CB -
It's a little bit more complicated than that. When the price of oil gets high enough, it's economical for US producers to come on-line. So OPEC keeps the price low enough to make it uneconomical for US producers to compete with them. OPEC isn't a monopoly.
Of course you're correct, but what I said about price determination is true in general, and just needs to be broadened a bit.
I claimed that all prices are set just high enough to face elastic demand above, so that any further increase in price will reduce total revenue.
There are three possible different effects that potentially create this price elasticity of demand above and they come into play at three different price levels.
At the lowest price level of the three is actual competition. Each one of two or more actual suppliers will face elasticity of demand above as he will lose market share as he raises his price above the competition, assuming that the competition has the capacity to fill that extra demand. This price level is not only the lowest, it also has the sharpest gradient and best defined threshold of revenue loss versus price increase and an immediate effect.
At the next price level is potential competition. At some price level, a monopoly supplier will face new competitors drawn in by potential profits that are larger than those available from other investment possibilities. This price level is higher than for actual competition, and is potentially just as sharp in gradient, but is far less well defined in threshold price level, as well as being delayed in time.
At the highest price level a monopoly supplier faces only the competition of all other products and services that may compete for the disposable income of consumers. This has a very weak gradient and no threshold price level at all, but is again immediate in effect.
These three conditions, to the best of my knowledge, cover all the possible conditions of supply, monopoly or not. In all cases the price that a given supplier attempts to set is the one that is as high as possible without intruding into an elastic price region above. This price selection process is subject to error in the estimation of demand, and will be slightly modified by variable profit margin conditions that may exist, but, in general, is the controlling mechanism.
Regards, Don |
