September 29, 2013

How big can the global auto parts market be?

I'm interested in the topic of cartels and price-fixing, in large part because nobody else seems to be interested in them, which reflects a massive change from as recently as the 1970s. For example, here's an NYT news story from last week about a federal $740 million fine of Japanese car parts makers for rigging the car parts market. 
In an expanding global antitrust investigation, nine Japanese automotive suppliers, along with two former executives, have agreed to plead guilty to conspiracy and pay more than $740 million in criminal fines for fixing the price of auto parts sold in the United States and abroad, the Justice Department said Thursday. 
The pleas were the latest in what the Justice Department said was its largest criminal antitrust investigation, one that has involved the authorities from Asia to North America to Europe and has now resulted in $1.6 billion in fines since 2011. 
More than a dozen separate conspiracies involving more than 30 kinds of parts affected sales to Chrysler, Ford and General Motors, as well as the American subsidiaries of Honda, Mazda, Mitsubishi, Nissan, Subaru and Toyota. 
“These international price-fixing conspiracies affected more than $5 billion in automobile parts sold to U.S. car manufacturers,” Attorney General Eric H. Holder Jr. said in a statement. “In total, more than 25 million cars purchased by American consumers were affected by the illegal conduct.” 
Hitachi Automotive Systems and Mitsubishi Electric paid the biggest fines, $195 million and $190 million. The Justice Department said the two companies’ price-fixing schemes lasted from at least January 2000 through February 2010. 
The parts included seat belts, radiators, windshield wipers and air-conditioning systems, Mr. Holder said. The Justice Department said that while the price fixing increased the cost of cars for consumers, there was no way to determine exactly how much.

What is is striking is how little of a splash this made in the blogosphere. Now it could be that the still hidden conspiracies in other markets out there don't really add up to a hill of beans. Or it could be that if we knew everything that was going on, we'd be shocked by the magnitude. I don't know. It seems like an interesting question, but evidently it's not.

Back in the 1970s, it would have been a hot topic. Being a part of the free market avant-garde (complete with my Adam Smith and Milton Friedman t-shirts I bought in 1976), all this hubbub in the press and on talk radio about monopolies and price-fixing struck me as mostly dope smokers' paranoia. 

And, I'm sure that the conventional wisdom was overblown back then. 

On this issue, my teenage self turned out to be a big winner. Everybody who is anybody seems to assume that cartels and anti-trust are some Teddy Roosevelt-era obsession and it can't be a problem anymore because of, you know, Moore's Law or the Fall of the Berlin Wall or something. 

Granted, there's a fair amount of interest in the obvious fact that Google, Facebook, Amazon, Apple, and Microsoft are all plotting to monopolize as much of the digital world as possible because that's cutting edge. But many would complain that I'm using "monopolize" like it's a bad thing. It's good for your stock holdings in whichever company wins, so what's not to like?

Still, price-fixing in boring industries like auto parts is boring squared (Who ever needs auto parts? Surely, the global auto parts industry can't compare in economic importance to Twitter's IPO?).

When I took Economics of Antitrust back in 1978 from a free marketeer professor who thought the worries about cartels were hugely overstated, I was out ahead of the curve. But there's another important concept in economics: diminishing marginal returns. It's cool that 35 years ago I was on what turned out to be the winning side, but now I'm worried that my side won in too big of a rout that's gone on too long.

In terms of intellectual fashions, people don't seem to pay much attention to the potential for diminishing marginal returns. Instead, the bandwagon effect seems stronger. If we had success in the past by recommending policy X, then the only thing to do is X times 2.

58 comments:

J said...

You are right: price fixing has lost its shine because everybody assumes that the WTA ensures fair trade. Yet the potash cartel is, thanks Karl Marx!, reviving.

http://h2oreuse.blogspot.co.il/

A Working Class American said...

Auto parts corporations advertise in newspaper and other media. Now that the subscription model is dead, ads is where all the revenue is.

You don't bite the hand that feeds you.

Scheissherr said...

The human mind wasn't made to understand the universe, it was made to reproduce. It's more useful to believe what everyone else believes so as to avoid being thought of as 'weird'. Thus, the bandwagon effect you describe.

Anonymous said...

Biggest cartel and biggest fixed market is the federal reserve and the US dollar.

Jeff W. said...

There are no examples of pure free markets in the world. Every market has some gang warfare mixed in.

To minimize and show unconcern for the power of cartels to manage markets is to be on the side of the cartels by opposing government confrontation with them. It's much the same as a peace activist working on the side of the communists in the Cold War.

To be on the side of big cartels is
to be on the winning side, and that is always a safe career move.

rightsaidfred said...

The dynamic seems to be what Steve Sailor has pointed out before: economic competition often becomes a winner-take-all affair until the number of firms becomes one and a half, whereupon they can cartelize/oligarch under the radar.

Anonymous said...

I have been wanting to make a very similar point here at iSteve about bicycles and a certain ethnic group which is rapidly cornering the USA market for the distribution of all things bicycle, but it will take a while for me to type it up.

Anonymous said...

my side won in too big of a rout that's go on to long

== "my side won in too big of a rout that's gone on too long" ???

anony-mouse said...

Well, like you say, if there are effective cartels around why not become a shareholder in a company that's making the appropriate outsized profits?

albert magnus said...

Though you are right about the boring industrial cartels, banking is something the left still talks about.

Have you see this clip of fish-out-of-water Alex Pareene on CNBC. The palatable fear of retribution by JP Morgan for Pareene suggesting that the bank's business practice may not be 100% apple wholesome is hilarious.

http://www.salon.com/2013/09/27/pareene_i_could_do_just_as_well_at_ignoring_the_london_whale/

Anonymous said...

The market they're talking about isn't the auto parts you buy at Pep Boys, it's the parts the OEMs buy from their suppliers. These constitute a sizable percentage of the cost of manufacturing a car. For example, an automaker will typically buy seats from a supplier like Johnson Controls at upwards of $1000 for a car set.

Power Child said...

Is price fixing in auto parts more related to new cars than used ones?

When you buy a new car, you buy it from a dealer who has a special license with the manufacturer. The car comes with all new parts that you don't have to shop around for, plus the dealership usually does all the maintenance on it for a number of years. In other words, you don't have to think about parts until much later--and by then many people replace their old new car with new new car anyway.

In the used car market, owners end up being more involved in buying parts, which means there's also a competitive industry around selling these parts to them (Auto Zone, Advance Auto, O'Reilly's, etc.).

How much does the notion of "thrift" in a culture have to do with all this? Don't thriftier people tend to stick with used cars--and take better care of them to keep up their resale value? As the balance of thriftier people wanes, do new cars become more dominant?

Semi-employed White Guy said...

When sellers of goods and services conspire to rig a market, it's called "price fixing". When unions demand a price for their labor, it's called collective bargaining. I've never understood the distinction.

Chubby Ape said...

It's cool that 35 years ago I was on what turned out to be the winning side, but now I'm worried that my side won in too big of a rout that's go on to long.

I think both the political Left and Right are caught in an endless loop right now. We all just keep going round and round in tighter circles, navigating by the political and cultural landmarks of the world circa 1980 or so. The Left is forever patting itself on the back for being able to get one of theirs into a position of power, despite that mean old white, Christian patriarchy, and the Right is still cheering on those plucky billionaires who dare to stick it to the state planners. "Three cheers for Maggie Thatcher's privatization of British Steel!", even though both Mrs. Thatcher and British Steel are now defunct.
So almost no one is interested in auto parts price fixing. The people on the Left have no red lights flashing on their dashboard because price fixing does not involve racism, sexism or homophobia. The Right believes people who worry about price fixing by big corporations are the same type of people who want to tax small businessmen, independent contractors and guys who earn a paycheque working for someone else. That's the stagnant pond we all swim circuits around year after year. It's the 1970s to 1980s forever.

Anonymous said...

There is no 'monopoly' in digital sphere except as a metaphor. You don't like Google, you can go elsewhere.

Kaz said...

>The Justice Department said that while the price fixing increased the cost of cars for consumers, there was no way to determine exactly how much.

Sounds like fluffed up charges.

Japanese cars have an incredibly low cost of ownership, most people don't care because this isn't something they do very often. Changing a car part once every few years doesn't really affect people.

I wish the government would get on printer ink though. It's 2013 and we can't make a reliably functioning printer and ink costs costs more per gallon that gasoline?

Anonymous said...

Steve there may be cartels that are active. But what percentage of your annual spending is going to the extra cost created by cartels other than opec? Probably no more than one percent

Lakini said...

"If we had success in the past by recommending policy X, then the only thing to do is X times 2."

This reminded me of a great post over at Vox Day's site; he reached a similar conclusion:

"Americans can no more grasp the idea that too much trade is possible any more than most Romans could understand that too much farming or too many legions were possible. After all, those two pillars of the Roman economy were the historical basis of Rome's original enrichment, so how could a source of enrichment ever prove to be a source of impoverishment, let alone societal decline?"

Jon Claerbout said...

I got quoted two hundred and some dollars for a replacement sun visor (interior) for a 1997 Honda Civic.

Mr. Anon said...

The modern elite is technically illiterate. They think that their stuff comes from the internet. They don't realize that it was all made in a factory somewhere. That's why they don't care where the factory is, or who controls it. They think the same thing about food. This is the problem with allowing your nation to be captured by a hostile urban elite. They don't understand the material basis of society.

Anonymous said...

Price fixing is anti-free markets, right?
It violates agreed-upon rules of conduct.

shahadat hussain said...

By the end of the 1960s, pension funds,
insurance companies and individuals owned 67% of all the shares on the Share Market.
But today they are just minnows next to the global hedge funds that really control Britain's companies.

Anonymous said...

Who knows?

I suspect the truth is as Steve says, namely that big business, (particularly in the USA and UK), has more or less entirely creamed the oppostion - in particular any notion of organized labor - and holds all the cards. Basically we're back in the pre-1840 settlement. Needless to say virtually all politicians in the USA and UK, (including those who call themselves 'Labour' people), are literally bought lock, stock and barrel by big business in the same way as yer average San Fernanado Valley multiple entry video whore is bought by the forces of big porn. Let's face it, that's the reality of today's political class.
Also you've got another bunch of hookers in virtually the entire maninstream economics profession, shilling for their pimps, and not to mention the vast bulk of the mainstream press owned by the same forces.
Basically in the global whore house he who's got the biggest wad gets the more unspeakable acts performed by the more unspeakable of the bought and sold. In other words it's a colossal stitch-up.

Dave Pinsen said...

I wonder if the explosion in consumer credit since the 1970s played a role in this. The typical, cash-poor American car buyer today is asked what he wants to pay each month and then is presented with a lease or financing plan. The vigorish built into the financing is probably bigger than the costs added by auto part company collusion, and the sort of shopper that buys or leases with little cash down isn't likely to think too much about component costs anyway.

Anonymous said...

Mainstream economic theory is like mainstream race theory: as a simple model it sounds plausible (as long as you don't put the conflicting parts of the theory next to each other) but when it hits the complexity of the real world it falls apart in a hurry.

-OSS

Anonymous said...

"I'm interested in the topic of cartels and price-fixing, in large part because nobody else seems to be interested in them, which reflects a massive change from as recently as the 1970s."

Yeah, who cares about auto parts, laundry detergent, air travel, alcohol distribution, dairy products or DRAM components? It's not like we use any of that stuff these days anyway, so when they expose these cartels and their price-fixing, it's like reporting about bi-planes and Zeppelins.

Anonymous said...

I got my MBA a couple years ago in Supply Chain and auto parts were constantly being used as case studies. No mention of this, ever.

On another note, a high-end mechanic I know has told me that vintage American pony cars 67-75 like Mustangs and Camaros have become the latest thing for overseas rich people to collect. Buying "daily users" and refurbishing them before selling them off to a Saudi or Chinese is a huge business now.

NF said...

Moderate doses of common sense and decency seem to be socially unstable. You can't just try to find worthy works of art which may have been overlooked for cultural reasons, you have to practice full-retard multiculturalism. You can't just treat gay people decently, you have to let them get married. You can't just try to find inspiration in the Bible or the Church, it has to be the end-all and be-all and the answer to everything.

Anonymous said...

http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-lgbt-actors-discrimination-20130927,0,1118300.story

Hahaha.

Anonymous said...

http://www.pinknews.co.uk/2013/09/03/france-actor-alain-delon-says-men-are-meant-to-woo-women-not-pick-up-guys/

Anonymous said...

As long as you own it and make a tidy living, it hardly matters how big it is.

There are a few smallish commodities at the Merc(like butterfat) that are controlled by a small group of traders. Try to mess with them and you'll get rolled.

Anonymous said...

http://buchanan.org/blog/iran-fourth-reich-5892

Zionists see Iran like SPLC sees white nationalists.

American Renaissance can barely hold a conference but SPLC and ADL foams at the mouth(as it's the 4th reich)... and mainstream cons do the biddibg of Jewish groups against fellow whites.

Of course, Jews are playing it both ways. They want Americans to hate, hate, and hate Iran as the enemy of Israel, all the while, Nixon-like, looking for a possible deal with Iran. And if Obama does it, he will get the blame from neocons though Obama will only have taken orders from lib Zionists working behind the curtains with neocons.

"Yet in the Eisenhower-Kennedy years, living under a nuclear Sword of Damocles unlike any the world had ever known, we Americans were on balance a cool, calm and collected crowd. How then explain the semi-hysteria and near panic in circles of this city over the possibility President Obama might meet with President Hassan Rouhani and hold negotiations over Iran’s nuclear program?"

Because Soviets had REAL POWER, whereas Iran doesn't. US had no choice but to be cool and collected. And hotheaded Khrushchev came to the same realization. With Iran, however, US has the luxury of throwing all kinds of tantrums since Iran has no real power.

"We hear talk of Hitler in the Rhineland, of a new Munich, of America failing to act as Britain failed to act, until, back to the wall, it had no choice but to fight. The old Churchill quotes are heard once again."

Actually, both Chamberlain and Stalin were smart and thoughtful in cutting some kind of deal with Hitler. They wanted to avert a major war. It was Hitler who was reckless and stupid for breaking the agreements.
At any rate, it took tens of millions of lives to defeat Germany.
Chamberlain and Stalin cannot be faulted for having tried to prevent such a thing from happening.

Steve Sailer said...

" Anonymous said...

"Steve there may be cartels that are active. But what percentage of your annual spending is going to the extra cost created by cartels other than opec? Probably no more than one percent"

One percent? Why not 0.5%? Or 5%? All these random guesstimates appear about equally plausible prima facie. So, what is the best estimate?

Seems like an interesting question to look into, doesn't it?

Anonymous said...

http://www.thecollegefix.com/post/14698/

"Dear Graduate Director Prof. Kantrowitz"

Anonymous said...

>The Justice Department said that while the price fixing increased the cost of cars for consumers, there was no way to determine exactly how much.

Because math is hard, we'll just pocket the fines and not even bother compensating the OEMs or their retail customers. If they really feel ill used they can always sue in civil court.

Cail Corishev said...

It's kind of bizarre: lower- and middle-class people these days just assume that big companies (except oil companies) are trying to give them low prices. They'll tell you they're lucky to have a Walmart, for instance, for the low prices, even though they have no way of knowing whether prices might be lower if there were a hundred small mom-and-pop shops scattered around town offering the various products Walmart carries. The assumption is that the smaller stores died because their prices were higher, and there's no concern at all that Walmart might have raised prices back up after driving out most of the competition. Walmart has the lowest prices possible because their advertising says so, and that's all there is to it. That same thinking seems to work for all industries except those that are regularly portrayed as being run by evil greedy Republicans.

Matt Buckalew said...

Yea strong labor unions would really prevent price fixing.

I mean there might be something to said for the fact that pouty 95 IQ union bosses (with their near perfect record of killing every golden goose they touched) might after not getting their annual 3% raise throw a tantrum and reveal price fixing just to piss of management, but the idea that unions by their self would care at all about price fixing is laughable.

Where are these tantrums being thrown by people who oppose Iraninan nuclear weapons? On the Iran post anyone who brought up the downsides was immediately labelled a Jew, but despite that the only tantrums I read were from jew baiting Hundson. The fact is MAD deterrence tends to fall apart when you are dealing with countries whose leadership is full of apocolpytic Shias. Also look at all the damage the Soviets were able to do thanks to their nuclear umbrella. Do you guys really not grasp this? It's not just that Iran will have nuclear weapons it is that they will now be able to close the Straight of Hormuz at will and undermine our allies in Gulf. The Gulf still sets a large portion of the oil price regardless of whether or not we buy from them directly. To be honest it is troubling to me that no one in the last dust up about this issue even bothered to answer the points that Whiksy and the anonymous poster raised. They just called them Jews and questioned their loyalty. I tend to remember certain paleocons thinking that was a dirty trick back when Frum was using it. But then Hundson has always seem some what let's just say Levantine in personality so maybe he's just projecting.

Anonymous said...

Tyson, Cargill, JBS and National Beef control meat packing in the US. How much of your grocery bill is rake to these guys?

Dave Pinsen said...

There are enough people who remember shopping at mom & pop stores to know that Wal-Mart's prices are cheaper.

A little cynicism is healthy, but too much is as silly as none.

Portlander said...

Speaking of price fixing, had you seen price fixing in salaries that Apple was the ring-leader in? There was smoking-gun emails from Steve Jobs, that pretty much sealed the settlement. It wasn't all that long ago, may be a year or so. Straight down the memory hole it went. Kind of like the million bikers ride to D.C. a couple weeks ago.

So yes, when Silicon Valley winner-take-all companies aren't lobbying for more immigrant workers, they're blatantly breaking the law to limit the wages of their own native-born top-talent.

Such nice guys those Silicon Valley entrepreneurs, I don't know why we don't turn over more of our national policy to them.

Jeff W. said...

anony-mouse 7:30 a.m. asked,

"Well, like you say, if there are effective cartels around why not become a shareholder in a company that's making the appropriate outsized profits?"

The answer is that most of the outsized profits will be soaked up by corporate insiders long before they get to the pathetic, powerless minority shareholder. Executive pay and bonuses, favorable contracts to insider vendors, lucrative consulting contracts, sweetheart loan deals. All these divert profits to the gang in charge. What's left for the little guy is a market rate of return if you're lucky.

Unanimous said...

"There are enough people who remember shopping at mom & pop stores to know that Wal-Mart's prices are cheaper."

LOL, Wal-Mart steak is cheaper than your neighborhood independent butcher for the same reason Wal-Mart gasoline is cheaper than your independent gas station. Just because the retail price is cheaper doesn't mean there isn't an OPEC.

Luke Lea said...

I think it is interesting that the "law" of diminishing returns has never -- well, almost never -- been modeled mathematically or explained physically in its various guises and manifestations: increasing marginal dis-utility of work, decreasing marginal utility of money, and, of course, the law of variable proportions when it comes to labor, capital, and land. Sure, we know the principle holds, but what are the physics and psychophysics that explain it? If there were no diminishing returns to the use of fertilizer, you could grow the world's food supply in a flower pot; and if there were no diminishing returns to the labor of building a house, then a million carpenters could build a house in a second. We see that intuitively, but what is the shape of the curve? Is it geometrical, polynomial, what? There is nothing on the web, or in libraries, or research papers that I can find except some hundred year old research in agriculture.

Whiskey said...

That's why Buchanon is an idiot in foriegn affairs. Stalin was stupid enough to make a deal with Hitler. Talk about stupid. He would have been better off fighting early with Britain and France than with a badly weakened Britain alone. Moron.

Cartels of course spark counter reactions. New cars too expensive due to car part cartels? Young people don't buy cars and wreck the industry. Cartels like Russia and Iran depend on killing the golden goose to make dinner. They are very destructive.

Yes because we barely avoided nuclear armaggedon let's try that again for what? Paying $20 a gallon for gas? That's the prize?

Mullahs don't care about Jews, Israel, or Palestinians save a demo of nukes and their cartel power. Goose, golden eggs. Dinner.

Tony Danton said...

I'm heavily into 60s cars and tube electronics, particularly stereo equipment. Oriental buyers have bought up all the old Western Electric theater sound gear and much of the Mcintosh, Marantz, and other desirable sudio equipment. Now the cars are going that way too.

How they treat this stuff is often depressing. In Japan, it is very expensive to have old cars kept on the road because of the inspection requirements so they are often junked after a few years. The Saudis abandon them in the desert like they do the Ferraris and Rollers.

Tony Danton said...

I'm heavily into 60s cars and tube electronics, particularly stereo equipment. Oriental buyers have bought up all the old Western Electric theater sound gear and much of the Mcintosh, Marantz, and other desirable sudio equipment. Now the cars are going that way too.

How they treat this stuff is often depressing. In Japan, it is very expensive to have old cars kept on the road because of the inspection requirements so they are often junked after a few years. The Saudis abandon them in the desert like they do the Ferraris and Rollers.

C. Van Carter said...

Shearman & Sterling claims global enforcement against cartels has increased. Both Reagan's and Bush's FTC pursed cartels and price fixing.

C. Van Carter said...

Speaking of cartels, under the Webb-Pomerene Act it is legal for competing US companies to engage in collective export sales.

Matt Buckalew said...

Whisky the prize is a select group of paleos who had their influence usurped by the neo-cons get to see the neo-cons get some comeuppance. It is a pure example of privatize the benefits and socialize the cost.

It's a shame because I think Steve's emphasis on family formation is very important. And I think Pat is a brave voice on the social issues. But it is clear that $200 oil is just the broken eggshells needed to make a Schadenfreude omelette.

Moreover, Pat B hates the Rosenbergs and would obviously have rather the USSR not possessed the bomb so I really don't understand what his point is. To be truly analogous Pat would have to argue what's the big deal with the Rosenbergs anyways. And for the record Iranian rhetoric far outstrips Soviet rhetoric. It's like one "we will bury you" (which basically set the tone for some of the most tension filled years of the Cold War) vs. a daily barrage of death to America. They actually paint that on their missiles. It is pure decadence that let them act like that and still beg them to negotiate.

Anonymous said...

Exactly C. Vann Steve's falling into the same trap that people do when comparing Taft and Roosevelt in regards to trust busting etc. Guess who busted more trusts. It wasn't the guy making all the bluster.

J said...

To answer Steve's question about the "mordida" of an efficient cartel: Potash fertilizer with cartel = 1000 dollar/ton, without cartel 200 dol/ton.

Anti-Democracy Activist said...

This would have been a big issue in the 70s because in the 70s the left would have cared about it. But not now. The left cut a deal with big business (and especially Wall Street) under Bill Clinton, just as it has cut a deal with the military-industrial-surveillance state under Barack Obama.

So now Wall Street runs rampant, dismal wars in obscure places grind on, and the government spies on us ceaselessly, all under a leftist government, but that's all fine because gay marriage.

JeremiahJohnbalaya said...

Steve there may be cartels that are active. But what percentage of your annual spending is going to the extra cost created by cartels other than opec? Probably no more than one percent

One percent total? Or one percent per cartel/industry?

Cail Corishev said...

We have no idea what the mom-and-pops would be charging for things today if the Walmarts hadn't driven them out.

On second thought, maybe we do. I get my beef from a local farmer through a local butcher, and pay $2/pound for the whole thing, including steaks far better than anything Walmart has ever seen. I get pasture-raised eggs for $2/dozen, and some people sell them for $1. Local producers are often much cheaper than the big box stores, but most people keep going to them because the TV says they're cheaper.

Even in the cases where the big corps are cheaper, that still doesn't answer Steve's question of why people trust them so much to be on the side of the customer.

Anonymous said...

"It's 2013 and we can't make a reliably functioning printer and ink costs costs more per gallon that gasoline?"

Epson now sell a printer with refillable ink tanks. In Indonesia. And the warranty's not valid elsewhere. Still, I'd take the risk on one. Possible arbitrage opportunity there - import a few container loads and immediately export them to US/Eur? (of course you may need your wits about you - Indonesia can be corrupt)

http://global.epson.com/company/corporate_history/milestone_products/44_l100l200.html

The auto parts market is one of the few areas that the internet hardly seems to have touched, with a few exceptions like ebay. Can't even find parts listings for your car usually - have to go to the dealer to be told what you need, then dealer prices are extortionate.

Corn said...

"We have no idea what the mom-and-pops would be charging for things today if the Walmarts hadn't driven them out.

On second thought, maybe we do. I get my beef from a local farmer through a local butcher, and pay $2/pound for the whole thing, including steaks far better than anything Walmart has ever seen. I get pasture-raised eggs for $2/dozen, and some people sell them for $1. Local producers are often much cheaper than the big box stores, but most people keep going to them because the TV says they're cheaper.

Even in the cases where the big corps are cheaper, that still doesn't answer Steve's question of why people trust them so much to be on the side of the customer."

You raise good points.
I wonder though, if another reason why people go to the big box store is convenience. No driving to the meatshop to pick up the local grass fed beef. No driving out to Farmer Fred's to pick up the free range eggs. No driving to the clothing store for a new jacket. Just get everything at WalMart or Target.

Dave Pinsen said...

Cail Corishev,

"We have no idea what the mom-and-pops would be charging for things today if the Walmarts hadn't driven them out.

On second thought, maybe we do. I get my beef from a local farmer through a local butcher, and pay $2/pound for the whole thing, including steaks far better than anything Walmart has ever seen. I get pasture-raised eggs for $2/dozen, and some people sell them for $1. Local producers are often much cheaper than the big box stores, but most people keep going to them because the TV says they're cheaper."


Why didn't Wal-Mart drive your local farmer or butcher out of business? Because your local farmer and butcher sell products of as good or better quality than Wal-Mart at lower prices. Your local mom & pop retail stores didn't, which is why they are gone. There's no grand conspiracy here.

"Even in the cases where the big corps are cheaper, that still doesn't answer Steve's question of why people trust them so much to be on the side of the customer."

I don't think "the people" trust big companies more. I think the policy makers do. I think there are two reasons for that.

1) They tend to be familiar with the econ theory Steve cites, and that theory is still true in most cases. Wal-Mart doesn't succeed by colluding with other retailers to maintain higher prices; it succeeds by being ruthlessly efficient in using its economy of scale, merchandizing, store layout, inventory management, supply chain management, etc. to profitably undercut the competition. If it succeeded by collusion, it would have much higher profit margins than 3.61%.

2) Where there is collusion and price fixing, it tends to be in areas most politicians and policy makers don't know or think too much about (e.g., potash).

Eric Rasmusen said...

The Justice Dept. is looking a lot harder for cartels now than it was in 1970 (the big change was around 1980). Back in 1970, antitrust was simultaneously too strict in thinking Big is Bad and too lax in neglecting to go after cartels. Also, back then foreign governments actively protected international cartels from US investigation; now many cooperate. Finally, there is now a good "Confess first and we forgive you" program that has made a huge difference.