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Core inflation and market power

October 17, 2010

The fact that most key industries are oligopolistic and therefore free to determine their prices independent of “free market” forces is sometimes noted as an aside in economics textbooks or occasionally alluded to while speaking on other issues, but except for the radical left, economists rarely speak of it in normal public conversation.

Paul Krugman demonstrated this yesterday by pointing to one of his earlier posts that explains why we need to measure “core inflation”.

“Some prices in the economy fluctuate all the time in the face of supply and demand; food and fuel are the obvious examples. Many prices, however, don’t fluctuate this way — they’re set by oligopolistic firms…”

He then asks us to imagine we are one of these price setters:

“Suppose that I’m setting my price for the next year, and that I expect the overall level of prices — including things like the average price of competing goods — to rise 10 percent over the course of the year. Then I’m probably going to set my price about 5 percent higher than I would if I were only taking current conditions into account.”

Krugman correctly states the reality of our political economy but he proceeds in his post as if nothing’s wrong with the fact that huge corporate entities have the luxury and power to set their prices outside the forces of supply and demand.  Krugman calls the trend of these prices “core inflation”, a strikingly neutral term for what is essentially nothing but raw market power.

So Paul, why shouldn’t any company that has the power to set their own prices be either regulated, broken up, or nationalized?  What justification is there for permitting such goliaths to set their own prices outside of market discipline on behalf of absentee shareholders and executive management?

Instead of worrying about “core inflation”, why not bring public attention to the sorry fact that major parts of our economy are operating under conditions of undisciplined power for the sole interests of private profit?

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