A student asks: But can citizens and the free market really fix themselves? A comment from the website of the Department of Justice (2011) states that the competitive process, which is within free markets, only works when competitors set prices honestly and independently.
I guess I’m partial because I work for a state agency, but they do have their benefits. True, when the government steps in, their intervention never seems to be truly successful, but we as humans are imperfect, therefore an imperfect market exists; when there are such practices as price-fixing and bid-rigging it tells me there are flaws everywhere.
(2011) Price fixing, bid rigging and market allocation schemes. Retrieved from http://www.justice.gov/atr/public/guidelines/211578.htm
Basically, you are pointing out illegal ways that some people try to manipulate price in a free market, and just like you, I agree this illegal behavior calls for government action. It DOES NOT CALL for government price intervention, but rather either putting people in jail or heavily fining them for violating the rules of the game or simply removing them from the marketplace.
Just like you, I too want, and the free market needs, even demands, regular enforcement of a reasonable rule-of-law that fosters competition.
Yet a different take of that DOJ website citation might be that free markets only work when government enforcement reasonably and regularly enforces a reasonable rule-of-law such that competitors feel free to set honest and independent prices. A meaningful motto might be: Government price intervention – never! Government refereeing, all-the-time!
However, let us look at this DOJ comment more carefully. First of all, the only way free markets really work is that almost all firms participating in a free market are price-takers, not price-makers or price-setters. They run the gamut from imperfect competition at one end of the competitive spectrum like gasoline stations and grocery stores to oligopolistic competition at the other end of the competitive spectrum where we have only a few competitors such as in cell phones or car manufacturing or cola beverages.
But just ask Nokia or Motorola or Research in Motion if the competition in the cell phone market is not bruising and brutal, for instance. Or ask Chrysler or GM about how kind their competitors are.
This observation does not include the rare market structure called ‘monopolies’, (often electricity companies) which are almost all heavily regulated by local, state-wide or regional government regulatory bodies, like corporation commissions. Nor does this observation fit a cartel like OPEC (an oligopoly supported by national governments), which manipulates supply, therefore manipulates price, which entities are outside of the reach of US law enforcement.
But few firms in America have sufficient market power to actually set the market price. So the DOJ is way off base, I think, in their notion. Whether prices are set honestly or dishonestly does not really matter. Practices such as bid-rigging and price-collusion are illegal almost everywhere.
Yes, I agree that someone in the firm sets a price for the firm’s product or service, then the consumers in the marketplace either buy the product or service, on not. But these type of ‘price-setters’ are really only gauging the market and mechanically setting a price at a level they think the market will bear. My I prove my point?
Take bread, for instance. If your neighborhood grocery store started charging eight dollars a loaf for bread that you could drive a bit farther and buy a loaf of bread at a dozen other nearby places for four dollars a loaf, how many of the eight dollar loaves would you buy? None, right? Why?
Because the free market, without government intervention, normally sets the price, based on supply and demand interaction and either your firm follows, or your firm might reap zero revenues.
This is true with almost any product or service, as long as there is a free market. This price mechanism is called the “invisible hand” and is the hallmark of free markets. Conclusion – Imperfect human beings DO NOT create imperfect markets very often, unless and until the government intervenes!