8.8.06

PROFITING BY THE IGNORANCE OF OTHERS? Eras of "energy crisis" provide all manner of Teachable Moments for industrial economists. (I find myself assuring students, or is it reminding myself, that although we could devote the entire semester to energy prices, we won't.) Take a couple of news items. One shows the Principle of Complements at work.

"I think everybody's very cautious about buying a larger SUV right now. They're great vehicles, but they do use more gas, and I think that's where people are concerned," said Dennis Worthy, general manager of the auto auction near Caledonia.

Worthy said prices for bigger used SUVs have fallen as demand has waned, but prices for smaller, fuel-efficient used cars have increased.

The lack of interest in gas-gulping used SUVs is just one sign that rising gasoline prices - which might climb further because of the BP pipeline problem in Alaska - are changing the market for cars.

The article also illustrates why economists keep on invoking ceteris paribus.

The run-up in gas prices clearly has cut the demand for vehicles that use a lot of fuel, but U.S. automakers haven't been nimble enough to adapt quickly, some experts said.

"They were making money hand over fist for a lot of years, so that makes it hard to change," said Jay Baron, president and chief executive of the Center for Automotive Research in Ann Arbor, Mich. "It's difficult to come up with new kinds of vehicles. . . when sales are going well."

Even though sales of big SUVs are dropping, it's way too early to start writing an obituary for SUVs, others contended. Not everybody wants a smaller vehicle, and many still consider the convenience and their personal needs - such as roominess - worth the cost of the gas it takes to keep an SUV or a bigger vehicle running.

We still have some work to do distinguishing long-run from short-run adjustments, as well as making sense out of optimal inertia. Established firms frequently get clobbered by surprises. But somebody had to come up with the idea of the SUV. It did not spring in full obnoxiousness off of Henry Ford's drafting table.

Economists also like to think in elasticities. Here's why.

[Paul] Taylor [of the National Automobile Dealers Association] noted that every dollar increase in a gallon of gasoline from now on will be smaller as a percentage than the boost to $2 from $1 and to $3 from $2.

The average price of a gallon of unleaded gas in metro Milwaukee on Monday was about $3.23 a
gallon, according to Milwaukeegasprices.com

"People make adjustments about the prices of gasoline in the context of all the expenses associated with buying and operating a new car," Taylor said.

In the two years after a 1997 increase in the price of a gallon of gas, from about $1.25 to $1.30 to $1.60 to $1.70, he noted, the purchase of four-cylinder autos went up about 5% in models in which less-efficient six-cylinder engines also were an option.

Relative prices, relative prices.

Another article shows that the confusion over what constitutes competition never goes away. There's this "minimum mark-up" law in Wisconsin that applies, or does not apply, to motor fuels.
The 1930s-era minimum mark-up law requires wholesalers to charge gas stations at least 3 percent more than they paid. Gas stations in turn must tack on at least 6 percent more at the pumps. The law's supporters say it prevents large retailers from underselling smaller gas stations and driving them out of business.
There's a cause to nail your colors to the mast for! Support your right to pay higher prices to buy at independent gas stations!
The Wisconsin Petroleum Marketers and Convenience Store Association issued a statement Tuesday saying the state's minimum mark-up protects small businesses from competitors who could undersell them.
If the underselling is by businesses using some improvement that's practicable on a small scale, such that a multiplicity of firms continue to serve the market, that's the textbook model of atomistic competition. But what happens if the improvement is one that's only practicable on a large scale? (At this stage, there are no large-scale improvements in ethanol blending comparable with the Standard Oil Trust's improvements in kerosene distribution in the late 1800s.) And if the improvement is being tested by a dominant firm? Then things get more interesting.

Banking representatives have been beating down the doors in Congress to get it to block Wal-Mart's bid to open a bank. The giant corporation has asked the Federal Deposit Insurance Corp. to give it a charter for a bank in Utah, a move that the bankers see as just the first. Wal-Mart insists that the bank will be used only to process debit and credit card transactions at its stores.

But bankers, particularly smaller community banks, are worried sick that Wal-Mart will start with the limited-service banks and eventually turn them into full-service financial institutions. Suddenly, the same folks who have fought any governmental "interference" with Wal-Mart's employment practices want the government to help them control what they now agree is a beast.

Wal-Mart could do to those community banks what it did to the locally owned hardware store.

(As if banks aren't entering into partnerships with retailers. There are TCF branches in Jewel-Osco -- isn't the integration of a grocer and a druggist anticompetitive?) But there is a connection. A Jewel-Osco or a Wal-Mart or a Meijer provides under one roof the services that used to be offered behind multiple sole-proprietor storefronts.

As of this evening, Wisconsin's governor has directed that the minimum markup law does not apply to ethanol blends in gasoline. Hence another policy lesson: efficiency isn't the only goal.

[Governor] Doyle told state Department of Agriculture, Trade and Consumer Protection regulators not to enforce the 1930s-era law that requires that gas prices go up by 9.18% between wholesalers and retailers. The Legislature this year debated but failed to pass a measure that would have repealed the minimum markup law for all fuels.

"More and more drivers are turning to ethanol-based fuels because they are cheaper, and that is a trend we want to continue," Doyle said.

But the governor's order was an election-year gift to ethanol producers, said Erin Roth, executive director of the American Petroleum Institute that represents major oil companies. The move could hurt those convenience stores and other retailers who don't sell ethanol-blended fuel as price-weary consumers shop for the lowest prices, Roth said.

"It's an incentive for people to buy ethanol-blended gasoline," Roth said. "He ought to do it on all fuels."

Sure, but there are a lot more cornfields in Wisconsin than there are crude oil wells. Now if one could extract the methane from the cow-flops ...

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