Economy has been being influenced by one man, which known as Adam Smith. His theory which explained about capitalism theory is well known as a great theory that explains market system. He explained that with the invisible hand, price would always go to the equilibrium price. Free market would always bring price in the market into equilibrium price. Of course if all of the conditions are ceteris paribus. This kind of theory has been being used to explain many economic phenomenons.
Fuel price has been just becoming a popular economic discussion’s topic for several months. Last year, world’s fuel price increased rapidly until reached the price level at more than 140 dollars. Even though now the price has not reached more than 100 dollars anymore. When the price reached more than 100 dollars, the government faced a tough condition. They have to decide whether to add subsidy to keep fuel’s price at current level (which sacrifice our APBN) or to increase fuel’s priced in order to save our budget. If government increase fuel’s prices by that time, they have also to face a consequences that it will influence the believe of our society at them. The decreased of believe can be very crucial for SBY’s prospects in next presidential and general election.
But, government was preferred to take the risk. They chose to take the risk and increase oil’s price in our country. They argue that this will save the budget/APBN of our country and save the future of our country. The increased of oil’s price had shown its effects. Without waiting for any longer, most sellers increase selling price of their products. However, there are no increased in the incomes of our societies. This situation made the buying/spending power of consumers became decrease. This situation really harmed our economy. The increase of the product came up without any further explanation about the reason and the number of the increase. Not long after that time, our societies hoped the situation would be better. They thought that their buying/consuming power would be increased after government decrease oil’s price. They decreased it for adjusting the decreased of world’s oil price. But that hope was not 100% become true. Or maybe never becomes true. The decrease of oil’s price does not cause the decrease of product’s price. Consumers still only has smaller buying power than before.
We go back again to the Smith’s theory. According to Smith’s theory, the price will always go to the equilibrium level. The market mechanism will bring the price back to the equilibrium. In this situation, if the increase really affects oil’s price, the decrease should also affect the oil’s price. But in the real market, the increase didn’t really affect the product’s price. This means that the situation has explicitly shown the failure of Smith’s theory. Actually there are some reasons why these situations are occurred. We can accept that the increase of fuel price makes the increase of product’s price. Because fuel price is involved in the production of products until they are being sold. Minimally, they are involved in the transportation cost. Or if it is not contributing in both of them, the seller needs to increase their price to adjust their income to the increase of other prices which is being influenced by both factors. When fuel price decrease, sellers also should have adjusted their products’ price again with the newest price. But that doesn’t happen.
The first reason is we cannot trace directly the contribution of those factors in the pricing decision. When we want to ask for new price, we cannot directly tell how much the new price level is. If we know the contribution of it and count for rational price, we can argue well with the sellers. On another way, we can say that this is caused by asymmetric information. The asymmetric information has caused the failure of Smith’s theory. The second possible reason is companies are always trying to maximize their profit without considering the impacts for societies. And their way for maximizing it is by doing or performing some cartels. Companies with the same market segments/market share promise one another to keep their products’ price at higher price. These make all of them better off. Game theory can explain in the end, both of them will not decrease their price. Cartel strength is one of ‘rational’ decision for companies in maximizing their profit. Another possible reason is that every company has the same expectation about inflations. The same expectation has caused the price stay and never decrease. Finally, we can conclude that in this situation consumer’s bargaining position is weak. Consumer’s bargaining position is not strong enough to affect market price.
Other possible factor to cause the situation is that actually there is no failure at all in the market mechanism. The high market price actually caused the real situation. The real situation which resources’ price for production process increases. Some of companies’ basic things for doing production are being imported from other country. Worldwide economies are now having a global crisis. Global crisis has caused the decrease of Rupiah’s value. The decrease has made imported things become more expensive than before. So, it directly affects the total cost to produce a product. So, it is normal that the cost didn’t decrease even though the fuel price has decreased. And based on this assumption, the market price is already the equilibrium price.
Societies is now having problem with daily products price. Fuel price didn’t really affect the change of products price. One thing that consumers can do to increase their bargaining position is by trying to maximize the use of several consumers’ association. Use it to question companies about the first factor. This can become one way to form public opinion and attract other people to join the association’s effort.
In this case, government should also come to solve the problem. If I assume that the last factor I’ve explained is not true, government can try to solve the problem by doing several things. Government can use the Smith’s theory to make the condition better. One thing that can make the market mechanism works again is adding some new competitors to the market. New competitor will try to get market share by staying at a rational price. This can make some hope that they will bring to the market the real and rational price for the products. After getting the market share, the other companies will follow the rational price. Unfortunately, it can be happened only if they don’t follow the old companies by joining the cartel.
Government can do this by make the barrier to entry become simpler. Nowadays, it takes about more than 70 days for a person to make a company and enter the market. Whereas, in our neighbor countries, it only need less than 20 days or even less than 10 days for making new company and enter the market. If government wants to reach the targeted products price, they can filter the name of product to fixed by finding the products which having great increase than the other. Then, government only needs to change simpler barrier to entry for those chosen products. Government has already made some adjustments for several prices which of they still have power to control. They have decreased public transportation’s cost, train’s cost, etc. But the main problem is that government does not have great power to control all prices in the market.
Mercantilism was part of history in the world’s economy. The era, the price of all products was being told by the government. Maybe this policy is one choice of solution for the problem. But Indonesia is a big country and it is very difficult to control all prices in this huge country. Finally, I come to an argument that several businessmen associations in this are needed to be stopped. Because I assume that they perform their cartel in those associations. But, this assumption can be wrong, if company can explain the mechanism why the price do not decrease following the decrease of fuel price just like when the increase happened. After all, the government needs to fix this problem because societies need to have and enjoy the equilibrium price according to the market mechanism of invisible hands by Adam Smith.
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