Comment by Manuel_D
2 years ago
The whole "greedflation" narrative still doesn't seem plausible. Why wouldn't one company reduce prices and capture the market share from the companies that artificially raised prices? In order for the "greedflation" to work, there must be some collusion in terms of price setting. This does happen in the market, but it's illegal and governments do take action against price-fixing [1]. A much more plausible explanation is that the economy as a whole had a massive rebound after the pandemic, and the record profits are just a byproduct of that rebound.
1. An example from my State: https://www.atg.wa.gov/news/news-releases/406-million-way-lo... It's not always super high-profile, but lawsuits against anti-competitive practices happen all the time.
Because real markets are not as simple as the toy ones of price theory in economics classrooms. There are transaction costs to entry and exit, information is highly imperfect, products are often not that fungible, inelasticities of both function and consumer preference abound, and nominal competitors often tend toward cartel behavior because many producers see themselves in a somewhat adversarial relationship with customers, and consider the true competition to take place in the corporate finance marketplace rather than the retail one.
Not to mention that they really are cartels. According to Oxfam international only 10 megacorps control the majority of top brands (1). It may look like there's lot of competition for say cereal, but there's basically just General Mills and Kelloggs with a few generic brands available.
1: https://www.good.is/Business/food-brands-owners-rp
> the true competition to take place in the corporate finance marketplace rather than the retail one.
This hits the nail on the head. There is no secret cabal of colluding business owners, but for any company that is public, they are necessarily “colluding” to keep share prices high. Since they are all optimizing for the same thing, it makes sense that they would take similar approaches.
Elegantly put! This is where the glorification of 'shareholder value' has got us; it's very unfortunate that commitment to other values like employment security or product quality are considered bad management in mainstream business thinking.
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No doubt markers are imperfect, and they can't respond to changes instantly. But that's way more vague than the "greedflation" narrative. The idea behind greedflation is that companies are systematically overpricing products, and no one is undercutting them because... (insert explanation here).
What that explanation is, nobody really seems to offer a good reason. Collusion is always a possibility, but there's strong disincentives for it. And it'd have to be a huge number of companies that are all colluding. There are much more mundane explanations, such as record spending. Is it really that surprising that record profits are made in a time of record spending?
No one is undercutting them because they are raising prices and taking the profit, too.
It's not "collusion" in the sense of "fat cat execs in a room all explicitly agreeing to do nefarious things." It's just an alignment of incentives, a zeitgeist, and a common recognition of an opportunity to make a shitton of money without any real consequences.
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This is a great answer. In particular, demand in general likely became more elastic during COVID, as consumers suddenly had more cash on hand. In that case, a single firm could raise prices without decreasing quantity demanded too much. That would have caused other firms to follow suit.
The assumption of defecting against a cartel by lowering prices also requires that the defector have more supply, but supply was restricted during COVID, so it stands to reason that defecting wasn't possible in the short run.
I’d also add that pandemic supply chain disruption meant that consumers were more accepting of limited choices initially or assumed prices would recover.
We saw that especially badly with the auto industry, which used the chip shortage to push people to buy more expensive models. Lots of people figured they didn’t have a choice so they bought what the dealer had available, especially before interest rates made it easier to not think about the difference. In 2019, fewer buyers would’ve put up with that because they’d assume the model they wanted would be available soon.
why doesn't economics classroom teach all this.
They do but not so many people take it as a major rather than jsut doing the basics.
> Because real markets are not as simple as the toy ones of price theory in economics classrooms.
If the experts in academia who spend their lives studying this stuff are so off the mark, how is it that you have more knowledge of how things "really" work?
Where did you learn the things that drive these strong opinions?
Do you believe that economics theories ignore the market forces that you're discussing?
That fundamentals like supply, demand and consumer behavior are less relevant than "cartel behavior"?
I guess I'd just like to understand what you're basing all this on.
Oh I'm not claiming that, I have a lot of respect for professional economists. What I mean is that most people's understanding of economics is very superficial and limited to toy models, in part because a few populist/pundit 'celebrity economists' oversimplify the topic to make easy money.
I'm reasonably sure that academic economics theories are an attempt to drive, to dictate how "things really work"
because that's what academia does and they know it. Academics talk about how to impact the 'next generations' of leaders all the time
economics are no different. e.g. today somebody studies economics and learn some theory about how stuff "really works", in 5-10 years they're a congressperson or some other high-ranking executive deciding what to do based on the theories they learned
so academics being off the mark means this plan as I very roughly outlined failed. reality asserts itself in spite of the wishes of a few corporate overlords
Until you get into grad school basically everything you learn is so simplified that it's functionally a lie. Pointing out that drawing a big X on a blackboard with the intersection labeled price is not actually how the world works is not setting yourself above economists.
I mean christ, if that was all there was to it what the hell are those experts doing spending their whole lives studying this stuff?
Risk-aversion is probably a big reason.
Drop your prices and maybe you capture more of the market. Works best if your product is a perfect substitute and consumers will both (a) immediately know about the drop and (b) be able to switch immediately. And then you can capture some of the lost per-unit profit in volume... but just how much market share would you have to capture to come out ahead of just cruising along with higher per-unit pricing and being more profitable as-is thanks to your costs dropping again? How much would you need to spend on advertising to get the message out, and how does that effect how much you need to capture?
And if it doesn't work, and you lost your margin without gaining enough to make it worth it, do you want to have been the guy in marketing who was pushing for the price cut? At this point yo-yo'ing the prices back up is gonna piss off the customers you do have once again, so you might be a bit stuck for a while.
Add in things like customer loyalty, stickiness, and habits, and "let's try to send the trend in the opposite direction" only looks riskier and riskier. For instance, if Walmart dropped their prices 10% how many Target shoppers do they convert who wouldn't already be going to the usually-cheaper Walmart?
There doesn't have to be anything nefarious going on to explain how markets can result in the consumer losing out, especially after shocks to the system. Let's say everyone was worried that customers wouldn't stand for 10-20% price hikes, but now that they've learned that they can, in fact, get away with it, they independently think it's easier to stay where they are then to try to get into a race to the bottom. No collusion, no "evil" cartoony-levels of greed, but no effective market pressure to fix it immediately either.
> but no effective market pressure to fix it immediately either.
this pressure comes from the consumers. If the consumers keep opening their wallets, then there would be no pressure.
So for prices to drop, all that is required is for consumers to stop purchasing. Unfortunately, people, esp. in the US (but basically all over the west too) are quite rich, and they rather spend even if prices are high.
maybe markets don't work in quite the just-so story way we've all been told?
Elaborate? I've already explained that price-fixing does sometimes happen, but it's illegal and governments do crack down on it. People like money, but they also like to stay out of prison and avoid losing that money in settlements.
If anyone is making a just-so argument, it's those claiming "greedflation". The idea that record profits must equate to something nefarious happening is in my view a simplistic just-so statement. At least in America, people built up record savings during the pandemic, and then spent those savings in record numbers once the lockdowns ended. Record profits during a period of record spending seems rather unsurprising, doesn't it?
It's not price fixing. It's what's stocked by big retailers.
Real world example.
Heinz Baked Beans, UK. There are tons of other baked beans brands, but almost every store has Heinz. It dominates the shelf space by a huge margin.
Heinz is specifically called out in the article. They've made massive hikes in price, everyone's complaining about it, but often it's the only product on the shelf for a common, quick meal ingredient in UK meals.
There is no choice. It's not a simple economic choice. Most people can't choose the cheaper brand as often there's no choice.
Heinz Tomato Ketchup is/was in an even more dominant position. Many mid-sized grocery stores literally only stocked Heinz. (the co-op one is a pretty good substitute btw).
While theoretically there is consumer choice in the market, the reality is that it's wasn't true unless you want to go round a bunch of different shops.
In the long run Heinz has done some serious damage to their brand, but short/mid term are making juicy profits as the market is so slow to correct due to the way supermarkets work. How shelf space is allocated. By how the industry has become a small amount of ridiculously large companies hiding behind a patchwork of acquired brands.
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Thanks, this made me laugh. I wish more people would consider such a simple fact.
Maybe y'all weren't paying attention when your economics 101 professor said that basic macroeconomics describes general economic behavior, and there can be a lot of other factors?
And how about the fact that at least in the US, we don't have a free market system?
Yeah maybe it does and maybe it doesn't. Do you have any theses to add instead of saying "maybe no?".
A data point to support the original comment is that there are arbitrageurs all over the place. If you are trying to raise your margin, lots of people without any technical or product knowledge will simply buy it cheaper else where and drop it into your margin and eat your lunch. See the whole drop ship economy phenomenon.
Direct collusion isn't necessary if the major players independently decide to ride the rising tide.
But a smart player would slightly undercut the competition and gobble up the market share. If each player acted independently, that is what would happen. There does indeed need to be some sort of collusion to prevent one player from playing the optimal strategy.
The factor that the greedflation proponents seem to ignore is that people were spending in record numbers after the lockdowns ended, and people spent the money that was saved in record numbers. This is reflected in GDP figures. There was a huge drop in 2020, followed by a massive spike in 2021.
There are indeed significant issues with the greeflation narrative: https://www.economist.com/leaders/2023/07/06/greedflation-is...
> But a smart player would slightly undercut the competition and gobble up the market share.
You assume "slight undercut" => "gobbled up market share" but this is hard to substantiate.
Any grocery store in the US will show you examples of name-brand products next to slight-undercut store-brand alternatives where many people continue to buy the name-brand one, despite the price difference being super obvious every time the purchase is made. Real markets aren't econ 101.
Prices go up much more easily than they go down. https://www.investopedia.com/terms/p/priceratchet.asp In many markets consumers aren't perfectly evaluating the options from scratch on every single purchase with price the only factor, and a company doesn't want to have to accept a drop in price any more than an employee wants to have to accept a salary cut. So prices go up much more easily than they go down, since they can get forced up but require someone to take a gamble to get them to start moving down.
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Executives are bragging in earnings calls about their supply chain prices falling and how they're keeping prices high...
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They didn't have to call up their peer. I feel like I'm going crazy everytime I read, "but that not how macroeconomics works!!!"
WE LITERALLY WATCHED IT IN REAL TIME. Covid caused supply chain issues, unaffected supply chains independently raised prices because people were willing to pay it. Trump was dumping $8T into the economy, business leaders also knew that. The supply chains started to clear up, but demand wasn't waning despite high prices. Throughout the entire thing anyone sitting on investor calls was hearing "highest profits in company history" over and over again.
Almost as if all that sociology about people behaving coherently without direct communication might have been on to something.
> Covid caused supply chain issues, unaffected supply chains independently raised prices because people were willing to pay it.
But that's not "greedflation". That's literally a normally functioning market. If Company A and Company B produce a largely interchangeable product, and 50% of Company A's output is lost due to shortages both companies are going to sell their products at a higher price point. The fact that Company B's output was unaffected doesn't change the fact that their product is now in more demand due to Company A's production shortfall.
After the supply chain issues eased, people had loads of savings from the lockdowns. This is a big reason why companies were seeing record profits in the post pandemic period: because people were spending in record numbers. Is it surprising to see record profits in a period of record spending?
“Greedflation” would be when those companies kept prices up after their supply chain had returned to normal. Competition will chip away at that but that’s going to be slow if you’re in a market with only another megacorp trying the same thing.
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Correct. It's pretty sad to see such fundamental lack of understanding of economic principles.
There's been over a year of quarterly earnings calls where executives have told investors about falling supply chain costs and when asked if prices would drop have laughed.
Trump also slashed corporate taxes and taxes for the ultra-wealthy, which certainly didn't help.
Yeah there was even a video compilation circulating (posted here IIRC) of recent earnings calls where the CEOs all said "blah blah great opportunity to increase prices". Surprising to read comments in here that seem to hold a sentiment along the lines of "companies are just doing what they gotta to get by".
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>Trump also slashed corporate taxes and taxes for the ultra-wealthy, which certainly didn't help.
How does cutting taxes raise prices?
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> Trump also slashed corporate taxes and taxes for the ultra-wealth
Congress writes the bills that set tax rates. Congress also writes the spending bills.
I thought Biden told us to blame US price increases on Putin.
"families are starting to feel the impacts of Putin’s price hike."
https://thehill.com/homenews/administration/597675-biden-bla...
I do find it fascinating that a world-leading economist could have findings in a peer reviewed study, and a random joe will reject it and be like "that's not how free market works!"
> illegal and governments do take action against price-fixing
You mean like how egg producers engaged in collusion in 2000's and the were founds guilty in year 2023, 20 years later? You do realise that it's too little, too late.
https://www.reuters.com/legal/litigation/us-jury-awards-177-...
Greedflation is a new word for monopolism. It not a monopoly or oligopoly this time, it's a more intricate network of multinationals, financial sector and govt.
Best thing we can do is start worker coops to serve our basic needs, and somehow vote law into place that makes worker coops more tax friendly than private limiteds (and related forms of business ownership).
> Why wouldn't one company reduce prices and capture the market share from the companies that artificially raised prices?
I feel like the answer here is probably along the same lines as the ‘because we have a good excuse’ line of thinking that caused the massive wave of layoffs a few months ago.
What makes "because we have a good excuse" more plausible of an explanation compared to the straightforward one (ie. "macroeconomic conditions have changed, money has gotten scarcer, and the management and/or shareholders are reacting accordingly by cutting costs and increasing prices")?
I’m not really sure if it’s more plausible, but it seems likely that at least part of the reason would be “all our competitors are raising prices without any ill effects, so we should too”.
I don’t think those large mammoths would go for something uncertain like ‘potentially capturing more market share’ if they have the option of ‘guaranteed increase in profits’.
It's as simple as consolidation... If there is only 1 or even 2 companies in an industry, both are probably shitheads, and it doesn't pay to be the loss leader, otherwise you may end up gobbled up, you both grab what you can while possible.
You don’t need collusion to make it work. They just all have the same idea. Charge more and see if people still buy it. They do? Charge a bit more.
Which is already what happens pre-covid. There's zero change in corporate pricing strategy - the cost increases are all due to monetary policies interacting with the covid shocks (that is still reverberating).