Monday, December 12, 2005


Price Fixing with prices at or below the cost of production?

So I was just randomly reading this article from Computerworld and was trying to figure out how there could be price fixing as indicated when I finally got to the last line of the article. "The computer companies and the U.S. government maintain that strong DRAM prices hurt business, despite the fact most DRAM makers posted heavy losses during the year in question, 2001, and DRAM prices remained below or near the cost of production for most of the year. "

Okay...wait a second. They ended up pleading guilty despite the fact that their prices just barely, if at all, covered the cost of production for most of the year and they posted heavy losses for the year.

If we go to the Department of Justice we get the following link.

"The charged combination and conspiracy consisted of a continuing agreement, understanding, and concert of action among the defendants and their coconspirators, the substantial terms of which were to agree to fix the prices for DRAM to be sold to certain OEMs. "

But I'm still lost. These companies acted in a concerted effort to sell DRAM at certain prices to SPECIFIC OEM's? Let's assume that this is true. If it is then there is the opportunity for arbitrage to sort things out. A quick internet search doesn't reveal this as being the case. So now I'm fascinated. I will admit I am generally skeptical of Antitrust claims. Most of the "landmark" Antitrust cases of been proven in subsequent years to be complete bunk to anyone with even a cursory understanding of economics. Also, very little weight is ever given to the idea of a "cost saving cartel." The Antitrust suit against vitamin companies in the 90's had the perverse effect of increasing prices once the "cartel" was disbanded. So let's hypothesize the arbitrage is impossible for whatever reason. Then it looks like we simply have a case of price discrimination based upon willingness and ability to pay. From an economic perspective that isn't really a bad thing. In fact, marketed properly I'm sure that many people would support the idea. If I told you that we were going to charge less to smaller companies because they can't afford to pay as much and we like to encourage small businesses, I'm sure that many antitrust advocates would applaud the decision.

I would have liked to have seen this go to court. It still might as there are other manufacturers being investigated. I imagine that based upon the history of Antitrust cases in the U.S. that they were worried that a prolonged legal battle would just drain resources and even if they did nothing wrong they might still lose because of how muddled the Antitrust laws are with regard to economic reasoning.

In other economic news, here is a slate article from Landsburg on different methods of establishing wage differentials based upon the decision to wait an additional year to have a child.

For those of you interested in the math, here is the article that Landsburg is writing about.

This paper also from Virginia makes mention of something I've complained about for a long time. The sequence in A Beautiful Mind where John Nash supposedly comes up with his "Nash Equilibrium" is not in fact a Nash Equilibrium. The paper is entitled "Participation Games: Market Entry, Coordination, and the Beautiful Blonde."

Okay...time for me to get back to work.

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