9.7.24. - Some quick personal questions on the JTC Petroleum case (Antitrust)
If you don’t know the JTC Petroleum case, look it up real fast. Or read this excerpt from Posner:
***As for the producers of the asphalt used by these applicators, the record contains evidence that the product is both heavy relative to value and prone to deteriorate when transported long distances, and that as a result the practical radius within which a plant can supply applicators is only about 70 miles. This has limited to three the number of producers that can supply applicators in the region served by the plaintiff and by the applicator defendants. The plants are specialized to the production of emulsified asphalt, meaning that they can't readily be switched to producing other products. This gives the producers an incentive to produce emulsified asphalt up to the capacity of their plants (because there is no profitable use of the plants other than producing this product), and, since it is a fungible product, about the only way of increasing output is by cutting price. But since the demand for emulsified asphalt is inelastic--that is, lower prices do not yield commensurate increases in volume--the effect of price competition would be to diminish profits. So the producers, like the applicators, have much to gain by eliminating competition among themselves. And since the product is standard and the number of competing producers few, an agreement not to compete should not be too difficult to enforce; that is, at the producer level as at the applicator level, cheating should be readily observable and hence quickly checked by a retaliatory price cut. Therefore a cartel agreement would not be quickly eroded by cheating, and so again the conditions for collusion are ripe and again the record contains evidence of such collusion.***
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The applicators in the JTC petroleum case faced an interesting problem, which is that there is an inelastic demand for their product (there is only a fixed amount of government projects), and their products are identical, making the only avenue to compete is really on price, or their bids.
Competitive bidding in such an environment would mean that reductions in price have no effect on quantity or output, it just reduces profit margins, eventually bidding competition should bring it to something like zero economic profits.
A zero profit environment where there is an inelastic demand can be modeled as one where there are no new market entrants; the usual story is that above normal profits attracts market entrants who compete away the surplus.
So you just have a few firms who, in theory, must improve productivity to increase their profit margins again, assuming they’ve all converged on the same bid/market price.
But these applicators all have the same set of suppliers for the asphalt, so other than labor practices maybe there is no meaningful way to compete on quality. I don’t know how wide the range of practices are in the applicator industry, but I can’t imagine there is too much room to optimize.
So it seems like a competitive bidding market here would create a “normal” or zero profits (in the economic terminology) environment with very little room for any optimizations.
I feel like this is the kind of market where you wouldn’t only see no firm entry, but firm exit, or where one firm eventually just outcompetes the rest because they secured the best talent, made the best bids enough times to put the other applicators out of business.
Such a situation means the government would eventually deal with just one firm, is that a better situation? Would that be a better bargaining environment, or would it just mean more cronyism?
Is it possible that a cartel that is price fixing to preserve slightly above normal profits is actually the only mechanism to ensure that there are multiple players in the market? Which in turn increases aggregate employment, and preserves some choice for the government here?
Really what's happening here is that this group of firms, by eschewing price competition, are choosing to distribute the market share among themselves more randomly, almost by lottery, which usually is more egalitarian. We neutuer competition in a lot of fields where we want more egalitarian distribution, like in spots for private schools———we prioritize our distributive aims over ideals of competition. Is it so bad for firms in an industry like this to do the same?
In short, is the existence of cartels in such small and local markets with inelastic demand necessarily a bad thing? Is price competition, or preserving more players in a market place the chief economic objective here, because it seems like these are actually at odds here.
Anyways, I had to write these down as it occurred to me while reading this case.