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Wednesday, February 01, 2006

Markets Can Fail? Really?

Senators are discovering that free markets are not necessarily competitive markets and talk of anti-trust legislation is being heard from both sides of the aisle:

US Senators in attack on oil industry mergers, by Stephanie Kirchgaessner, Financial Times: Washington lawmakers’ growing ire with the high price consumers are paying to heat their homes and fill their cars prompted new questions ... about the effects of consolidation in the oil industry, and whether it was time to re-think the nation’s anti-trust rules. Arlen Specter, the Republican chairman of the Senate judiciary committee, said the number of mergers in the oil industry had been “excessive”, and that record profits at giants like Exxon Mobil meant “it just may be time to legislate in this field”.

Senator Herb Kohl, a Democrat from Wisconsin, went further by calling for a break-up of the world’s largest oil companies, citing an independent congressional report that found that the more than 2,600 mergers and acquisitions in the industry since the 1990s had contributed to higher oil and gas prices. “We need to ask the serious question as to whether our anti-trust laws are sufficient,” he said. Chuck Schumer, the New York Democrat, agreed ...

The senators are worried about excessive profits, and they should be if they arise from market power. But in general high profits are not necessarily a bad thing. In a competitive market with free entry and exit, high profits are not a worry - high profits are the signal for more resources to flow into the industry. That's how the invisible hand works, but it's essential that the assumptions behind competitive markets are approximately satisfied for this mechanism to work properly.

In any case, I can't see much anti-trust action happening under this administration's watch.

    Posted by on Wednesday, February 1, 2006 at 03:40 PM in Economics, Market Failure, Oil | Permalink  TrackBack (0)  Comments (14)

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