Their argument is basically that while normally a company raising prices would mean that some of their customers move to a competitor, in today's environment there is an implicit agreement that every company will keep prices high.
So are they saying that the free market is basically not a thing anymore because of covid, and no company wants to get an edge over its competitors by undercutting on price despite having record margins?
* Rent (they're all high; and can't afford to buy anywhere near where I work)
* Food (prices are pretty much the same everywhere)
* Internet (Cable's the only modern-speed option where I currently rent)
* Energy / Gas - either utilities or again, the same everywhere
I think most everyone else is in the same boat. I can scale down some of these a little bit, but they're all fairly __inelastic__. I can't stop eating. I need all of these for life and work.
Want to tame inflation? Tax the hell out of profits above X%!!! Someone's making money on this.
and the companies do not want to compete: most modern large companies only exist as a _vehicle for investment_, and as such compete for shareholders, not consumers. Due to this, short-termism dominates: average CEO stays 4 years at a given company, and performance of the company after they leave is largely uncorrelated with their carreer success, while share prices during tenure actually does.
So they'll suck the blood from us, crash everything, and get a raise when politicians ask them very nicely to try and fix it. And while share prices will go down on the S&P, billionaires will gte richer, and hedges will make bank...
I'm not familiar with the law of rent, but it does not seem accurate. Right now blue collar workers can't afford to rent within a 60 minute commute to Boston, where they are not paid a wage that justifies that commute. Why would you cook or clean in Boston when you could do it literally anywhere else in MA without the commute?
I guess my point is that markets continually prove to not be rational. Maybe a philosopher hundreds of years ago imagined they could be, but that's not how things are shaking out.
> Why would you cook or clean in Boston when you could do it literally anywhere else in MA without the commute?
Because that's where you have your social connections. Friends, family. That's where your home is, your parents lived there, your grandparents lived there, you grew up there. And you hold out for better times. And that's why you can be exploited like that.
That's the "not rational" part. The humans participating in the market are not "rational", for some odd definition of the word. But if you think through motivations, they are rational, if you put value in the reasons why people do this kind of job in this kind of situation.
No the "not rational" part is that wages are not commensurate with cost of living increase because short term thinking yielding record profit margins is addictive.
Workers are leaving because they can't afford it, not because they want to stratify their families and leave their homes.
For those thinking this is the market successfully working: has the market successfully worked in the Bay Area? How does SF look right now?
> No the "not rational" part is that wages are not commensurate with cost of living increase because short term thinking yielding record profit margins is addictive.
Wages are where the two parties met. It's high enough so the seller of the good (employee) is ok with selling and it's low enough so the buyer of the good (employer) is ok with buying. As long as they do business with each other, they are apparently both deciding, rationally, that this is an acceptable deal. Better than the alternative.
> Workers are leaving because they can't afford it, not because they want to stratify their families and leave their homes.
Great that they are leaving! They should be leaving! Cause then, and only then, will businesses be driven closer to raising wages since the sweet spot in the above equilibrium moves upwards.
> For those thinking this is the market successfully working: has the market successfully worked in the Bay Area? How does SF look right now?
Well in the Bay Area, the market is highly distorted. Lots of NIMBY zoning rules preventing high density housing being built. People sitting on detached homes because they can't afford to move. This heavily distorts housing costs which then impacts salaries since all those tech workers need to live somewhere. Big tech and VC-funded not-as-big tech is floating in money, so can afford to push salaries/compensation higher and higher. It's the market, but it's not pretty and it's heavily distorted.
In the case of the Boston cleaner, that seems to indicate the living costs can also drive salary. If nobody applies to work somewhere, the wages either go up or the job goes unfilled.
> In the case of the Boston cleaner, that seems to indicate the living costs can also drive salary. If nobody applies to work somewhere, the wages either go up or the job goes unfilled.
When one job salary doesn't cover living costs, you are more likely forced to have two or three, not a raise in your current one. It also solves problem of unfilled jobs. Because there are cases when job is only economically feasible if performed in urban area with high population density, so you can't really change your location.
When then starts happening the politicians start screaming about how we need more immigrants (who are willing to live 5 to a 1 bedroom apartment and suffer a brutal commute).
Is no one cleaning in Boston? It seems pretty easy to test whether it’s a market failure (ie, there are no cleaners cleaning in Boston).
I think if you ask anything vs “new law passed by Congress” I’m going with anything. So at least the invisible hands will eventually solve this problem by raising cleaner pay until someone is willing to commute 60 minutes (note that was my commute in a larger metro area on programmer pay) or cleaners can afford closer.
The problem with your (and many others) "short-term thinking" argument is that the assumed long-term consequences -- you wrote "crash everything" -- doesn't happen. We went from 2008 to now, 15 years, with corporate profits and stock prices zooming straight up. Even shutting down the globe was just a temporary blip. Highly aggressive corporate activity, massive expansion of economic inequality, yet the longest non-recessionary period in this country's history.
Been hearing "unsustainable" for a long time. I believed it wholeheartedly for a while. Sure, we will have recessions again, perhaps we're in one presently, but do you think the USA is going to somehow collapse? It will likely see a gradual decline in living standards, I agree, but you are overlooking how bad the 70s were economically, when the Baby Boomers were in their 20s and 30s.
That's the thing though, we shouldn't be seeing a decline in living standards. Technology, productivity, efficiency are all up dramatically. We just have an oligarchic ruling class sucking up all the difference.
I'm not claiming there will never be another downturn -- of course there will be -- but the fact that we just went through the longest non-recessionary period in this country's history, despite all the "short-termism" already indicates at least some flaws in the original hypothesis
I would question whether the measure we should be concerned with is "recession or not" - everything can be getting worse while simultaneously corporate profits are high. That's kind of by definition what short-term thinking gets you - cash in hand but ruined infrastructure and societal safety nets.
You can always find negative things if you go looking for them. The reason people care so much about "income inequality" rather than "poverty rates" is that poverty has declined dramatically around the globe. So doom-and-gloomers shifted the goalposts and ignore successful results.
You can't accuse corporate CEOs of short-term thinking and then use infrastructure and "societal safety nets" as the measurements -- CEOs are responsible for the success of their company, not of the well-being of an entire society, that's the government's job.
Notice how many of those things have highly inelastic supply, are monopolies (or close), or have really bloated "value adding" supply chains.
NIMBYs and such ensure that more housing can't be built, at scale, in areas with high rents, to have normal supply/demand dynamic.
Food is relatively cheap, if you cook for yourself and don't mind a lot of beans, rice, bread-machine bread, peanut butter, etc. If you want heavily processed or prepared food, or restaurant food...that's an order of magnitude more expensive. And many parts of the food industry are far too consolidated to be competitive.
Etc.
Taxing the hell out of profits sounds great...but in sectors where the real problems are strangulated supply, monopolies, and massive processing in the supply chain - it won't do much good.
> Food is relatively cheap, if you cook for yourself and don't mind a lot of beans, rice, bread-machine bread, peanut butter, etc. If you want heavily processed or prepared food, or restaurant food...that's an order of magnitude more expensive. And many parts of the food industry are far too consolidated to be competitive.
The people already doing so are absolutely fucked.
While potentially still cheaper, those basic staples have typically seen a disproportionately large rise in their price. The price of porridge oats and milk increased by over 30% in the UK between 2022-2023[0]. Own brand plain dried pasta went up by 41% in one, relatively cheap, supermarket[1].
CPI as a whole is at 8.9% but food is at 19.2%[2].
That's not even accounting for the noticeable inflation in the price of the cheapest goods that occurred prior or energy bills more than quadrupling between 2019 and 2023, even before Ukraine they had nearly doubled.
The argument that undermines the price gouging theory is that consumer demand for optional Goods remains High and is also inflating. This indicates that consumers are not responding to higher prices by decreasing demand.
I wasn't arguing the merits of price gouging, rather that as opposed to what CPI figures may suggest, the poorest have been hit much harder, by much higher inflation than those better off.
Seeing as we're now on the topic. Demand may be high where you are but that certainly doesn't hold true in the UK. The statistics show clearly that people are buying less[0] and getting less for it.
Retail volume is down 3.1% on 2022 across the board, there's literally a chart titled "Divergence between retail sales volumes and values"[1] showing how severely people are being squeezed. Figure 4[2] breaks out the same data for food retail specifically.
While certain demographics have been able to somewhat keep up with rising prices, the reality is that some food banks are having to distribute 50% more than they did pre-pandemic[3]. Real disposable income is already well below 2020 levels and expected to erase a decade of "growth" as it nosedives towards that of 2013[4].
Prepared food is really unconsolidated like bulk food unless you live in a total roadside mall hellscape. There seems to be agreements on maintaining irrational pricing where there is price differentiation. I.e. you will pay more for cheaper to make vegan food because a vegan can't eat a cheap burger. IMO this is more distributed in nature like landlords sharing a price fixing app.
Disagree. There is a very old rule of thumb in the restaurant biz, that your selling price has to be 4x your actual cost of the food - because of all the labor, kitchen equipment, rent, etc. overhead. I'd bet that similar rules of thumb apply to grocery stores' deli departments, shrink-wrapped sandwiches in vending machines, and pretty much every other sort of non-restaurant prepared food.
And, at least in the area I live in, the barriers to entry for the restaurant biz are pretty minimal. Most restaurants are (at most) local micro-chains, and there's a lot of churn as people try to make a restaurant work...and often fail financially. Want to get into the restaurant biz? With a low-6-figure nest egg, and willingness to wait for some local commercial landlord to have a vacant failed little restaurant on his hands, it's "easy". And the real estate supply is pretty elastic - cities and NIMBYs favor the (often quick & easy) construction of more small retail spaces; likewise converting generic vacant retail spaces into more restaurants.
Vs. if you want to be residential landlord - I'll guess a 7-figure nest egg to buy existing property (limited supply, and buying some does not increase overall supply). If you want to actually expand supply, by building rental housing at scale...you'd better have an 8-figure nest egg, and experienced legal team, and be willing to spend 8+ years (from "ready to do this" to "collect rent checks") fighting your way through the government red tape, NIMBY-land's standing army, and actual construction. With no guarantees of success.
Short term it would create a strong incentive not to hoard property. If it's not rented out it is losing money. Landlords would scramble to rent them out - driving up supply.
Medium term rents would decrease, too. A land tax would create a powerful incentive to yield low density housing in high value locations to be redeveloped into high density housing - increasing supply.
What would also go down is property prices. Significantly.
It would kill all political will to fight redevelopment too. There would be no point fighting to declare a launderette historic to prevent it from being turned into apartments. Desperation for local housing wouldnt get directly turned into home equity and higher rents like it does now, it would just jack up your tax bill.
The idea that you can tax an input more and reduce prices is ridiculous on its face.
> Demand for housing would remain the same.
Also unlikely. Basically any change in local conditions will impact housing demand one way or another. The global number of people needing housing may not change, but that’s not housing demand (globally or locally).
> Short term it would create a strong incentive not to hoard property. If it's not rented out it is losing money.
Property tax already does that, and most places have properry taxes. Also, the fact that property has non-tax maintenance costs does that. “Hoarding real property” is largely a theoretical concern.
> Landlords would scramble to rent them out - driving up supply.
Except they already do that, but higher taxes would raise the break-even price.
> Medium term rents would decrease, too. A land tax would create a powerful incentive to yield low density housing in high value locations to be redeveloped into high density housing - increasing supply.
No, it wouldn’t: housing demand already does it, the constraint is regulatory (zoning control) not the desire to build. Higher taxes on lans drive up costs without dealing with the constraint. Deal with the constraint and you’ll see development because more housing on the same land is more money for the landlord even with 0 taxes. All more taxes do is raise the break-even rent.
> What would also go down is property prices.
Nominally, but the cost of ownership would stay the same or be higher, some of it moving from purchase price to taxes.
> It would kill all political will to fight redevelopment too.
No, the political will to kill redevelopment would just also be political will to kill the taxes.
> There would be no point fighting to declare a launderette historic to prevent it from being turned into apartments.
There’s no financial case for that now, and higher land taxes wouldn’t erase nonfinancial political motives.
>The idea that you can tax an input more and reduce prices is ridiculous on its face.
Of course. It would absolutely reduce the price of property.
Just not rents.
>Basically any change in local conditions will impact housing demand
Hand waving.
>Property tax already does that, and most places have properry taxes.
When high enough property taxes do inhibit hoarding, yeah. They approximate a less desirable form of land value tax.
In my city property taxes are capped at an absurdly low level and property is hoarded like bitcoin while people die on the street. Tax policy at work.
>Except they already do that, but higher taxes would raise the break-even price.
Remember when you said?
"The idea that you can tax an input more and reduce prices is ridiculous on its face."
You were absolutely correct. PROPERTY prices would decline to compensate for the higher taxes.
That would in turn keep the breakeven price more or less the same for developers.
It would also reduce the capital intensity of property development since the cost of the land wouldn't be front loaded.
Dont get me wrong. This would turn property owners into renters of a kind (renting land from society) and this would make a lot of property owners furious - and probably violent. It's not a panacea - it's just a way to euthanize one kind of economic parasite.
Taxing land doesn't increase rent; it's an inelastic good with greater demand than supply. See Ricardo's Law of Rent, Henry George, or basically any analysis of land tax (or indeed, taxing any monopoly good). The incidence of land tax is well known to not fall on the tenant.
It is passed on to the consumer but the consumer in this case is the landlord not the renter.
There are two markets with two types of consumer here:
1) The market for a roof over your head. This is highly (but not completely) inelastic. People need somewhere to live.
2) The market for property as an investment. Higher taxes on an asset disincentivizes ownership of that asset. This is elastic because there are tons of other asset classes you can pour surplus wealth into.
Effectively a land value tax already exists for renters - in demand locations have higher rents. The "tax receipts" just dont flow into government coffers.
Depending on how high and fast it was raised it would likely lead to a steady stream of landlords defaulting on their mortgages and leaving the banks holding the property.
(Usually) rents are already as high as they can be, in aggregate. In other words, the market cannot bear a higher cost for the good, so an increase in cost has to be eaten by the landlord.
This is actually very easy to see in countries with no 30 year mortgages, because landlords have to refix their mortgage rates every 1-5 years. This means you can see regular landlord cost changes as interest rates fluctuate, as well as the impact on rents.
The impact on rents is essentially 0 as landlord costs change; instead, rents follow tenant incomes, because landlords are able to charge more as long as tenant incomes increase.
I've got plenty of data from New Zealand if you're interested, but I'm sure it's the same everywhere there is supply-constrained housing.
> Usually) rents are already as high as they can be, in aggregate. In other words, the market cannot bear a higher cost for the good, so an increase in cost has to be eaten by the landlord.
Rising tenant incomes. As incomes increase, landlords are able to increase rents proportionally. This is only true where demand outstrips supply, but that's the case in most developed cities in the West, as well as many other cities.
Tenants have several fixed costs to pay: taxes, food, rent, and transportation being the main ones. If their incomes go up, rent typically consumes the increase, because housing is a fairly uncompetitive market.
Why would you want farms in urban settings? We have plenty of farm land as is, in fact if many cities were more densely structured rather than suburban there would be even more farm land.
A land value tax wouldnt tax density it would just tax the value of the land.
This would encourage property density in high value locations like inner cities but wouldn't enforce it.
In terms of farmland it would just mean that farmers rent the land from the government rather than, say, blackrock or bill gates (two of the biggest owners of farmland right now).
This would not affect food prices by much it would just mean that when you buy food from those farms, instead of ~15% of the price flowing into bill gates' pocket it would flow into government coffers. Bad luck Bill Gates. Bad luck Blackrock.
> A land value tax wouldnt tax density it would just tax the value of the land.
I wasn’t responding to an LVT suggestion, but a suggestion of taxes that would be based on density of use and go up for lower density. I quoted the suggestion in my response. LVT is a whole different thing.
The value in LTV would be influenced by density. If every parcel around a plot of land is dense the total value would be higher. So tax the land at the average density of surrounding parcels and allow for unlimited density. That would incentivize density and development where it is needed and prevent a single hold out from inefficiently blocking development.
Builders won't build less if it's people paying rather than corporations. There isn't going to be a shortage of demand until there is an increase in supply because housing is inelastic.
All of them were sorted during WFH. I moved out to remote places and paid far less. I saved quite a bit on all of the above remote other than Internet of course. The economy is setup to extract your money from you once you've earned it.
Well, yes. How else can the rich keep getting richer? And the umpteen million individuals assuming "stocks will return 10% over the long term" in their retirement planning actually manage to retire as they planned?
And as long as the culture wars can be kept burning fairly hot, the line-ups of new movies and video drama compelling, and the web addictive - the poor working masses won't put up too much of a fuss over all that extraction.
In my country, rents are increasing now after the markets have already been flat or down, the startup boom has long fizzled out, and there are layoffs almost every day.
It's baffling. Rents were down during the pandemic but they've now rocketed up 50-100% in some areas.
> Food (prices are pretty much the same everywhere)
I can't believe this is true. Either you're shopping for food at a subsistence level, in which case you know exactly what you're missing and how much easier it would be if you could afford a bit more, or you indulge yourself a bit and you're wilfully ignoring that you could pay less.
A good where consumers have inelastic demand does not mean that individual companies face inelastic demand curves - that's the whole point of competition. ie. It doesn't matter if you're willing to pay a lot to avoid starvation since no individual company is making profits off of having some market power to starve you.
The thought that food providers are colluding to raise prices is absurd and should serve as a reductio ad absurdum in these arguments, not a fundamental explanation for "greedflation".
> The DOJ, explained forbes.com, charged that company “executives worked together to keep prices paid to poultry farmers low while raising costs for consumers at grocery stores and restaurant chains.”
> Seems relevant to note that these charges failed..
As USA lives in post law age it only means that relevant corporations carpet bombed regulator with lawyers, paid politicians, lobbyists, job offers for key bureaucrats(after they retire/leave) to make it go away. And to prosecute corporation regulator needs money, money they have is finite so they need to choose their fights. And they need don't know if around the corner some corporation doesn't produce fentanyl out of baby skulls. On top of that fixing plight of chicken producers won't translate into them spending money on lobbyists, hiring retired bureaucrats or financing PACs, everything corporations that gain from it will definitely do.
I'm not sure COVID is a root cause rather than a convenient occasion.
The free market is supposed to work through scale and optimization; scale is still a relevant force, but mostly serves market consolidation. Optimization is not something that can be frequently innovated on. So everyone has pretty much the same cost basis in long established industries like food.
There is simply no incentive for these corporations to start a price war; they all know starting one will only result in a very brief competitive advantage until everyone returns to baseline profits.
Funnily enough, a lot of recent reductions in cost basis in "innovative" startups is not done through optimization; it is done through VC speculating on their competitor finding a more permanent place in a (supposedly) new market after consolidation and prices adjust back to reality. An example I can come up with of this is food delivery services in Germany: For a while, several providers were undercutting each other in price and service level. Now all of Germany is dominated by Takeaway, and their service level is slightly above "we don't care". We'll see the same in instant grocery delivery in a year or so. Getir seems to be winning that one. Until then, enjoy ridiculously cheap instant grocery delivery, powered by VC funding and extra dirty worker exploitation (only one of those will continue to exist).
An efficient free market was never a thing except in the fever dreams of economists.
Most forms of the efficient market hypothesis have been formally proven incorrect. The remaining ones are harder to disprove but can be tied to other things (ie only true if p=np).
There are literally mountains of evidence that you have to ignore to believe in efficient free markets at this point. The evidence for them has always amounted to "I have a theory, I looked at a market for a while and it was sometimes true. Therefore my theory is proven"
All countervailing evidence is "no true scotsman"'d. No inefficient market is free enough you see.
It’s one of those things that people feel like should be true, but just isn’t.
meanwhile, if you start from the theory that there’s no particular reason for free markets to be efficient, stories like this aren't even news.
I don't think it's about the free market not being a thing. It's that, in a context where every company is increasing prices and customers have resigned and accepted that reality, the increased profit from extra clients is less than the increased profits from higher prices.
Good Odd Lots episode goes into this theory. [1] Basically companies found that by raising prices, they were able to increase profits despite shipping fewer units - and they wanted to see how much they could do so. When Pepsi had to leave Russia, which accounted for 4% of revenue, they just increased the price in the rest of the world to compensate without issue. And seeing that, Coke followed suit.
However at this point in the arc, companies are losing their ability to push prices. They won't pull them back or anything, but we are seeing reversion to the mean.
That stabilization should be sufficient to see much lower inflation levels moving forward.
This story is not incompatible with a more-basic one where inflation debases the currency, so when a company starts exploring price hikes for whatever reason they unsurprisingly realize greater profits (since they were implicitly lowering the price by selling for the same quantity of a less-valuable currency). Imagine that Pepsi was selling for ETH in 2021, then "discovers" after the price of ETH halves in 2022 that they can get away with hiking the price - in this case the price hikes are the consequence of the currency devaluation, not the cause.
> This story is not incompatible with a more-basic one where inflation debases the currency, so when a company starts exploring price hikes for whatever reason they unsurprisingly realize greater profits (since they were implicitly lowering the price by selling for the same quantity of a less-valuable currency). Imagine that Pepsi was selling for ETH in 2021, then "discovers" after the price of ETH halves in 2022 that they can get away with hiking the price - in this case the price hikes are the consequence of the currency devaluation, not the cause.
Then they can increase prices two, three or four times and because they have inflation as excuse no one will say a bad word against them. On top of that they hold their suppliers by the throat so they will be able to keep surplus of money in their pocket. Hence astronomical revenue they have during "inflation".
Inflation is measured from a change in purchasing power, it's not a function of supply - because what you do with the supply is what matters, not that it exists. These companies raising prices would be inflationary in and of itself.
Supply may or may not yield inflationary pressure, but a change in supply is just that - a change in supply. Inflation is measured from a change in prices. For instance, a 100% sales tax would be massively inflationary (at least initially) and wouldn't be reflected in supply of currency units.
ETH like BTC prices are just high-beta derivatives of US dollar liquidity in the global financial system. And that's pretty generous, assuming it's not just a rigged mob casino run by a small handful of insiders. It's not really comparable because it's not really a currency. In the sense that nothing is actually priced in ETH or BTC - it's an open loop system. Everything's priced in dollars and converted at the last second to a BTC/ETH price, and then those are usually immediately sold for dollars to pay suppliers, etc. There's at best a negligible closed loop BTC/ETH economy.
>These companies raising prices would be inflationary in and of itself.
Sure, but there are scenarios where this would be profitable and scenarios where it wouldn't be, and we expect the former to occur when there's been an exogenous debasement to the currency. Inflation is measured from a change in prices, but that does not mean that the exogenous factors which rationalize price hikes are not fairly characterized as the cause of inflation - "greed" or "profit seeking" do not have any narrative value here since there's no covariance between these phenomena and actual observed inflation. And no one seriously expects a company to not raise prices when a currency is debased anyways.
I think Pepsi and Coke are really interesting example because they are not necessary to live. Many of the arguments in this thread rely on the idea that companies are coordinating to price gouge for life-sustaining Goods. If that were the case why do we see inflation in optional Goods as well
No, it’s the result of the massive shift in antitrust regulation from the Reagan era on, where US largely abandoned anti-monopoly enforcement, resulting in corporate concentration and collusion. The free market is “not a thing” because of a lack of real competition.
That is certainly part of the story yes. Especially in grocery. It's wild how much better a job restaurants did controlling their food costs than individuals could.
The last two years has been such a clear downgrade in standards and quality across the board.
One product I've bought for 20 years used to be sold in clear glass bottles. Last year, they replaced it with cheap plastic bottles. Then they reduced the quantity by 20% while keeping the same price.
That's just one example, but practically everything I used to buy has either increased in price, decreased in quality/quantity, or often, both together.
> the free market is basically not a thing anymore
The free market was never a real thing. It's like spherical cows in a vacuum. It describes what you would expect to see given a sufficiently large number of buyers and sellers, with no network effects, with perfect information for buyers and sellers, no players with controlling stake of the market, and over a long enough timespan.
In this case, the fact that most industries have literaly been reduced to one or two players, the powerful force of competition isn't very effective at reducing prices. It might eventually, but because there are so few competing sellers, we'll have to wait a long time.
> So are they saying that the free market is basically not a thing anymore because of covid, and no company wants to get an edge over its competitors by undercutting on price despite having record margins?
Covid has nothing to do with it. Market always worked this way. There's really very little reason for a company to lower the prices below what consumers are already willing to pay. When the market is saturated and all customers are accustomed to paying certain level of prices for a given good and you try to lower your prices for that good it won't automatically mean you'll sell more. You might even sell less because people will assume you sell a good of lower quality. It can take decades for the customers to learn while you are leaving profits on the table. Profits that you might have used for marketing to actually get more sales at higher price.
It is what helps one understand that demand and supply are not only things that dictate the price of even a very common goods, even in absence of advertisement.
As US and western customers are getting poorer for the first time in decades they are just starting to notice the inflation. The inflation was there before and companies were milking it at least since 2000, but since customers still had money nobody was really thinking about it. Of course only recently inflation got as high as it is, because of all the money printing done in the pandemic and a bit before.
That sounds about right... But if we want to get to the root cause, we'd have to look at the design of the monetary system and the last decade of monetary policy.
Never in history have there been so many market oligopolies; and it coincided with a transition to a global soft money standard as global fiat currencies became increasingly more decoupled from gold.
Before, a dollar could be exchanged for a certain fixed amount of gold; this had clear and objective economic value. Nowadays, money is decoupled from any hard/objective economic value.
Today, banks issue credit proportionally to asset prices which are themselves determined by how much new credit enters the system... A vicious cycle which forces banks to keep loading new generations with more credit at a steadily increasing pace to avoid bursting bubbles.
For almost all goods, price increases will decrease the amount purchased. If there's still insufficient excess supply capacity after substantial price increase and decreases in people's purchasing power and consumption, then the reason competition isn't lowering prices is because that's the actual market-clearing price where demand is equal to the amount that can be produced.
This can't be fixed by forcing companies to lower their prices since they won't be able to supply the demand that exists at a lower price, and attempting to do so anyway via price controls inevitably leads to empty shelves.
> For almost all goods, price increases will decrease the amount purchased...
Except that housing, at least in America, has dynamics which are nothing like that. And housing is by far the largest living expense for a very large fraction of Americans.
High housing prices do reduced demand, just not by much. People living with roommates or parents are example of people priced out of the market. This is demand reduction.
No, that’s a just lower quantity demanded, not lower demand; demand is the function mapping price to quantity demanded.
Its possibly that price level could over time effect actual demand (as well), that is, it could convert people who would buy at price $X to people who would only buy at a price lower than $X or not at all, but that’s not what your example is.
(It does, actually, induced demand from availability it observed, anf the reverse from the opposite condition would be logical.)
You are right that I'm talking about the quantity of goods demanded. I think this is relevant because we are talking about the price per good demanded as well. Your classic supply and demand curve which we're talking about is units supplied, units demanded, and price per unit.
If you want to think about absolute demand for housing in absence of a price reference, the demand is enormous. If houses cost $0, I would probably demand three or four large ones for myself before getting to the point where I refuse a free house.
> You are right that I'm talking about the quantity of goods demanded
Right, that's different than demand. Demand is the function mapping price to quantity demanded (just as supply is the function mapping price to quantity supplied.)
There are things that shift demand, but price changes resulting in a different quantity demanded are not evidence of shifts in demand, just evidence of a normal shape of demand curve (which is not to say that price conditions over time don’t shift actual demand, that’s just a more complicated thing to demonstrate.)
I think you are right that demand is a function. I would quibble that it is pretty clear that "demand" refers to the quantity demanded when stated with the other variables of the function. e.g. "what is the demand for $10 coffee in a desert".
In the context of this discussion I thought it was pretty clear which I was talking about.
>>>For almost all goods, price increases will decrease the amount purchased.
>>Except that housing, at least in America, has dynamics which are nothing like that.
>High(er) housing prices do reduce demand...
Do you have any thoughts on if price impacts the quantity of homes demanded.
That makes assumptions that don't hold in the round. Once you have a lack of supply capacity such that there is inflation, then everybody can pass on the price changes and the amount purchased doesn't change.
That's the problem.
Somebody has to stand the loss, and for that to happen there has to be an expectation that you can't pass on the price shift somewhere in the cycle, which then forces that somebody to reduce the quantity purchased or shift it to an alternative supplier.
>>the free market is basically not a thing anymore
I'd say this has little to do with COVID (beyond that it is a random event that decreased then re-increased demand), but the accumulated effect of decades of failing to enforce anti-trust law.
The most propserous times and bigges middle class ended with the Reagan administration, who in 1983, ordered the DOJ, FTC, and SEC to stop enforcing anti-trust laws dating back to the Sherman Act of 1890[0].
This massively destroyed small businesses and concentrated corporate power. E.g., the closer a store was to the Walmart location, the greater the likelihood it would close. Persky and his colleagues found that for every mile closer to the Walmart, 6 percent more stores closed. Close in around the store's location, between 35 and 60 percent of stores closed. [1]
Previously, anti-trust laws were enforced so aggressively that when Buster Brown and Kinney shoe companies wanted to merge in the 1960s the Supreme Court blocked the merger because the combined company would control about 5 percent of the US shoe market. Nike alone today controls around 20 percent of that market.[0]
Obviously, when anti-trust laws stop being enforced and massive corporations gain oligarchic market and pricing power, they can create inflation at will.
This power needs to be rebalanced.
Again, recognize, that the "free market" is ab absolute fiction — there is no such thing. Every market has rules and regulations, explicit and/or tacit. The only question is what are the regulations and who enforces them.
Absent sufficient regulation, the market dynamics will always end up with all power in the hands of a few major players. This is what is happening here. Looks like is is not the FED that can fix it, it is the SEC and DOJ.
> The most propserous times and bigges middle class ended with the Reagan administration
Reagan took office in 1981. So you're claiming that the late 70s -- oil embargo, hostages, double-digit inflation and unemployment -- were "the most prosperous times"? Really?
I'm claiming that the 50s, 60s, and early 70s were the peak[0].
Yes, yes, the economy did take a hit in the 70s before Reagan took office, but it is quite obvious that that inflation was a combination of extrinsic geopolitical influences and Nixon's abandoning the Gold Standard.
Absent a huge anti-working-class / anti-union push, and shutting down most anti-trust enforcement, recovery of the working class would have been a lot faster and would be a lot further ahead.
Instead, as you can see from the chart, it has literally taken 50 years for the working class to just get back to the same level as 1973...
I don't see any argument that large corporate power, especially pricing power, has somehow declined since Reagan stopped enforcing antitrust laws. Since this is a long-term slow effect, we're seeing the cumulative results now. Most of inflation is NOT materials or labor cost increases, it is corporate profits increases. In a reasonably-regulated (e.g., regulatory bodies not captured by large corporations themselves) economy, this would not be possible. but here we are.
> I'm claiming that the 50s, 60s, and early 70s were the peak
So before computers kicked off unprecedented productivity increases, and before standardized shipping containers enabled manufacturing to be relocated globally.
I can hold recognize that things are not all good or bad, and I don't place 100% of the blame on anyone. That's not the same as saying they're absolved or irrelevant either.
I strongly supported (still do) Reagan's vision of the city on the hill, the global champion of democracy, and strengthening of the military to meet those goals and challenges.
But his strong pro-corporate actions (stopping anti-trust enforcement and union busting) also did huge damage to the middle class, the legacy of which is still here. Similarly, undoing the fairness doctrine instead of extending it to cable (which also use public infrastructure) and weakening laws on maximum ownership of media, also lead to the insane polarization of media we have today.
While microcomputers increasing productivity and shipping containers obviously have some influence, productivity still occurs in the context of workers having rules (or not) that support their bargaining position, and shipping containers in the policy of global trade. Reagan certainly damaged the former, and I don't recall him either much exacerbating nor helping prevent the problems of the latter.
Similarly, Obama did some great things, including a major step towards universal healthcare, but he also failed to respond to Russia's invasion of Crimea and actions Syria, both of which directly emboldened Putin to start his current genocidal war on Ukraine. Neither Reagan nor Obama are solely to blame for these serious problems, but they also bear some real responsibility for their major (mis-)steps in the wrong direction.
I assume that at some point prices will normalize again. But my assumption is that the feed back loop of the free market also has a time delay and needs time to self-correct and I guess this time delay can be longer than expected. Especially when supply chains are disrupted, for many products customers often cannot simply switch to a competitor. Covid kind of "broke" the free market, and it will heal itself, but it takes longer than expected.
Yes, they are saying exactly that, and those economists are idiots. They think that prices are the result of costs+profit, rather than optimized to maximize demand*profit; demand being a function of price.
It probably should be in the internet age. There is a huge cottage industry out there for fixing prices. I hope that the feds discover all the OTHER companies out there that are similar to RealPage.
But economics teaches us when a player overcharges, others will step in to undercut and take all the market share.
So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.
Why not both? The modern dismantling of antitrust regulation and enforcement is a significant driver of both. It's gotten way worse now than ever, to the point where private equity firms like Vanguard and Blackrock can be the biggest shareholders in direct duopoly competitors (KO and PEP are an example), or where investors and producers are permitted to fully horizontally and vertically integrate (AMZN is an example). And media (among many other industries) has been permitted to consolidate to ridiculous levels that would have been unimaginable to the architects of early-mid 20th century antitrust laws even on a practical level -- an Amazon-level entity would have been literally impossible to envision in the early 20th century because companies just practically couldn't get that big with manual technologies.
The largest US company in 1929 had revenues of about $1.5bn - roughly $30bn in 2023 dollars, which wouldn't even put it in the Fortune 100 today. Walmart today has revenues of about $600bn, which is roughly equivalent to 6x the top 50 companies in the US in 1929 combined!
It's mind-blowing to me that economics is still using these ridiculously old, flawed models whose assumptions are less true than ever. To me, econ 101 should be teaching how irrational consumers and lawmakers are, what state capture is, monopoly-seeking behaviours as the primary modern driver of profit growth, etc...
Econ 101 is using those models for the same reason Phys 101 uses Newtonian mechanics in a vacuum with rigid bodies of low mass and no charge and with all collisions being elastic.
They are a good enough approximation to reality in a lot of useful situations, and understanding them does help in later classes when they bring in relativity, electromagnetism, fluids, thermodynamics, quantum mechanics, bodies that aren't rigid, and so on.
Even after you've got all that stuff under your belt the Phys 101 stuff remains useful, because often something that cannot be modeled accurately enough with just Phys 101 material can be modeled accurately enough if you take the Phys 101 model and tweak it a bit with the rest.
When I took Econ 101 it was very much lectured into me that these models are all based on a bunch of assumptions.
The thing I ultimately found pretty amusing that nearly every model had perfect information, many buyers, many sellers as part of the assumptions and almost every time I see somebody citing Econ 101 either 2 or 3 of the assumptions aren't there.
> The largest US company in 1929 had revenues of about $1.5bn - roughly $30bn in 2023 dollars, which wouldn't even put it in the Fortune 100 today. Walmart today has revenues of about $600bn, which is roughly equivalent to 6x the top 50 companies in the US in 1929 combined!
US real gdp is 10x what is was in 1947 [0] (FRED only goes back to 1947). Add in the extra 18 years and the fact a bunch of companies are now global thus expanding their markets and those revenue numbers don't look so surprising.
Also, why'd you pick the start of the great depression as your start date?
You cited Amazon's vertical integration as a reason they need to be broken up, however Amazon retail's margins vary between 0 and 5%. Walmart on the other hand is more like 25%.
Amazon is the best middle man that customers could ever want. They clip the ticket an almost imperceptible amount.
The stores you'd probably promote, small mom and pop stores, generally have 50%+ margins.
Who exactly is gouging customers? It's not Amazon retail.
> The stores you'd probably promote, small mom and pop stores, generally have 50%+ margins.
Let's assume this is true, along with your other margin numbers (I honestly have no idea one way or the other offhand).
Where does that money go?
It goes to Mom & Pop buying stuff at other stores in the area.
It goes to improving the small store (by paying contractors, vendors, and other people in the area).
It goes to Mom & Pop improving their house (by paying contractors in the area).
In short, it goes back into the community.
Where does Walmart's 25% go? At best, Bentonville, Arkansas. At worst the Waltons' offshore accounts.
Where does Amazon's 5% go? It gently gilds the top of Jeff Bezos' staggeringly and increasingly titanic fortune.
High margins, on their own, are not a bad thing that we should automatically seek to squash. They are one datapoint among many, and must be taken in context.
I feel we are entering seriously dangerous territory when someone is defending monopolistic practices because during the time of a monopoly consolidating itself the customers get a brief period of lowered prices that the monopolistic forces use to undercut all competitors.
Monopolistic practices is the term I used, exactly to not call Amazon a monopoly because they are not one yet. They are engaging in monopolistic practices though (price dumping causing stifled competition, etc.).
First, that's gross profit, which doesn't include the cost of paying the employees that work in the store, or the cost of paying "mom and pop" for the work they put in, or the cost for rent, electricity, heating, garbage collection, insurance, etc.
Second, judging by what little I can see without paid access, the "50% gross margin" refers to "health and beauty care products", not to all products sold by small shops in general.
If an econ forum started a discussion of physics with discussion of what the ether teaches us, it would be quickly dismissed. Yet HN's fine, again, with the equivalent as the starting block, indeed highest voted comment, for discussion of an econ topic. Wisdom of the crowds perhaps, though crowds of people did once stone crows.
If an econ forum started discussing gravity, there'd be some austrian physics guy yelling about how the invisible hand of the market pushes down on everyone.
Econ indeed does teach us what the poster suggests, in perfect competition.
If we're finding that lots of businesses have substantial pricing power, such that it's a driver of inflation (and this is open to debate)... then it looks like we have a whole lot of really imperfect competition.
Thats not really accurate. The rest of the curriculum is about how that is still correct but how people attempt to gain market power so they can stop others undercutting them, bringing market back to efficiency.
There's this strange thing that is done. We have economics departments and business schools and they aren't the same thing.
Mainstream neoclassical economics is mostly preoccupied with what ought to happen in some mathematically defined fantasy world and business school is the study of what actually does happen.
In fact when you get into post-graduate classical economics, it's mostly just a formal branch of mathematics with models and axioms. It's got nothing to do with how people actually engage in the real world with the distribution of resources.
It's based on some mathematically defined homo-economicus and has a bunch of assumptions like infinite knowledge, exclusively rational and always correct based on some utility function calculation, etc... as if every single person, without exception, pours over arbitrarily complex excel spreadsheets covering a wide variety of properties for every single purchase and they all, in unison, arrive at the exact same conclusions and without any more thought immediately respond to the price signal. Oh and they also are acting only in their self-interest without any regard, at all, like some kind of narcissistic psychopath, for anything but themselves.
That's why the advanced economics books are just proofs, axioms and math while the business books are things like real world sales numbers. Classical Economic theories predict real world human behavior about as much as an astrology chart. (There's lots of revolutionary work in economics in the past 30 years that present other models but many people outside the discipline haven't gotten the memo yet and think James M Buchanan and other Virginia and Chicago school people from the mid-20th century are all of economics - it isn't and never was)
I've given a pretty good multi-year study into both. One of them reflects reality more.
It's part of the "4-6" ps of marketing. (usually price/place/promotion/product - sometimes people and presentation). As you can see in that link, those things are part of it.
It's way more complicated than sellers stupidly slashing their profit margins in some purely competitive feeding frenzy for your dollar. That does happen - but usually only in collapsing markets where price, speculation, information, and value are counterintuitively all unknown.
Robert Shiller has documented this, how the predictive capacity of neoclassical models reach their highest accuracy during market panics. So there is that
I think marketing (and branding) is the antithesis of classical economics and the primary reason reality diverges from theory. Marketing is extremely effective (despite everyone saying they are immune) at de-commodifying commodity products and detaching demand from price (or at least minimizing price's importance)
Take auto insurance... probably the biggest TV advertiser in the US. Highly regulated product, nothing tangible, it's all the same. But the gecko and Flo and Jake from State Farm are there every commercial break to pound your head in to differentiate their product from alternatives. Doesn't hurt that price discovery is painful in this industry, they know it is unlikely you'll compare more than 2, mayyyyybe 3, companies.
Meanwhile there's essentially zero marketing for health insurance in USA, because people have no choices, the employer chooses for you.
Marketing is part of the product design. The decisions on what to do and what not to do when coding or designing a feature should be a result of a marketing interrogation because you're building the product to be used in some set of ways by some set of people.
Once you stop thinking about what they actually care about, you're drifting away from a successful execution.
This is from copy to code. From price to presentation to features and flow.
It's not a nice to have or something that's tacked on, it is the soul of the product in the prospects mind - the driving force for the whole effort from the first keystroke to the last signoff from QA, your product lives or dies by your market models and theories and how focused your execution of them were.
Doing this right is the difference between Creative Zen, Apple iPod and Sandisk Sansa or FirefoxOS, Android and MeeGo.
Technical competency is a necessary ingredient but it doesn't get you there alone.
If you want to build something that doesn't bomb, you need to study marketing, significantly and heavily.
People generally miss fundamentals and don't account for a moving store of value, they often assume its constant. Economics is marginally only used to sell something often with deceit in mind on someones part.
As for what's driving inflation, its obvious its the fact that government is spending more than they have each year, printing the difference, and have now gone gangbusters with manufacturing spending to offset china imports.
They are also printing money to buy back bonds to control yield curve in lockstep with other central bank currencies (you see these fluctuations in the relative value of the currency).
The corruption, fraud, and graft that this money is funneling to have become so large that its inflating the dollar as its not necessarily creating economic activity. Rising interest rates have stressed the already overleveraged companies to the point they are shutting down or massively laying off.
Some producers base their prices off a business as usual approach. Others project profit sufficient to normalize against changes in the currency price level and any additional expenses/shortfalls in supply chain problems during the short term. While prices may be inflexible for some things, that's only if there's no shortage and the product is available.
Also, you have distributors refusing to do business with smaller companies (as has been seen with a couple of the small time farmers). They want shortages, so they can have an excuse to charge more. Classic characteristic of stagflation and lack of antitrust.
All of this can only get up to a point before food becomes relatively unavailable, and then everything hits the fan.
You are attributing a lot of agency to different players.
They generally aren't that monolithic.
You seem to be conflating shortage and scarcity, which generally aren't the same.
It's an interesting theory but I'd like to see some evidence.
For instance, the general consensus is the supply chain issue is from Lean manufacturing which, although has a lower overall cost, trades that off with a much lower tolerance for disruptions. It presumes availability and it turns out these supply lines were both much longer and more delicate then presumed.
You can see that in practice. Monolithic traditional manufacturing didn't have such issues. Things like paper products for instance. When the demand for toilet paper shot up in March 2020, the supply was able to meet it within days, compared to the years for electronics and automobiles.
These are pretty studied topics in the journals. You seem to be interested. They're pretty approachable. Go check them out.
Scarcity is just a given in a scarce world. The perception of shortages on the other hand acts similar to static versus dynamic friction. Once things get moving they become less sticky.
Most of the issues originate in one industry, that says it doesn't pick winners and losers, but consistently does at the tax-payer's expense. They also have a very sordid history as a private institution and to date have never met their chartered mandate. I've read a lot about the history of the Fed.
The supply chain issues rely on cheap labor and cheap transportation that were optimized in many respects for single points of failure due to cost savings. If your an authoritarian regime you usually have both. I've worked as a System's Engineer, and we always look for these in any system for improved resilience in the design.
The lack of silicon processing is a special case, and underlies the complexity of manufacturer; the same issue affected both electronics and automobile shortages. The methods of manufacturing are much more specialized and fault intolerant in the former (because only 1 company supplies the dependencies, ASML) than the latter (paper).
That wasn't my experience. Intro to micro had the simplified model throughout. Intermediate & advanced macro are all math.
Macro at all levels is Keynesian theory plus increasing levels of math. IMO, much of macro resembled alchemy.
Several upper-level classes, though by no means all, took the assumptions in earlier classes, tore them down, and then re-built economics from there. These are assumptions like preferences being transitive, perfect information, rational self-interest, etc. Many of the claims of econ are defensible even when the assumptions are not. Game theory, for instance, is a very solid defense of economics (albeit one I don't agree with). Institutional econ, political econ & public choice are another family of approaches. Some approached like behavioral economics attempt to "debunk" old theories, though these have had problems with things like replication.
Also, econometrics is quite widespread now. Undergrads typically must take at least one semester of it, and OLS regression is essential for understanding certain papers in most upper-level classes. Econometric models are empirical and have only a tenuous relationship with the mainstream theoretical models like supply & demand, AD-AS, ISLM, or the various growth models.
It's not too dissimilar from physics (economists are infamous for physics envy), where Newtonian physics is wrong but still worth learning.
What the OP is describing is the frictionless, perfect-cylinder, massless-pulley version of Newtonian physics. Even a first semester econ class can talk about things like startup costs, inelastic demand, information asymmetry, and other things that make "a new business will spring up with lower margins" Just Plain Wrong.
I only did 101 and 102, but even then the professor always spoke in terms like we were some old village, probably to make things easier to understand. But obviously those analogies don't apply to the world today, mostly.
The problem is that people aren't rational, and they don't have perfect information.
So the history of finance and commerce has been a cat-and-mouse game where the cats find new ways to cheat people, and the mice try to recognize and prevent those schemes.
One example: cartels. If an industry is dominated by a small number of large players, they can collude to set prices and stifle competition through regulatory capture, acquisitions, cornering supply chains, etc. It works like a monopoly, but no individual member is large enough to pursue as a monopoly. It falls apart with too many members, because the rewards for defecting are high.
The lack of information (or information asymmetries) are such a huge deal and not often appreciated.
I would pay a lot more for many small electronic gadgets if I knew that they would 1) work better and 2) last longer than the cheap ones. However, It's basically impossible for me to find out how good is the signal on my bluetooth usb stick or how long my plant LED lights are going to last without breaking so I just buy the cheapest since the price doesn't seem to be a very reliable indicator of either of those things. I'm sure there are players on the market who make things that I'd like to buy, but it's impossible for me to find them and verify that they actually do what I want so they are not getting my money.
They can just look at what their "competitors" are doing. I raise my prices a little bit. You see me raise the prices a little, and you raise them a little. And then I see that and raise them a little more. Then I do a tiny round of layoffs. You also layoff some people. Then I do a bigger round of layoffs and communicate big profits publicly. And you follow suit.
You and I never talk, never "collude". But we are effectively communicating through our numbers. As long as we have captured a big enough market, we don't need to talk, and we both benefit.
I don't know if there's even a term for this kind of "tacit collaboration". Perhaps "anticompetition"?
Yeah exactly. What we're looking at here are similar actors reacting to the same incentives. Pepsi raised prices because they can and their shareholders demanded it. Coke raised prices because they can and their shareholders demanded it. Thus 80% (or whatever) of soda worldwide increased in price, without collusion. So you have the failure case of collusion without the cause, which sucks because we didn't really consider that this failure case might have two causes (which, I would argue that we should have, probably back in like 1920).
It's an important first step to realize this is happening. Larry Summers was like, "I don't think suddenly corporations got more greedy", implying that because corporations have been maximally greedy the whole time that that can't be the cause of additional inflation.
But it can be that it causes a new, unfortunate reaction with a new set of incentives, and this is exactly the situation we find ourselves in. It used to be OK (well, not really but let's stipulate) for corporations to be maximally greedy, but now it's not.
So what's the next step? I don't really know. People float stuff like a tax on profits or price controls. I generally think those are probably too blunt, though I could get behind a tax on profits I guess. I might prefer some kind of blanket industry regulation ("Hi Coke, Pepsi, we know you didn't mean to exactly but you inadvertently increased the price of 80% of world soda by 20%--please stop") because this kind of thing seems like it can be nuanced and tailored to a specific situation. Maybe also a prohibition on stock buybacks to lower investor pressure to juice short-term profits--but I haven't thought this one through very much.
Corporations were always maximally greedy, but there were times where the markets were not 200% saturated and new demand did not had to be created artificially by mass indoctrination.
I mean, everybody who have seen their neighbor's electric / gas stove wanted one for themselves very quickly to avoid the need to lug wood. And when radio and TV came? Don't even get me started. Fridge, washing machine, dishwasher, vacuum cleaner, camera, car, phone, portable music player, PC, laptop, cell phone...
It all sells / sold really easily just by word of mouth and you just needed to run slightly faster than competitors to capture higher portion of the market. So the incentives were mostly aligned and capitalism delivered value (in those areas).
Now there is no easy way to create a good or service that will instantly save multiple hours per week for almost everybody. No easy way to make luxuries of past like having oneself painted or being served a meal (women must have loved that) available to masses. But still, some that provide meager improvements managed to take off. Robotic vacuums, food (and grocery) delivery services come to mind.
Hence the rush to convert the market shares into an enduring rent.
Eventually corporate landlords will realize that they have the ultimate power and just tax everyone so high that only the basic subsistence is possible, with zero luxury. Maybe then the public will finally reconsider the arrangement.
When every company has easy access to the entire world, or at least an entire country, the natural direction is towards far fewer, extremely well-capitalized companies eventually squeezing everybody else out. And we're seeing that in almost every industry, for sure.
I'm not that old yet, in my mid-30s, and still during my lifetime I've seen an incredible amount of corporate-consolidation in multiple countries. It's happening in multiple societies, across multiple different industries: food, media, banking/finance, tech, auto manufacturers, etc.
Last time I looked into some companies from my home country that were part of daily life in my childhood I see that most have been acquired by a larger corporation, or became corporations with multiple mergers themselves.
It's been happening pretty fast the past 20 years.
In practice, the markets still work pretty great even without perfect rationality and information. Those are just assumptions for a mathematical model, not something that must always be satisfied lest everything collapse. Econ classes will show you how things can break if these assumptions are not satisfied, but in actual practice, they don’t need to be satisfied perfectly in order for actual operations to match mathematical models very closely.
> So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.
It's objectively obvious that the latter is true, but why?
One of the reasons is regulatory capture. But another is that people have stopped believing the former.
Suppose there is a market with an existing duopoly that charges high prices and you're a rich investor who likes to make money. Popular theory says that you shouldn't enter that market because they'll just undercut you until you go out of business and then go back to charging high prices.
But how does that work? Once you've invested the money to enter the market, you're committed. The incumbents have to deal with that. If you charge slightly less than they do, they have four options. One is to ignore you and keep doing what they were doing, which would allow you to take a disproportionate share of the market. Another is to match your price. But then you still get a third of the market where you previously had none and you now have goodwill with customers because you finally caused the market price to move in the direction they like, so that's quite profitable for you. The third is to buy you out, which is you turning a profit again.
The last is to undercut you and launch a price war. But by then you've already paid to build the infrastructure needed to compete with them. It exists. Even if you were to give up, you would still have that infrastructure to sell to anyone who wanted to give it a go. And if the expectation is that prices would return to profitable levels at any point in the foreseeable future, there would be returns in doing that for anyone with money to invest. Which mitigates your risk. And means the incumbents can't eliminate the competition by doing this. They can only torpedo their own profitability. Their real options are to lose some of their market share to you or buy you out, both of which are profitable to you.
So who taught investors that doing this is not profitable?
Only if the infrastructure is something tangible, often the startup costs are regulatory, and not necessarily transferable.
There is also the problem that if the incumbents move to undercut, then any onlooker would assume that even if they bought the infrastructure they would also face the same undercutting; and would therefore have to remain solvent longer than an incumbant to make a return.
I think this is why there is so much focus on tech or disruption; you need some way to compete against the scale efficiency of the incumbant.
Regulatory costs aren't lost in acquisitions. You buy the whole company.
> There is also the problem that if the incumbents move to undercut, then any onlooker would assume that even if they bought the infrastructure they would also face the same undercutting; and would therefore have to remain solvent longer than an incumbant to make a return
But the incumbent has the same problem. If the unit cost is $1 and they're selling for $0.90 to undercut you, they're losing money too. Anybody can see that they won't be able to keep that up forever, and as soon as they stop, whoever invested in the competition is making money.
> I think this is why there is so much focus on tech or disruption; you need some way to compete against the scale efficiency of the incumbant.
Most markets have a minimum scale past which being larger provides no significant efficiency benefit and only creates diseconomies of scale from bureaucratic overhead and internal politics. This is why companies try to commit antitrust violations to keep barriers to entry high enough that others can't get a foothold. Because once they do, the incumbent has no advantage and is commonly outmaneuvered because monopolists typically become inefficient from lack of competitive pressure and existing customers tend to hate them.
Again, not all costs associated with regulatory compliance are transferable; this is by design to keep a barrier to entry. Many accreditations/certifications have a reset clause when something significant in a business changes (like owner), or have a not widely available cheaper streamlined version for long-standing businesses.
This is even assuming that selling the whole businesses is the best way to exit; taking over the whole business rather than just the machinery (for example) is a restriction that might be detrimental.
The thing you are not understanding, is that you have to be able to loose money for longer than the competition; it either requires an investment on the same scale as the total valuation of the incumbent, or a string of failed attempts from others to set the stage... And you can estimate ahead of time how long you can operate for, and how long the competition can, so you can likely tell before you start that you are going to be one of the failures.
it is only profitable if you are a big corp who made his money elsewhere, a significant amount of money compared to the money in the market you're trying to enter.
We've always known that a big guy can come into a small guys party and squish them all. That's why microsoft wasn't allowed to push their browser (OS = big guy, browser market = small guys party).
This is why amazon shouldn't be allowed to sell its own items in its own store, any supermarket really. With their power of scale, these market owners can squish anything they sell in their store, killing competition with it.
It's only profitable if you have enough to invest to meet the entry costs in that market. Which is where the regulatory capture is causing trouble by raising entry costs. But that only means you need more or bigger initial investors, not that they don't make money by investing.
> We've always known that a big guy can come into a small guys party and squish them all. That's why microsoft wasn't allowed to push their browser (OS = big guy, browser market = small guys party).
That was an antitrust issue for an entirely different reason. The browser market had the potential to disrupt Microsoft's control over the OS market, because web pages are platform-independent. That gives Microsoft the incentive to dominate the browser market by operating at a loss in order to make sure that web pages are tied to Microsoft Windows by using platform-specific ActiveX controls or web extensions specific to Microsoft's browser.
The web reducing dependence on Windows is largely what happened in the intervening years outside of some specific app markets like gaming (where Microsoft has held on through similar dirty tricks with respect to DirectX and other APIs, and is finally starting to lose their grip).
Bare economics theory doesn’t account for the myriad irrational inputs that the actual world sees. For that, you go to behavioral economics, which tells us that choice isn’t just price, it’s also:
I’d say it’s roughly still true it just looks different than a very traditional sense. “Undercutting” happens in different ways now - while some entrepreneurs don’t care to compete in commodity markets and compete in tech since it’s not as messy and scales more easily. In tech people can be sold products for “free” and it’s all about their data. But for commodities for example to start an egg/dairy farm you need land and lots of physical resources. So these days a lot of times instead of competing with the egg farmers or dairy directly, entrepreneurs are making faux eggs/dairy. So instead of a new farm they’ve invented a “new” egg/dairy and so instead of undercutting they’re actually charging more for it since it’s a premium product now and “healthier” or is saving the planet/backed by an expensive mission.
These days it is about exploiting willingness to pay, so (some) companies tend to model how much they can charge or how to charge more (incl. by increasing consumer surplus). Overcharging is less likely in such a setting.
>economics teaches us when a player overcharges, others will step in to undercut and take all the market share.
A take I've read and stuck with me is that right now, there's also significant risk. In my country, Hungary, there are also losses introduced by the government, which capped the prices of several popular items. A way for a business to stay afloat is to incorporate this risk into their prices - and I think that this risk also makes the other players more hesitant to undercut. And thereby they all enjoy the benefit of the higher price.
Some companies are playing with fire by charging so much. A notable example is Nvidia, which is basically crippling its own lineup with their weak specs and high prices.
That's more because supply shortage from the bens of moore's law and design costs are still exponentially growing so there's incentive to slow walk your development/release to maximize lifetime value.
They're charging way more than what cost increases can justify. Some of their new cards have very small performance increases. Others are cripple by having way too little VRAM. But they're still charging way more money than the last generation.
In Portugal, for most of 2022 to this day, the price of 1L own/white brand of semi-skimmed milk (one of the most basic and essential staple foods) has been the exact same - to the cent - on all different supermarket chains (Lidl, Audi, Auchan, Jerónimo Martins, Intermarché, Sonae, Dia, etc.) operating here. And, it has risen in steady small increments at exactly the same time in all of them, multiple times. As in, price time evolution correlation = 1.0
If this is not price fixing, I don't know what it is. The regulators just whine and yawn.
And obviously, MBA-types haven't read Numerical Recipes' chapters on random numbers ;)
I'm not saying there is no price fixing, but this could also be explained by the supermarket chains all using the same suppliers (which is most definitely the case since the dairy market is not as diversivied as one might think; it's dominated by a few big players) and those suppliers already doing cut-throat price competition with razor sharp margins, meaning that if the slightest cost increase happens then it impacts all of them and once one can't take it anymore and raises by a few decimal percentage points, everybody else will immediately do that to.
Ever been to a gas station? That raised the price multiple times a day just like the other gas stations a few hundred yards away? Same principle. Doesn't need price fixing as explanation. They are just all buying the same raw product.
For your alternative explanation to be true, it would require that all the 8 retail chains would have the exact same margin by natural, fair chance - and, cumulatively by fair chance, increment prices by exactly the same amount, at exactly the same time...
Why "natural, fair chance"? Of course they see what their competitors charge. That's one of the ingredients of a free market. The quicker they react, the quicker the information is dissipated in the free market.
Weird because Portugal has had a higher inflation rate than the US in 2022 (8.1% vs 6.5%). The same is likely going to be true for 2023 according to projections and current data
Negative. In America, the labels set their prices, this was first brought to focus by Coca Cola. They had an issue where the stores were driving the price higher to increase margins. Coca Cola started the five cent advertising campaign where they set the price. You can see this with bread items here, they place the price on the bag / sticker / wrapping technology.
There was a push by the stores to allow them to discard what the manufacturer set the price to, but the courts said no to that. This was the appliance manufacturers effort.
Why the profit margins, governments make is so hard to compete with the established players through regulatory compliance, the incumbents can. I have not seen increased profits in my business, and I had to increase the prices. That was done because of input costs. The manufacturers may be making more because they have found costs savings due to input prices going down Or they increased prices to factor in future increases
Nope. No price controls ever enacted. Only recently, a sales tax exemption on basic staple foods was put in place - just started May 2023. (which will be obviously absorbed into retailer's profits)
The graphs lay out a clear picture of rising corporate profit margins, meanwhile the text is saying to "Ignore the man behind the curtain." What's different today that the WSJ can run this piece today?
Of course that's what happened. Once companies saw they could make money hand over fist charging higher prices why on earth would they ever lower them back down once the supply issues were gone? Instead they just made record profits while they shifted the blame from "It's not our fault! There are shortages!" to "It's not our fault! It's inflation!"
Meanwhile they've suckered a bunch of folks into blaming inflation on the pathetic amount of government aid we gave people during the pandemic so that they didn't immediately lose their homes or starve to death while nobody could work. Now consumers are facing record amounts of debit, and evictions and utility disconnections for non-pay are rising and people still think the problem is that Americans just have too much free money.
The Fed started blowing up banks in its attempt to crush worker wages because when you kill a 1,000,000 plus people, disable countless more, force a bunch of early retirements etc you have to jack up rates super high, super fast to overcome wage increases from the resulting labor shortage. People who read the WSJ work at and invest in banks and don’t like to lose their shirts. So, they’re conceding to a little internecine war among the ownership class in the hope that the financiers can squelch the corporate price fixers before the banking system implodes.
> when you kill a 1,000,000 plus people > resulting labor shortage
Alternatively when you kill a bunch of mostly retired and sick people, perhaps you increase unemployment (nurses and rest home workers freed up) and decrease spending (dead people don’t buy services or goods).
Besides, the total number affected is a very low percent of the population, which is less significant than other economic changes over the previous 20 years.
Without some deeper analysis, your cause and effect is purely hypothetical.
Free market economists are followers of a cult full of animistic creatures, like the "Free Market" and "Inflation", which have their own volition and just choose to "stick around" or "fairly distribute goods", without the need for absolutely no human to many any decision at all.
"This damned inflation is so sticky!" I imagine one of them complaining, while trying to wash it off their hands.
"Yeah, if only Free Market could solve it," says the other, while praying the Corporate Profits to raise even more.
>Free market economists are followers of a cult full of animistic creatures, like the "Free Market" and "Inflation", which have their own volition and just choose to "stick around" or "fairly distribute goods", without the need for absolutely no human to many any decision at all.
If you can't find a narrative of how "human decisions" caused inflation in 2021-2022 you aren't trying very hard.
I'd say that believing that there was an exogenous shock to greed during the pandemic is much more animistic than these explanations.
Printing money to handout to people is not part of any free market theory I know about. Also buying banks with tax payer money to avoid their fall is also not part of any FREE market. When some business get saved but others are forced to close (for any reason), there is no free market. In fact those things are precisely the opposite of "free" and create an uneven playing field where big players have unfair advantages.
In the UK there's a company called Virgin Media (broadband, TV, phone provider) which has been completely blatant about it. They recently informed all customers that going forward they will annually be increasing prices by RPI + 3.9%.
I jumped ship from them before Christmas.
I'm with YouFiber now, I get symmetric gigabit for £35/m and £5/m for a static IPv4 address that opts me out of CGNAT. The first 3 months were free.
Vodafone did the same - CPI (10.5%) + 3.9% "to help support the continued investment in our network as we expand coverage". I guess 3.9% is some government limit?
I don't know how that's legal when you look at how the CPI is calculated and it included these companies already. They're adding onto their own adjusted price inflation.
The effect an individual company would have on CPI is negligible. Besides, CPI strongly underestimates the actual devaluation of currency. You can look up local newspaper prices from 10 years ago and today and compare that to newspapers index that goes into the CPI calculation and I'm almost sure the price difference would be significantly larger compared to that skewed statistic.
> “We do have to think about pricing differently,” said Ms. Weber. “A cost shock, or bottlenecks can create an implicit agreement among firms that raise their prices, so they can expect others to act likewise.”
Interesting theory. I've definitely seen some restaurant surcharges from COVID stick around even as they have fully opened.
This only works in an environment that's flush with cash. E.g. a decade long bull market with artificially low interest rates, 2018 tax cuts, and stimulus from covid. Was a perfect storm.
It works fine as long as the money you lose from the people you price out amounts to less than the money you gain by overcharging others who can afford it.
You don't need an environment flush with cash for that to happen, you just need enough people who are well off enough to pay, or (as we saw in the pandemic) desperate enough to go into debit in order to get what they want.
There's likely a rather large segment of the population who can be pushed out of certain goods and services entirely while companies make record amounts of profit exploiting a smaller pool of wealthier folks.
It's not as bad when it's limited to luxury goods, but it's shitty when the goods people have always been able to afford are suddenly out of their reach and it's a real problem when increasing segments of the population are priced out of things like healthy foods, PFAS free cookware, healthcare, or housing.
Exactly, and this is why wealth inequality is the biggest social-economic problem we have right now, leading to the rise of the far-right (interestingly, the far left seems quiet compared to the early 20th century - I suppose the 'defeat of communism' is fresher in everyone's minds than the defeat of fascism).
> you just need enough people who are well off enough to pay,
Which is what happens after a decade long bull market, tax cuts, low rates, and stimulus. More people had more money that didn't before and they wanted more things and they wanted them now.
But you still need a critical mass of demand, which means a bigger portion of the population demanding goods. Which means you need a bigger population than the mega rich to explain the problem. There was always rich people - yet we never saw this problem until now.
Where goods and services are not commodified, people are unwilling to pay switching costs ("so much is uncertain, why increase uncertainty when I don't need to?"), so long as price differences are not "too large". This implicitly puts a floor on prices as producers hold onto their customer bases and slowly raise prices on newcomers.
Where goods and services are commodified, the commodities have largely (at least in the US) been captured by oligopolies that implicitly understand that they should keep prices high, no direct collusion required. New entrants to the commodified markets (who would produce the commodities at lower prices) are nowhere to be found, as markets are highly regulated with high barriers to entry.
Break up the oligopolies and encourage entrepreneurship.
In the past 15 years we engaged in unprecedented fiscal and monetary stimulus, which saw US Govt debt triple to $30T and the Fed balance sheet increasing 8 fold to $9T.
And yet despite 15 years of stimulus we have had persistently low inflation for all except the last 2 years or so, the first half of which was very clearly driven by supply chain issues.
It’s almost like even if stimulus has had an impact it’s not the only, or even the primary driver.
We've had inflation. Inflation was in assets rather than in commodities. Housing is insane, the stock market is detached from reality, billion dollar evaluations for mostly valueless companies. The only reason inflation started hitting consumers is because asset growth reached the end.
No, we have had lower „inflation“ according to the CPI which is a single number for a multi-dimensional and connected phenomenon. The real impact can be seen in the price of large city real estate, tech stocks or luxury goods. Those certainly didn’t have low price increases.
The extra money largely ended up there because a side effect of the stimulus was that safe investments had negative real yields. In response people chased any positive real yield. This is why Pension funds invested in crypto, they could not guarantee their promised growth with just treasuries and aaa bonds.
Inflation is never linear, and tends to over/under shoot.
Under normal circumstances, supply chain issues (otherwise known as supply reduction) results in demand being priced out of the market. But we didn’t do that. We gave stimmie checks, and gas cards, and increased unemployment benefits, and paused loan repayments.
When there’s not enough of thing X it means some people won’t get thing X. Giving people money to make it “more affordable” just pushes price higher without increasing affordability (as the market still settles on a market clearing price).
Japan had the same monetary policy for the same period of time and saw zero inflation.
It's not monetary policy. There's no reason to think that 15 years later some magical thing happened to flush all the pressure that had built up out of the pipes.
It was due to a combination of fiscal stimulus, yes, to a degree - and also supply chain issues, a land war in Europe, shutdowns in China, and myriad other confounding factors. There's been a lot of perfect storms lately.
Having any inflation at all is remarkable for Japan - they've basically had deflation since the early 90s. The measures they've been using to keep inflation that low also look unsustainable (their foreign currency reserves are going to be eaten away).
But supply chain issues have resolved yet inflation is still high?
If you want to understand why the massive expansion of the monetary supply didn't initially stoke inflation, Professor Selgin does a nice job of explaining it.
Basically, the Fed printed new money, but at the same time offered a very high interest rate on Excess Reserves held at the Fed (first time ever in 2008). So banks took the new money, and deposited it back at the Fed because they got a higher interest rate than anywhere else. So at least for the for a while, a lot of the new money never entered the broader economy. Check the Fed's charts on excess reserves. $3.2T dollars was just sitting at the Fed collecting interest.
This was entirely intentional by the Fed. Bernake said "our liquidity provision had begun to run ahead of our ability to absorb excess reserves held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the Federal Open Market Committee. … Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed"
The Fed was initially try to "sterilize" the new money by selling Treasuries at the same time (print $1T in money to buy failed assets, sell $1T in Treasuries = net $0 new money). But they ran out of Treasuries, so resorted to printing new money, but incentivizing banks not to use it because otherwise the they'd drive the interest rate way below target.
Isn’t this reversing cause and effect? Corporations are able to raise prices because consumers are willing to pay higher prices. Corporations always want to make as much profit as they can. If consumers can pay more, you get inflation.
Competition should drive down prices even if consumers have deep pockets.
This suggests that the US market has gotten less competitive. I wonder how much it has to do with ownership of competing firms by a few large index funds with concentrated voting power.
Don't forget supply and demand works on the capital side of the equation too, higher inflation means shareholders push for higher profits in the same way that high inflation causes workers to push for higher wages.
There's increasing supply of investments at higher rate of return, bond yields are close to 4% which means riskier investments need to pay more to compete.
Absolutely. But for competitors to raise margins bilaterally requires cooperation, because each side can take market share by keeping prices low.
I just wonder if the cooperation might come in the form of, say, one powerful shareholder of both competitors making calls to the boards of directors of both competing companies.
Is this really the case though? All shareholders are pushing for higher returns because of inflation, it's not an indication of collusion, it's an indication that the market conditions have changed.
As I said on the flip side the fact that all workers are pushing for higher salaries isn't a reflection of collusion between different sets of workers, it's just a reflection of the new economic conditions on the ground.
Shareholders are always pushing for higher returns, inflation or not. The thing is that normally Pepsi and Coke would be preventing each other from raising margins. In a hypothetical state of perfect competition, where Pepsi and Coke are perfect substitutes and customers have no loyalty, and with constant or declining marginal costs at scale, Coke increasing their profit margin by 1% without Pepsi doing the same would result in Pepsi eventually taking the entire market from them. And if they both raise margins, that should result in a third party taking the entire market. Obviously this isn't as good for soda shareholders as if all soda companies raised margins at the same time, but game theory is supposed to prevent that kind of cooperation, and keep every company at their competitors' throats.
However, if both companies had enough shareholders in common -- or just one big shareholder in the Soda Index -- then they sort of stop being competitors, and just become brands.
Only if the competition thinks the increase in share is worth more than the increase in per unit profit.
And depending on the industry, there might not be much more to be gained by scaling up. Going from 45% to 60% of the market might not be more profitable than an extra few percent per unit.
Perhaps, but that's sort of like pointing to the prisoner's dilemma and saying "clearly, the best and easiest option for both prisoners is to both cooperate, thus achieving the best outcomes for both".
We usually expect that competitors would try to compete, and going from 5% to 10% market share would result in getting undercut so badly that you lose far more customers than the higher margins are worth. It's not so easy to hand-wave the reasons why that hasn't happened here.
Well no, there is no real dilemma, because unlike the prisoners you can change your choice at any time.
You can do research and make a decent guess at the units sold at a price point of you only make a small increase, and then your competition does the same, and as long as you can all keep pushing the price each small increase is absorbed.
This is essentially a mechanism for discovering inflation, it continues step by step until people stop buying.
The "and then your competition does the same" is precisely what I'm talking about. If their input costs have not gone up, there's no reason they need to do follow in step rather than take your customers away. It doesn't matter whether it happens gradually.
Multilateral increase in margins demonstrates a lack of competitiveness between competitors.
It's similar, but when the price of the product is closer to the willingness to pay, market share becomes important again.
It's also has an impact on what products get made, and investment in r&d. If you fall behind the competition in terms of quality, you loose marketshare.
A few people have said that the response to inflation will be price controls eventually. Reviewing this article and comment section has convinced me that it is politically possible. Perhaps it’s a good time to remind people that inflation has happened many times in human history, as has price controls, and that the outcome will be shortages.
Right, the dynamic is that high prices are due largely to shortages. Increasing supply requires investment, so yes price controls would reduce profits, but at the cost of curtailing investment which will sustain shortages and high prices for longer.
It's certainly not great that profits have spiked, a chunk of that will get skimmed off for sure, but profits also do stimulate investment. The government can help by adjusting tax rates and incentives, but the best way to do that here is by encouraging investment not penalising profits. We want that money going to the right places for sure, but the money is needed.
