Collusion to Tighten Supply

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    Is the unhampered market equipped to deal with the following scenario?

    Company A, B, and C are the 3 biggest suppliers of product X. They collude to hold their supplies of X off the market until later in the year. Then, when the price has rise from the shortened supply, they will all dump their supply on the market and make big profits.


    The question seems to rest on a false assumption, namely, that market prices must always favor the buyer. In other words, it presupposes that if this scenario happens, then there is a market failure. The market, however, is concerted effort. It’s the attempt of people to arrange a division of labor to economize production.

    As to the scenario itself, an entrepreneur maximizes his revenue by asking the price at the mid-point of his demand curve (where demand is unit elastic). Any other price, either higher or lower, reduces his revenue. If entrepreneurs act together, this principle is true of their overall demand. With a given demand for the product, entrepreneurs would lose revenue when they restrict supply and begin to sell at the higher price.

    Take a look at the lecture on Competition and Monopoly.

    Of course, it could be the case that the unit elastic point of the joint demand for the entrepreneurs’ product is at a higher price than the unit elastic point of any of the entrepreneur’s demand when they do not act together. But in that case, they must sell less at the higher price to earn more revenue. In other words, they must not dump their supply on the market, but continue to restrict it to maintain the higher prices and larger revenue.

    Take a look at Murray Rothbard on cartels in Man, Economy, and State.,%20Economy,%20and%20State,%20with%20Power%20and%20Market.pdf


    I’m not sure that the scenario you describe could even happen in real life. Dr. Herbener can correct me if I’m wrong here, but aren’t prices a factor of supply and demand at any particular moment, and that historical pricing serves as a guideline rather than a written-in-stone obligation (I remember reading about this in Human Action I think…)

    While it’s true that if many suppliers held their goods off the market, the price of the good would rise (supply has fallen relative to demand), when they “dump” their goods back on the market, the supply will rise relative to the current level of demand, and therefore prices will fall. Perhaps on the day of the dumping people might not be aware of it and would continue to pay the higher price, but I think the market would adjust to the new supply quite quickly.

    I also believe we’ve seen this happen in reality numerous times, and not just from cartels and collusion. Look at the gas lines on the east coast in the wake of Hurricane Sandy. Putting aside government-enforced prohibitions on selling goods for true market prices, the current real market price for gasoline is quite high, because the supply has fallen dramatically. But once the shortage revolves itself, absolutely nobody will be willing to go on craigslist and pay $12 for a gallon of gasoline. The price adjusts according to the supply.

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