Regularly – in Germany recently in the discussion about the governmental gasoline discount – an common misconception can be noticed in the discussion that should not actually happen, especially not with an economy-friendly party like the FDP: The assumption that if production costs – or even taxes on them – are lowered, the price must also automatically fall. Those who argue in this way reveal that they believe in a concept of a “fair” or “reasonable” price, i.e. that the price somehow linearly reflects the production costs (in the best case, perhaps plus a (small) profit margin).
But is it so? In economics, it has been a commonplace for generations: The price is not determined by production costs, but by supply and demand. In other words, it is somehow “negotiated”. Of course, production costs play a role – in the long term, no one will sell at a price at which they lose money. But while that may be true in the long run, it can make sense for a short term (e.g. to squeeze out competitors). In any case, the reverse is not true: If production costs fall, but competition is lacking – then the incentive to lower the price is also lacking. Or, to stay with the example of the gasoline discount: Once consumers have become accustomed to diesel prices of €2, and suppliers find that the volume purchased at this price does not drastically reduce, why would they lower the price if production costs fall?
You would think that this would actually be a no-brainer. Seems not, though, when you see the astonishment so often: Why do energy costs stay so high now? And bank fees? We don’t have negative interest rates anymore… the simple answer: Because the consumer has gotten used to it or can’t do anything about it (or at least thinks he can’t do anything about it….).