|Price-Fixing or Market Forces?|
|Topic||Market Failure, Regulation, and Public Choice|
|Key Words||Prices, Federal Trade Commission, oil companies, supply, signaling, competitors, production, price-fixing|
Retail gas prices in the Midwest have been very high in the summer of 2000. In Chicago and Milwaukee, for example, the price of gasoline rose to $2.50 a gallon in June. This prompted Congress and the Clinton Administration to pressure the Federal Trade Commission (FTC) to conduct an investigation. The FTC subpoenaed at least seven oil companies, and owners and operators of pipelines, terminals, and blend plants, asking for details about the supply, refining, marketing, transportation and pricing of gasoline. It is now reviewing boxes of documents.
The issue at stake, according to the FTC, is "whether there was any illegal contact, communication, or signaling among competitors". The FTC told Congress that it realizes that the Organization of Petroleum Exporting Countries reduced production, causing the price of crude oil to rise to $33 a barrel, and that reformulated gas (which is harder to produce) was required in Chicago and Milwaukee after May 30, but that these factors were insufficient to account for the extent to which gasoline prices rose. However, an industry spokesperson stated that the idea of price-fixing was ludicrous.
Prices in the Midwest have fallen since the investigation began. At $1.45 a gallon, they are the cheapest in the nation.
(Updated October 1, 2000)
1. Suppose that the market for gasoline is in fact competitive.
2. Suppose that, in addition, the firms in the industry colluded in some
manner and fixed prices.
3. Why is price-fixing problematic? Refer to your diagram.
4. Why might the temptation to fix prices through collusion be relatively great in the gasoline industry? (Think about the elasticity of demand for gasoline.)
|Source||Sara Nathan, "Oil companies subpoenaed in price-fixing investigation," USA Today, July 28, 2000.|
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