Are producers, manufacturers, and suppliers obligated to pass on cost decreases as they do cost increases?

Question

What happens to the communication value of the pricing mechanism between producers (Supply) and consumers (Demand) when they don't? Use bank APR's or oilco gasoline prices as examples if you have to!

Answer 1

Yes in a way because of competition.  It has been said that the firm the survives is the firm the can supply a product than consumers demand at the lowest cost while still making a profit. (this was from my managerial economics book)  What it means is that businesses are all about driving down cost.  If cost decrease, they lower the price to take business from their competitors.  As an off-shot, though.  The fear is that you lower cost (ala Wal-Mart) you drive out the competition and then raise prices from the lack of competition.  Obviously the price will rise in this situation because of the market structure.  A whole detailed analysis of this question would include how different market structures operate.  However, this was not asked and as such I will stop.

Answer 2

Producers, manufacturers, and suppliers are not obligated to pass on cost decreases as they do cost increases in the same way as the consumers have no obligation to buy anything at any price that are available in the market.  To buy or sell is a voluntary decision and there is no compulsion.

To what extent cost increases or cost decreases will be shared between the producers, suppliers, manufacturers on the one hand and the consumers on the other hand depends on slopes of the demand and supply curves and particularly on the extent of competition.  Under monopsony or oligosopsony or monopsonistic competition, the consumers/ buyers gain whether costs rise or decline, under monopoly, oligopoly and monopolistic competition, the consumers suffer when costs increases and do not gain much when the costs decline. But under perfect competition, the consumers gain the most: producers/ manufacturers/ suppliers have very little power to pass on cost increases and are forced by competition among themseleves to pass on cost declines.

Obligation is a useless word in the context of exvahnge  done on a voluntary basis except to the extent of the terms of the contract of exchange.

When banks and customer enter into contracts for variable rate of interest, the cost increases and decreases are passed on as per the contract. When the rate of ineterest is fixed for the period of loan, neither cost increase nor cost decrease can be passed on the customer. However, there may be forclosure and refinancing provisions that benefit the customers when interest rates go down.

The same principles apply to gasoline markets.

Depending on the extent of competition, gas stations fight to retain customers by not passing on the cost increases and accepting lower margin of profit or even accepting losses for a while.