Sunday, June 24, 2012
After the oversupply is stripped out
Deflation from oversupply, that is when there is an excess, causes a slump in prices that lasts as long as the excess inventory. Eventually though, the excess inventory is gone, the excess capacity is closed, which is good. However, at that point pricing power returns because excess inventory can go in a fire sale as production costs are sunk. There is no advantage producing additional oversupply at a loss though.