Saturday, August 25, 2007

Half-baked Theory on Cooking Oil's Price Hike

And now, this is from Steven Landsburg's latest book (to avoid problem with your office's internet filter, I won't mention the title here), page 137.
When prices spike sharply upward, economic illiterates everywhere are quick to see evidence of collusion or monopoly power among the oil companies. In fact, big price spikes are evidence of exactly the opposite. Colluders and monopolists don't have to wait for changes in supply and demand to hike their prices; they squeeze us to the limit all year round. Sure changes in demand and supply give them a little more leeway, so prices still fluctuates --but only a relatively small amount.

A monopolist always has price sensitive customers --because if they're not price sensitive, he'll keep raising his prices until they are. Therefore, even when market conditions change, a monopolist can rarely afford to raise prices very much. Big price fluctuations are evidence of competition. (All of this, incidentally, is standard textbook fare.)
Now, replace "oil" with "cooking oil" , recall this media fuss (Aco has good insight on the topic, by the way), and pay attention to the statement by our House of Representative's Commission VI chairman, asking government to prosecute colluders, monopolists, and hoarders. Does he make a good sense?

Apparently, according to Landsburg, alas, no. He failed to distinguish a "rising" price from a "high" price. Monopolists could be responsible for "high" price, but not for "rising" price.

Moreover, the recent cooking oil price rise is best explained by changes in (world) supply and demand (China and India apparently cook more roast duck and chicken tandoori as they grow richer). It also tells us that the market is competitive. In a competitive market, the best way to have lower price (and to fight against hoarders) is to have more supply, hence more competition. Recall: high price attracts more producers, and vice versa.


  1. Rizal, so what is the point of your critique? Is it the price war and collusion or the statement of DPR on the punishment of colluding firms or the statement about rising and high price?


  2. Ado,the idea of prosecuting monopolists/hoarders based on (false) argument of "rising" price.

  3. You can not compare the two concepts. Rising price is a dynamic concept but price level is static