The "let them eat cake" responce is cold comfort. In this case, we're dealing with a luxury good, but other price-fixing cases aren't as benign.
The existence of bodies like the Office of Fair Trading illustrates the problem of what Frederic Bastiat called "what is seen and not seen" in economic policy. What we can see is that certain toys from certain suppliers have been made cheaper than would otherwise have been the case. What we do not see so well is that any regulation of markets impairs the discovery procedure that they embody. Firms may need to seek permission to do things that seem barely worth doing even without the cost of seeking. Or they may need to make disclosures that it is not in their interest to make. Or they may find the whole regulatory framework captured by some big competitor that then effectively closes the market. We cannot know the opportunity cost of any specific act of regulation. But we can be sure that the cost of a general course of regulation is new products not introduced to the market, or new ways of producing or marketing them. Consumers gain in the short term in ways that all can see. In the longer term, they lose, if in ways that no one at all can see.
Not necessary so. The regulation here will increase the supply of toys into the market by lowering their prices. The collusion profits aren't adding to market innovation, they're adding to underhanded behavior. I don’t see how price-fixing adds to the commonweal or the overall wealth of the country; maybe some more learned members of the Peanut Gallery can fill me in.

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