Reaping Rewards from Human Capital

I like a stock analogy best. If you own MS, and it goes up in value in China, it goes up world wide. No one expects you to sell a share of stock for less than "Mr Market" is willing to pay.

Yet they expect you to sell oil based on what you paid for it.

Ask Charles Osgood if he will sell you his house for what he paid for it plus a reasonable profit -- let's say the T-Bill rate.

Rational people sell things for what they cost to replace, not what they cost when purchased.

But I've never heard Charles Osgood accused of being a rational man.

Don,

The problem is the difference between economics and accounting. Accounting makes use of historical prices that, for economics, are sunk costs. For economics, and for business attempts at profit maximization (and loss minimization), it is estimates of future replacement costs that are important.

Regards, Don

For gas retailers, replacement cost determines price, not the cost initially paid.

A good example is from insurance. If you built a house 30 years ago, and it burned down, would you expect the insurance company to pay you what you paid for the house, or what it costs to rebuild?

Unfortunately, they have it both ways.

When Katrina and Rita hit oil production in the Gulf, retail prices went up immediately in anticipation of higher costs, not later when the higher costs were incurred.

The misbehaving is when they lie about the real reasons.

The listeners to The Osgood Report don't have the patience or disposition to hear the "real reasons," which include other people (gasp) maximizing their gains.

It all hinges on the objectivity of what is "fair."

Which works fine as long as I'm the world dictator. But as soon as I let someone else in on the game, it just all goes to pot, so we better stick something not so easily abused.

Cade,

What retailer is expected to give reasons why prices are the way they are? And even if they did, why would you believe them?

Oil prices went up from the hurricanes for 2 reasons: prices to replace the gas they were selling went up quickly as landfall was more assured (check the futures prices), and the market paid the higher prices.

Actually, only the latter reason needs to be true for prices to change.

I don't believe "they" (whoever that means), came out and lied about reasons. Please cite references because I've read that accusations before but I've never read the actual "lies".

Mr.Donald J. Boudreaux, At a general conception you are right but not particularly, when as an buyer individual gets more than what he gives, he is happy to receive it, why should he deny it when something that extra comes free which he is not ordering for. How your expecting a buyer to understand giver point of view. It is unnecessary.

This is an example of the old fallacy that price should be related to cost.

Did anyone see a 30-day price-match guarantee when they filled up? Reverse things: Retail gasoline prices drop rapidly. When you fill up, do you feel guilty for misbehaving? Or, you book a hotel room in advance and the price of the room later triples. Any urge to handover your “extra” profits?

You nailed it. ;-)

The real lie is that anyone, including the oil companies, actually understand all the "real reasons" for market price levels.

All vendors try to maximize profit, and if a price level results in lower profit due to fewer number sold because of too high a price, or too little revenue because of too low a price, they change their price.

The demand curve cannot ever be 100% predicted a priori.