a low-cost producer distorts competition. That's an interesting notion, to say the least;
This appeared to be the case in Southern California in the '90s. One major company raised its prices for gasoline and waited. If the other majors didn't follow suit they could rescind the increase. But the others followed suit. No one had the capacity to replace the supply of another major so why compete at the margin if you could get more.
The increases were noteworthy for not being accounted for by increases in the prices of crude or the availability of refined product for the local market. An uncouth business writer for the LA Times wrote an article on the phenomenon. The large vendors learned to be more subtle. Articles appeared with greater frequency explaining the peculiarities of the California gasoline market, refineries came to be more prone to outages during the peak season, etc. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
It's just not usually explained like this: people tend to find average cost of production more "logical" a pricing mechanism, which means that market pricing is actually rather counter-intuitive.
But it's never explained properly. In the long run, we're all dead. John Maynard Keynes
But it's never explained properly.
