tag:theconversation.com,2011:/africa/topics/price-signalling-3062/articlesPrice signalling – The Conversation2015-02-02T19:02:37Ztag:theconversation.com,2011:article/369442015-02-02T19:02:37Z2015-02-02T19:02:37ZTime for a blunt lesson on HECS and price signals<figure><img src="https://images.theconversation.com/files/70783/original/image-20150202-25914-yqevmm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">By letting students in who might not otherwise be able to afford university, HECS sharpens the price signal.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>There continues to be a lot of discussion about the future of tertiary education in Australia. Should fees be <a href="https://theconversation.com/au/topics/fee-deregulation">deregulated</a>, places <a href="https://theconversation.com/state-funding-to-universities-is-stable-but-questions-remain-over-uncapped-student-numbers-36998">capped</a>, interest on student loans charged at the bond rate? And on, and on.</p>
<p>In all of this debate, however, there has been across-the-board praise for the HECS system, designed by economist Bruce Chapman and implemented by the Hawke-Keating government. And rightly so: it allows students to pay their share of the cost of their education over time, and do so contingent on income. This does two things. First, it provides credit to students, thereby eliminating the need to have up-front cash to pay tuition fees. Second, it provides insurance against labour market risk. Loan payments are only due when a solid income is being earned.</p>
<p>All good, right? I sure thought so. Yet education policy scholar Peter Noonan recently <a href="http://www.theaustralian.com.au/national-affairs/education/get-over-gough-whitlam-on-higher-education-fees-alp-told/story-fn59nlz9-1227196446840">said</a>: </p>
<blockquote>
<p>“Anyone who thinks that a system that blunts price signals can simply underpin price deregulation doesn’t understand economics.” </p>
</blockquote>
<p>Then University of Melbourne Vice Chancellor Glyn Davis <a href="http://www.theaustralian.com.au/higher-education/review-constraints-unclear-davis/story-e6frgcjx-1227198701229">told The Australian</a>:</p>
<blockquote>
<p>“HECS does blunt price signals but we don’t know whether it blunts them so much that it won’t work.”</p>
</blockquote>
<p>Really? The argument seems to be that in a deregulated fee environment, an income-contingent loan (HECS) means prices aren’t as informative as in a market without HECS.</p>
<p>Well, I do understand economics and I beg to differ. In this market, HECS makes prices more informative, not less.</p>
<h2>Price signals explained</h2>
<p>To see why let’s first be clear about just what a “price signal” is. The reason why people like me are fans of markets is because the market’s price mechanism has a remarkable ability to aggregate and communicate information. It can do what no central planner could ever hope to do.</p>
<p>My favourite story about how remarkable the price mechanism is in this regard comes from when I was living in Boston. I used to go to my local supermarket every day, and they had in-store-squeezed orange juice. One winter day, that seemed indistinguishable from the last, I noticed the price had more than doubled from $3.25 to $7.00. I also noticed an employee with a pricing gun changing the price of other juices in the refrigerator. </p>
<p>What had happened? It turned out that 18 hours earlier there had been a frost in Florida that had damaged orange trees, disrupting future supply. This had become known to traders, frozen concentrate orange juice prices had shot up, and local suppliers of oranges had raised their prices immediately in Boston. The supermarket manager, realising that in-store-squeezed juice and bottled juice were close substitutes raised the price of those, too. All in 18 hours — and all through markets.</p>
<p>So in a deregulated market for tertiary education in Australia what would be the price and what information would it convey? The price, of course, would be the cost of tuition. A high price would suggest a valuable degree — perhaps because of field of study (e.g. law or medicine), because of university reputation, or because of the quality of the education and educators. Right now prices are all essentially the same – so no price signal.</p>
<p>Different potential students have different information and perspectives on the value of those disciplines, universities, and faculties. The magic of the market is that the price of various degrees — in a deregulated market — aggregates and assembles all that dispersed information. This point was made forcefully by Austrian economist <a href="http://evankozierachi.com/uploads/The_Use_of_Knowledge_in_Society_-_Hayek.pdf">Friedrich Hayek</a> in 1945 and was later <a href="http://www.jstor.org/discover/10.2307/2326627sid=21105737979033&uid=2&uid=2129&uid=4&uid=70">formalised</a> by the great American economist Sandy Grossman.</p>
<p>Now, there’s other information besides prices: rankings, word of mouth, ATAR cutoffs, and more. So prices wouldn’t be the only source of information in a deregulated tertiary education market, but still a very important one.</p>
<p>The key thing to understand in all of this is that most students are credit constrained. They don’t have accumulated cash to pay tuition up front. So they have to borrow. HECS allows them to do that on very generous terms. But suppose there was no HECS. What would happen?</p>
<p>Without the private loan market stepping in this would mean a whole host of students could not afford to pay for university. So they would not participate in the market. This would be terrible for them, but also terrible for the market. Their valuable information about the future would not be incorporated into the price for tertiary degrees and that would make even those who could afford to participate worse off.</p>
<p>The bottom line is that for markets to work well they need to be liquid — they need to have a lot of participants. The more liquid they are the better they are at aggregating and communicating information. When a huge chunk of people are credit constrained and can’t participate in the market that’s bad for them and bad for the market. Letting them in, as HECS does, sharpens the price signal.</p>
<p>Would it be sharper still without income contingent repayments? I think not. That would make students bear more labour market risk and drive more students out of the market for tertiary education. Both efficient risk-sharing and efficient credit-provision makes price signals better. And that’s precisely what HECS does.</p>
<p>The trap that Noonan and Davis have fallen in to is to think that because HECS makes students less responsive in their decisions to changes in prices it makes prices less informative. Not so.</p>
<p>It is an understandable mistake, for well-functioning markets do two things. They equate supply and demand, and they convey information. Both are pretty important! But it’s in fact the latter that is what a “price signal” is really all about—particularly in a market like that for tertiary education with dispersed information and a good deal of uncertainty about the future.</p>
<p>Hayek would have liked HECS. It helps, not hinders the market weave its magic. It makes the price mechanism work even better. It’s time to stop apologising for it!</p><img src="https://counter.theconversation.com/content/36944/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>There continues to be a lot of discussion about the future of tertiary education in Australia. Should fees be deregulated, places capped, interest on student loans charged at the bond rate? And on, and…Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/318242014-09-22T20:28:34Z2014-09-22T20:28:34ZWhy it’s time to scrap price signalling laws<figure><img src="https://images.theconversation.com/files/59697/original/brqh5yf7-1411368495.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some price signalling can help consumers.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-119055175/stock-photo-portrait-of-a-man-yelling-into-a-megaphone-against-blue-background.html?src=vkEkxC7RsO4V_vSp_ZMDMw-1-62">Aaron Amat/Shutterstock</a></span></figcaption></figure><p>Among the 52 recommendations contained in the <a href="http://competitionpolicyreview.gov.au/draft-report/">draft report on Competition Policy</a> from economist Ian Harper, is a suggestion price signalling laws established in 2011 be repealed. </p>
<p>These laws currently make it unlawful for banks to disclose price-related information in a broad range of circumstances.</p>
<p>Price signalling laws in Australia have an almost comical, and highly political, history. Their genesis was the Australian Competition and Consumer Commission’s defeat in a number of high profile petrol price fixing cases. This led to calls to expand the scope of the existing price fixing provision to capture a broader range of “concerted practices”. </p>
<h2>Yes Minister</h2>
<p>The previous price fixing provision required proof of a “contract, arrangement or understanding”, interpreted as necessitating some form of “commitment” by parties to act in a particular way. In particular, merely giving or receiving information was not considered enough to satisfy the requirement. A review into the meaning of understanding was promptly conducted, but failed to produce any recommendations. </p>
<p>No further action was taken by the government until concerns were raised about the level of competition in the banking industry. Suddenly “price signalling” legislation was on the agenda, this time targeting the big four banks. </p>
<p>The current laws were first introduced by then Treasurer Wayne Swan as part of the government’s “<a href="http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/091.htm&pageID=003&min=wms&Year=&DocType">Competitive and Sustainable Banking System Package</a>”. They passed into law in 2011, and came into operation on June 6, 2012. There has not yet been any litigation involving these provisions.</p>
<p>Two forms of price disclosures are prohibited by the existing price signalling laws:</p>
<p>• private pricing disclosures between competitors are prohibited, without the need to prove that competition has been harmed in any way, unless made in the “ordinary course of business”</p>
<p>• public disclosures of information relating to price, capacity or commercial strategy are prohibited if made for the purpose of substantially lessening competition in a market. </p>
<p>Both prohibitions apply only to classes of goods and services prescribed by regulation; currently only banking services have been prescribed.</p>
<h2>Bank bashing?</h2>
<p>When introducing the existing laws, Wayne Swan indicated they would initially target banks because the ACCC had advised “there is strong evidence of banks signalling their pricing intentions to each other in a bid to undermine competition”.</p>
<p>The industry specific nature of the provision has, however, been roundly criticised. For example, in its <a href="http://www.lawcouncil.asn.au/lawcouncil/images/LCA-PDF/docs-2800-2899/2847_-_Australian_Government_Competition_Policy_Review.pdf">submission to the competition review</a>, the Law Council noted that there is “no principled justification for selective application of these provisions”. In addition, no criteria have been identified for determining which sectors ought to be prescribed. </p>
<p>The ACCC has also long argued that the sector-specific focus is unfortunate. The <a href="http://www.accc.gov.au/system/files/Harper%20Review%20-%20Issues%20Paper%20-%20ACCC%20Submission%20-%20FINAL%20%28for%20website%29%20-%2025%20June%202014%20%282%29.pdf">ACCC’s first submission to the review</a> called for the industry-wide application of the price signalling laws consisting “with the principle of universality”.</p>
<h2>Over-reach</h2>
<p>The prohibition of unilateral price disclosures to competitors, without a competition test, has the potential to capture ordinary and pro-competitive business conduct. This was recognised during the drafting process when a series of banking-specific exceptions were added to the otherwise general prohibition of price signalling in the Act.</p>
<p>Despite the exemptions, the prohibition still requires no link between the signalling conduct and any form of collusion or facilitative practice, recognised as necessary before competitive harm is likely to result. As a consequence, the prohibition fails to appropriately distinguish between conduct which may cause harm to the market and that which may not.</p>
<p>The price signalling provisions were roundly criticised in <a href="http://competitionpolicyreview.gov.au/issues-paper/submissions/">submissions to the Harper Review</a>. There were several calls for the provision to have industry-wide application, including from the ACCC, and many more calls for their full repeal.</p>
<h2>Addressing the real issue</h2>
<p>The competition review panel concluded the current price signalling provisions do not “strike the right balance” in distinguishing between pro and anti-competitive conduct, and expressed the view that competition laws “ought be capable of general application to all parts of the economy”.</p>
<p>The review panel did not consider that there was any sound reason for prohibiting public pricing disclosures, such as announcements about future interest rate rises, noting that they were unlikely to raise significant competition concerns. To the contrary, the panel highlighted the potential for such statements to assist consumers in making informed choices. </p>
<p>In relation to private price disclosures, the preview panel observed that such disclosures may harm competition when used to facilitate collusion. However, they accepted that there were also a number of circumstances in which such disclosure is necessary for normal business. </p>
<p>However, to address concerns about anti-competitive price signalling, the review panel recommended modification to the existing prohibition on anti-competitive agreements (section 45). Although it considered this section in its existing form would capture most forms of price signalling, it recommended the prohibition be expanded to capture “concerted practices” having the purpose, effect, or likely effect of substantially lessening competition. It also suggested this cover “a regular and deliberate activity undertaking by two or more firms”.</p>
<p>The competition review panel’s recommendations should be welcomed. The existing provisions look more like industrial policy designed to align with a transient political agenda, rather than well constructed and universal competition policy.</p><img src="https://counter.theconversation.com/content/31824/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Julie Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Among the 52 recommendations contained in the draft report on Competition Policy from economist Ian Harper, is a suggestion price signalling laws established in 2011 be repealed. These laws currently make…Julie Clarke, Associate Professor, School of Law, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/70342012-05-27T20:35:52Z2012-05-27T20:35:52ZPrice cycles and signalling in the petrol industry: what other markets can tell us<figure><img src="https://images.theconversation.com/files/11052/original/cc5yctjf-1337910964.jpg?ixlib=rb-1.1.0&rect=23%2C26%2C1952%2C1329&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What can international markets tell us about whether Australian petrol price sharing arrangements are anti-competitive?</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The way petrol is priced in Australia has been a <a href="https://theconversation.com/graeme-samuel-the-problem-with-petrol-the-nbn-and-the-scare-campaign-against-supermarkets-6655">perennially vexed issue</a>. </p>
<p>Earlier this month, the Australian Competition and Consumer Commission (ACCC) announced it would <a href="http://www.accc.gov.au/content/index.phtml/itemId/1049774/fromItemId/142">launch an inquiry</a> into price-sharing arrangements in the petrol industry, saying it was concerned petrol retailers could “quickly signal price movements, monitor competitors’ responses, and react to them”, reducing competition.</p>
<p>Although media reports at the time mentioned “price fixing”, the issue here is actually price signalling among major retailers. </p>
<p>In the spotlight is the private company <a href="https://www.informedsources.com/">Informed Sources</a>, which offers a widely used database which claims to accurately report petrol prices at site level.</p>
<p>Research undertaken in 2011 by <a href="http://www.economics.unimelb.edu.au/downloads/wp/wp11/1124.pdf">Queen’s University Professor Roger Ware and I</a> in Canada found that petrol stations monitor each other “on the ground” intensely enough such that dominant chains in cycling markets can coordinate price restorations, and maintain stable price cycles, without websites like Informed Sources.</p>
<p>Nonetheless, my and others’ research on petrol price cycles generally supports the ACCC’s concerns over price signalling in petrol markets, and whether Informed Sources causes a substantial lessening of competition in Australian petrol markets.</p>
<p><strong>Petrol Pricing in Canada</strong></p>
<p>My joint paper with Professor Ware analyses daily station-level petrol price data for more than 100 markets in Ontario, Canada. </p>
<p>The paper examines the characteristics of markets that exhibit petrol price cycles, and investigates petrol stations’ pricing strategies within cycling markets.</p>
<p>We found large urban markets like Toronto exhibit “cost-based” pricing, where day-to-day petrol prices move in lockstep with daily wholesale prices. Intermediate sized markets - roughly with 25,000 to 100,000 people - have petrol price cycles. Price cycles are characterised by weekly drastic price jumps (“price restorations”), followed by a sequence of daily price decreases (“the undercutting phase”). </p>
<p>Our examination of branded and independent stations’ pricing strategies within cycling markets also yielded a number of insights. </p>
<p>Branded stations are those that operate under the name of major oil companies that also own oil refineries. In Ontario, there are four major brands: Esso, Petro-Canada, Shell, and Sunoco. </p>
<p>We found that during price restorations, brands lead in initiating price jumps and setting prices, while independents follow. During the undercutting phase of the cycle, independents lead and are aggressive in undercutting prices, while brands are non-aggressive in price undercutting. </p>
<p>We further showed dispersion in petrol prices across stations evolves over the price cycle. At the top of the cycle just after a price restoration, there is little dispersion; all stations price to the same point. </p>
<p>As the undercutting phases ensues, market-wide price dispersion grows. Brands appear to leverage their large networks of stations to periodically initiate price restorations, and coordinate all stations’ prices to a higher level. As the undercutting phase ensues, prices depart from their restoration levels and variability across stations’ prices rises.</p>
<p>Our findings, along with those in a recent International Journal of Industrial Organisation article by <a href="http://economics.osu.edu/people/lewis">Matthew Lewis</a> of Ohio State University for the US market, represent the first formal statistical analyses of stations’ pricing strategies in markets with petrol price cycles. </p>
<p>The key insight from these studies is that cycling markets tend to have dominant retailers who operate a large network of stations relative to the size of the market. Having price leaders in a market is crucial for establishing a stable petrol price cycle. </p>
<p>In large markets like Toronto, brands do not have a large enough presence relative to market size to consistently coordinate price restorations, and stations instead adopt a cost-based pricing strategy.</p>
<p><strong>Lessons for Australia</strong></p>
<p>These insights are relevant for the ACCC’s current investigation into <a href="https://www.informedsources.com/">Informed Sources</a>, a website that Australian petrol companies use to share information on each other’s stations’ prices. A related issue, which was raised in the <a href="http://www.accc.gov.au/content/index.phtml/itemId/806216">ACCC’s 2007 petrol inquiry</a>, is that of price signalling amongst petrol companies (though price signalling laws in Australia currently only apply to banks). </p>
<p>To be clear, this investigation has little to do with price fixing, or agreements amongst petrol companies on price setting. It directly relates to our finding from cycling markets in Canada that brands leverage their large networks of stations to raise prices and initiate price restorations, and have confidence that their competitors will follow.</p>
<p>Informed Sources facilitates how dominant petrol retailers signal price restorations since major brands can easily monitor and react to price jumps easily with this website. </p>
<p>For the ACCC, the key questions will be: how would petrol prices look in a world without Informed Sources; and would such a world be substantially more competitive than what we currently see? </p><img src="https://counter.theconversation.com/content/7034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Byrne does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The way petrol is priced in Australia has been a perennially vexed issue. Earlier this month, the Australian Competition and Consumer Commission (ACCC) announced it would launch an inquiry into price-sharing…David Byrne, Lecturer, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.