• Bill's Boogeyman

      Bill O'Reilly was on the warpath last week about record-high oil prices. He says collusion among greedy oil companies is a big factor, and he bet me $1,000 that the gas stations in his town charged the "exact same price," which he says is evidence that they collude.

      I checked his town's prices, and he's wrong. I win $1000! Here were the prices this afternoon:

      Gulf: $3.95 ... Getty: $3.99 ... Shell: $4.05 ... Mobil: $4.07

      If oil companies collude, they're not very good at it: The average gas station had a profit margin of 5 cents per gallon last year. Oil wholesalers also have thin profit margins - Exxon's most recent margin was one third of a cent per gallon.

      The government is far more effective at taking your money. Where O'Reilly and I live, in New York, taxes are 65 cents per gallon. Here's a map for all the states.

      Why don't gas stations take a bigger cut? Because collusion is hard. Even cartels have trouble keeping all the players in line. Milton Friedman recounted the story of railroad cartels in his classic Free To Choose:

      By 1890 there were more than 1,000 separate railroads... Competition was fierce. As a result, freight and passenger rates were low, supposedly the lowest in the world. Railroad men, of course, complained of "cutthroat competition." ...

      The railroad men of the time tried to improve their position by joining together, forming pools, agreeing to fix rates at profitable levels and to divide the market. To their dismay, the agreements were always breaking down. So long as the rest of the members of a pool kept up their rates, any one member could benefit by cutting his rates and taking business away from the others. Of course, he would not cut rates openly... such practices arose as secret rebates to favored shippers and discriminatory pricing between regions or commodities. Sooner or later the price cutting would become known and the pool would collapse...

      In the end, the railroads successfully colluded. But they only were able to do it with the help of politicians and government force!

      some farsighted railroad men recognized that they could ... use the federal government to enforce their price-fixing and market-sharing agreements ... The outcome was the establishment of the Interstate Commerce Commission in 1887.

      Friedman goes on to point out that the commission was made up of railroad industry men (after all, who knows more about railroads than they?) who proceeded to forbid companies to charge too little on routes that had what they saw as too much competition.

      That was good for established railroads. But it was bad for competitive railroads, and bad for the American people.

      Collusion to raise prices is rarely successful in the free market. It's when corporations get in bed with government that we should be afraid.

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      Economics
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