Sunday, July 3, 2022

Economic Analysis of the Bezos vs. Biden spat

 WSJ reports on a spat between world's richest man and world's most powerful one: Inc. founder Jeff Bezos criticized President Biden for pressing gas-station companies to immediately lower their prices at the pump, accusing the president of “misdirection” or “a deep misunderstanding” of market forces that have driven up costs.

The White House replied:

“Oil prices have dropped by about $15 [a barrel] over the past month, but prices at the pump have barely come down. That’s not ‘basic market dynamics.’ It’s a market that is failing the American consumer,” White House press secretary Karine Jean-Pierre wrote on Twitter. 

Lets bring some economic analysis into this war of words by asking the question, "Should President Biden set retail gasoline prices or should individual gas station owners set them?"  To answer it, lets look at who has enough information to make a good decision, and the incentive to do so.  

President Biden noticed that when the price of oil came down, gasoline prices did not fall by a similar amount.  Although oil is an important cost factor for retail gasoline, there are many others: (i) the cost of the real estate (real estate prices have been climbing by 20%/year), (ii) wages (businesses face labor shortages, caused partially by generous government benefits, and businesses have had to raise wages to attract workers), and (iii) the cost of holding inventory, to name a few.  

These costs vary from station to station, and it is unlikely that President Biden, or the economists who work for him, would know the right price for each station.  A price too low and we have excess demand (lines and shortages).  A price too high deters drivers from buying gas and driving (a voluntary wealth-creating transaction).  

OK, so gas station owners have better information.  But what about incentives?  President Biden is criticizing high prices because he wants to appeal to voters.  In contrast, gas station owners want to make money.  Though they have an incentive to price high, gas stations also face competition from rivals.  If they don't give consumers a better deal, consumers can go to a rival, or choose not to buy.   

Blogging Disclosure:  I have worked for the government as a regulator, and for the companies that they regulate. 


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