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To: eddieww who wrote (44)	12/11/2001 3:17:23 PM
From: Don Lloyd	1 Recommendation Read Replies (1) \| Respond to of 445

eddieww - For the sake of discussion, let's say that the price agreed to by the mini-cartel is just low enough to keep citizens of Needles from driving the 75 miles to get gas at a 20% discount to the cartel's price. I made it a mini-cartel of 5 rather than a single station to allow the discussion to reasonably include the case of a new entrant into the gasoline selling business in the cartel area. If one new entrant started to build a station, she would likely find it in her best interest to join the cartel, and the cartel to accept her and the slight reduction of margins her entrance would entail. The important question, in my mind, is: Should the citizens of Needles, through the body-politic, restrain the cartel? OK. The first issue is that the cartel will be pressured by the fact that the five stations are not selling the same identical good. Here I'm not primarily referring to brand, although that may enter, but that the locations will differ in their accessibility and visibility. Service quality may vary. Also other products, both automotive and non-automotive, minimarts, for instance, may be provided, and gasoline itself may be most valuable as a loss leader for one or more of the stations. Costs will certainly differ between the stations. Given all this, and other things besides, it would be almost certain that gasoline sales volume would vary by at least two to one among the five stations. Given the reality of fixed costs, the station with the lowest volume will be far less profitable than the one with the most volume and will be under tremendous pressure to either lower its price or exit the business. There may well be enough business in total for five stations, but they are likely to all be better off if they differentiate themselves to attract different subsets of customers for a broader range of products than just gasoline. This is what you see in the real world. One station will provide full service, another a food minimart, a third will concentrate on roadside service, etc. Finally, in the unlikely event that a cartel didn't break up on its own as its members pursued their own interests, all the customers have to do is threaten to minimize their local purchases in a public way. Gasoline stations, as gasoline stations alone, are low margin businesses that cannot afford even a week of an increase of out of town purchases. Since deliveries are not synchronized in time, there will always be a mix of stations that have nearly full underground tanks and others that are in need of replenishment. Price differentials are needed to manage this supply condition. Finally, forming a cartel is usually inferior to merging, as the significant cost advantages of merging cannot be realized. Note that this is virtually the same thing as one station going out of business and having the remaining stations increase the sales volume over which their fixed costs are allocated. This is all off the top of my head. I would expect to find more considerations with a little research. The problem with government price fixing is that there are only two prices in that case, too high and too low. Prices that are not allowed to be set by the dynamic market cannot modulate demand to match supply, nor attract new supply if required. Price controls almost always cause shortages and rationing or surpluses. Regards, Don