6 ms·

It's a likely theory. 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

It's a likely theory. 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.

jfengel 4y ago
That is what the first two weeks of economics teaches. The rest of the curriculum is about how wrong that is.
- silisili 4y ago
  Perhaps you went to a better school than I did. 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.
  - tiedieconderoga 4y ago
    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.
    - 7speter 4y ago
      I didn’t take tooooo many econ classes but it sure seems like there are a lot of monopolies, oligopolies, and potential cartels these days.
      - listenallyall 4y ago
        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.
        piva00 4y ago
        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.
    - xyzzyz 4y ago
      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.
    - vjk800 4y ago
      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.
    - otikik 4y ago
      They don't even need to "collude". 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"?
      - camgunz 4y ago
        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.
        4y ago
- snapplebobapple 4y ago
  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.
  - kristopolous 4y ago
    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. Price signal is real, don't ignore it. $100 packs of gum won't sell ... unless they do (https://www.mastika.store/products/mastika-gum-gold https://www.mastika.store/products/mastika-gum-gold) 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
- baryphonic 4y ago
  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.
  - jfengel 4y ago
    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. Economics has "friction", too.
throw2awaymay 4y ago
[dead]
fionic 4y ago
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.
BreakfastB0b 4y ago
If this were true, wouldn’t all corporate profits be next to zero as companies compete on the slimmest possible margins?
- silisili 4y ago
  Yes, this is what econ 101 teaches, or did when I was in school. See: https://en.m.wikipedia.org/wiki/Zero-profit_condition https://en.m.wikipedia.org/wiki/Zero-profit_condition https://en.m.wikipedia.org/wiki/Perfect_competition https://en.m.wikipedia.org/wiki/Perfect_competition
_hypx 4y ago
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.
- andromeduck 4y ago
  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.
  - _hypx 4y ago
    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.
refurb 4y ago
Economics is theoretical. Nobody believes it perfectly describes the real world. No model is correct, but all models are useful. As well, nobody said economics happens on an instantaneous timescale. Those trends can still happen, but take weeks, months or even years to play out.
simiansays 4y ago
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...
- tzs 4y ago
  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. I believe its the same in economics.
  - lesuorac 4y ago
    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.
zhte415 4y ago
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.
- honkycat 4y ago
  weak argument. econ and physics are two wildly different fields. you are comparing a natural science to a social science.
- ikiris 4y ago
  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.
- mlyle 4y ago
  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.
- praptak 4y ago
  Econ can't hold a light to physics in terms of falsifiability of hypotheses yet people still treat it as hard science.
dclowd9901 4y ago
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: - convenience - availability - familiarity - self-image - etc etc People buy a thing for a million different reasons that have nothing to do with price.
RandomLensman 4y ago
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.
ohjfjfk 4y ago
With what capital will someone step up and undercut the minority that have monopoly control of capital? At this point it’s a network of too few who collude out of view.
AnthonyMouse 4y ago
> 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?
- doublespanner 4y ago
  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.
127 4y ago
Without strong regulation, free markets do not work, as the players start to distort the market to win.
spaceman_2020 4y ago
Tough to happen in a world of monopolies. Look at all the bank failures and mergers - it just gives pricing power to a couple of banks.
mordae 4y ago
> But economics teaches us when a player overcharges, others will step in to undercut and take all the market share. 1. They will all reluctantly increase the prices, testing waters. 2. And as long as their stuff sells, they will keep rising them. 3. Eventually consumers will get fed up with their preferred brands screwing them over and start switching. 4. Aggressive sales will start to pop up, making the consumers reconsider. 5. Eventually the sales will taper off with new prices established. Most customers will stay loyal to their brand(s). Some will switch.
npteljes 4y ago
>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.

jfengel 4y ago

That is what the first two weeks of economics teaches. The rest of the curriculum is about how wrong that is.

silisili 4y ago
Perhaps you went to a better school than I did. 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.
- tiedieconderoga 4y ago
  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.
  - 7speter 4y ago
    I didn’t take tooooo many econ classes but it sure seems like there are a lot of monopolies, oligopolies, and potential cartels these days.
    - listenallyall 4y ago
      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.
      - piva00 4y ago
        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.
  - xyzzyz 4y ago
    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.
  - vjk800 4y ago
    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.
  - otikik 4y ago
    They don't even need to "collude". 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"?
    - camgunz 4y ago
      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.
      - 4y ago
snapplebobapple 4y ago
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.
- kristopolous 4y ago
  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. Price signal is real, don't ignore it. $100 packs of gum won't sell ... unless they do (https://www.mastika.store/products/mastika-gum-gold https://www.mastika.store/products/mastika-gum-gold) 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
baryphonic 4y ago
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.
- jfengel 4y ago
  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. Economics has "friction", too.

throw2awaymay 4y ago

[dead]

fionic 4y ago

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.

BreakfastB0b 4y ago

If this were true, wouldn’t all corporate profits be next to zero as companies compete on the slimmest possible margins?

silisili 4y ago
Yes, this is what econ 101 teaches, or did when I was in school. See: https://en.m.wikipedia.org/wiki/Zero-profit_condition https://en.m.wikipedia.org/wiki/Zero-profit_condition https://en.m.wikipedia.org/wiki/Perfect_competition https://en.m.wikipedia.org/wiki/Perfect_competition

_hypx 4y ago

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.

andromeduck 4y ago
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.
- _hypx 4y ago
  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.

refurb 4y ago

Economics is theoretical. Nobody believes it perfectly describes the real world. No model is correct, but all models are useful. As well, nobody said economics happens on an instantaneous timescale. Those trends can still happen, but take weeks, months or even years to play out.

simiansays 4y ago

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...

tzs 4y ago
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. I believe its the same in economics.
- lesuorac 4y ago
  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.

zhte415 4y ago

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.

honkycat 4y ago
weak argument. econ and physics are two wildly different fields. you are comparing a natural science to a social science.
ikiris 4y ago
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.
mlyle 4y ago
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.
praptak 4y ago
Econ can't hold a light to physics in terms of falsifiability of hypotheses yet people still treat it as hard science.

dclowd9901 4y ago

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: - convenience - availability - familiarity - self-image - etc etc People buy a thing for a million different reasons that have nothing to do with price.

RandomLensman 4y ago

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.

ohjfjfk 4y ago

With what capital will someone step up and undercut the minority that have monopoly control of capital? At this point it’s a network of too few who collude out of view.

AnthonyMouse 4y ago

> 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?

doublespanner 4y ago
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.

127 4y ago

Without strong regulation, free markets do not work, as the players start to distort the market to win.

spaceman_2020 4y ago

Tough to happen in a world of monopolies. Look at all the bank failures and mergers - it just gives pricing power to a couple of banks.

mordae 4y ago

> But economics teaches us when a player overcharges, others will step in to undercut and take all the market share. 1. They will all reluctantly increase the prices, testing waters. 2. And as long as their stuff sells, they will keep rising them. 3. Eventually consumers will get fed up with their preferred brands screwing them over and start switching. 4. Aggressive sales will start to pop up, making the consumers reconsider. 5. Eventually the sales will taper off with new prices established. Most customers will stay loyal to their brand(s). Some will switch.

npteljes 4y ago

>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.