Friday, January 28, 2011

Price Signalling

One feature of the most recent round of bank responses to the official interest rate rise was the return of "price signalling" by the banks. This is the practice whereby they go to the media and suggest what their response might be, hoping that this informal communication can build a consensus.

Competition regulators, commentators and pundits all regard it as tantamount to collusion on price. The problem for them all is that the economic model of "competition" that we have become conditioned to supporting would not only see this as not a problem, it is actually a pre-requisite for the market to work.

The set of assumptions about a fully competitive market that lead to the mathematical conclusion of (Pareto) efficiency has as an assumption perfect knowledge by consumers and producers of what the actual price will be.

To put it another way, the fact that everyone is charging the same price is either evidence of perfect competition or perfect collusion - but the equivalence of price itself isn't deterministic of either (and could be a fluke in a less than perfect scenario).

But the "vibe" of price signalling has seen the coalition introduce a Bill that attempts to outlaw all price signalling, and the Government to publish an exposure draft of a more complex Bill that would at least be limited to markets specified by regulation.

Jennifer Hewett writing in the Oz has highlighted the kinds of damage that any price signalling law could produce.

Ultimately a core issue is just how useful it is to give the ACCC additional powers given that none of their existing powers seem to be used particularly effectively. In reality was the failure to secure a price fixing prosecution of a few petrol stations anything compared to the failure of the ACCC to act on shop-a-dockets?

And more simply if we really believe there is market power allowing banks to make "super profits" then an alternative regulatory mechanism is merely to confiscate the super profit by taxation, rather than by litigation.

Novae Meridianae Demetae Dexter delenda est

1 comment:

ian said...

Politicians and the media don't actually care what price banks actually charge (to judge by their reports and comments).

No one reports the interest rates, just the increases. A bank which had the lowest rate, but a higher increase, still resulting in the lowest rate would still be castigated.