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Thursday, September 01, 2005

Comments

Roehl Briones

On this issue I think Tim has the correct view. Localized supply disruption should, under laws of supply and demand, drive up the price. It could conceivably increase market power among the remaining suppliers in the area, but this would surely be temporary once higher prices stimulate supply inflows from outside. In practice, during an emergency situation the government has basically no information at hand to distinguish competitive supply and demand from the exercise of monopoly power. Price controls could act as a disincentive to increasing local supplies, (because the supply disruption presumably increases the cost of delivering to the affected area), thus having opposite its intended effect.

knzn

I don’t think you can compare the market for a gasoline to the supermarket. Gasoline is a (more or less) uniform commodity, usually purchased in isolation, and with prices advertised even to those who don’t enter the establishment. Supermarket goods are purchased together, usually somewhat differentiated from one brand to another or from one market to another, and with only limited external price advertising. This makes the gasoline market much more efficient, with prices much more flexible and much more effective in eliciting supply (and demand) responses. So I think Bean and Worstall are just reading different chapters in the same textbook. (Bush apparently didn’t read either chapter.)

I also think you’re confusing the issue of sticky vs. flexible prices with that of posted vs. bargained prices. Posted prices can still be flexible, provided they can be re-posted at zero cost. Bargaining requires either bilateral monopoly or information asymmetry. (Otherwise one party is a price-taker, so the bargaining is a waste of time.) Sticky prices require only unilateral monopoly. (The one who sets the prices can’t be a price-taker.) One explanation for the absence of bargaining would be the absence of bilateral monopoly. (If you look at the ratio of buyers to sellers at a typical supermarket, it would suggest that any monopoly power is unilateral on the part of the sellers.)

Edward Hugh

"I don’t think you can compare the market for a gasoline to the supermarket."

I'm not sure I agree here, in Europe the situation seems to be the reverse to the one you describe: all those free newspapers I am given when I enter the metro are full of price related ads for specific supermarket, or hypermarket products, while the gas stations all seem to offer boringly similar prices.

"I also think you’re confusing the issue of sticky vs. flexible prices with that of posted vs. bargained prices."

Well in fairness it would be Bean who's doing that, but then he goes back to the way Hall uses the idea of spot prices in the paper.

"One explanation for the absence of bargaining would be the absence of bilateral monopoly. (If you look at the ratio of buyers to sellers at a typical supermarket, it would suggest that any monopoly power is unilateral on the part of the sellers.)"

I suppose to capture the idea of what Hall is getting at you would have to imagine (and I suspect he's right) is that all the (*) variables are constantly fluctuating - even day by day (or hour by hour) - so really the product should have a bar code holograph flashing light which offers the price for just that instant (although then we would get back to the old argument about whether a line is continuous or composed of a series of discret points).

This would only require that the entire economy was plugged into a super computer, and that we each voluntarily agree to have a small, non invasive implant (designed I imagine by Kurzweil). Actually British computer whizz Stafford Beer was working on a model for something like this at one stage (down in Santiago Chile of all places, before Pinochet rudely put a stop to things).

So where I imagine Bean is confused is with the suggestion that this would need to involve individual haggling.

"On this issue I think Tim has the correct view".

I'm not sure I agree. I more or less go with the NYT that we have a state of emergency here, and that the normal rules don't apply. I think that is more or less assumed once you need the troops in to protect the gas stations. Also in other areas of the country you need to prempt the stampede to fill tanks, since that is self-fulfillingly going to cause a shortage. So you need to steer expectations insofar as there will be no shortages and no sudden price hikes. Basically you need gasoline from the German strategic reserve, and pronto. The Germans reckon that the first supplies can arrive in two days.

"Price controls could act as a disincentive to increasing local supplies"

This really depends on whether it is an ongoing or a short-term issue. I take it we are talking about six to eight weeks here like Bernanke is suggesting, if this is longer term then of course I agree, let the price mechanism work.

What is interesting though, and I guess this is why I put this, is that Republican thinking (I think we can make Tim an honourary member on this occassion) is pretty divided between the economic liberals and the big government people.

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