Tuesday, November 09, 2010

Memo to Joe and Wayne

To Joe and Wayne and anyone else who wants to bob up in the debate on banks, you continue to misrepresent competition.

The suggestion is that somehow or other a lack of competition means that customers can't shop around for better rates. But the economic theory on which competition policy relies asserts that in a competitive market producers have to price to market. That is, in a perfectly competitive market all producers set the same price.

This creates a conundrum for competition regulators that they can't distinguish between the effect of collusion (the same price) and the effect of competition (the same price).

Equally the rejection of "signalling" (a conduct that I've often thought does amount to tacit collusion) can equally be defended as the assumption of free market theory is that all producers and all suppliers are fully informed before they make decisions.

The solution isn't mindless repetition of the word competition - it is to understand the dynamics of the market - and the related problem of asset valuation (see next post).

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