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I think this talk about costs vs profits sounds important to lay people, but is completely irrelevant. Companies do not price goods based on the goodness of the

I think this talk about costs vs profits sounds important to lay people, but is completely irrelevant. Companies do not price goods based on the goodness of their hearts. They price it at the point that maximizes volume*(unit price-COGS). Companies are constantly testing this price point. For example, a promotion may produce data that can indicate how consumers will respond to a price change. In an inflationary period, consumers expectations change allowing more movement in this price than normal. And this permits companies to increase prices, and produce higher profits. Note, their upstream providers are doing the same, and some of these higher profits will be passed on upstream. Companies that are in a weaker market position, will find themselves unable to raise prices as much as their competitors.. and if their upstream providers find demand enables them to raise prices more than they can, they will find their profits decrease. Some of these companies will go out of business. This is one of the ways that inflation rids the market of less desirable companies. Cost-plus pricing (how many consumers imagine pricing works) has almost entirely gone away in retail pricing. Even if a producer does this, the retailers will market adjust the price themselves... This is what has happened to car sales: the manufacturer didnt capture the difference, so the dealership captured it instead.

zozbot234 3y ago
> And this permits companies to increase prices, and produce higher profits. It's worth noting that this mostly reflects short-term pricing power. It takes a lot of time for new competitors to enter any industry. So we should expect these price increases to occur rarely and be somewhat time-limited as competition ultimately reestablishes itself.
- cortesoft 3y ago
  Maybe... but if competitors realize that the established companies can just lower prices once they enter the market, it might not make sense to enter the market at all.
- coliveira 3y ago
  Competition doesn't work correctly in modern economies because companies are allowed to buy their competitors. If you start competing with another company, they can essentially raise money to buy you and stop what would be the "normal" process. As a result, all theories that people have about how competition works don't apply as they think it should.
  - dantheman 3y ago
    That can only go on for so long; if people see companies buying out competitors people will jump to create more and more competitors for the easy exit.
    - coliveira 3y ago
      Will they? Only if they can. Tech industries are example #1 for this behavior. At some point very few people can create a competitor for Amazon, Google, or Apple.
      - revelio 3y ago
        Apple has lots of competitors and doesn't even have dominant market share. Google is hard to compete with due to network effects, because they don't often miss tricks, and because they've invested so heavily in core R&D for so many years. The classical story about competition is that a big rich company becomes complacent and stops improving their products, opening a gap for new companies to enter, but Google hasn't really done that, they continue to tweak and try new things (arguments about search quality specifically for precise programmer queries aside). Amazon retail is hard to compete with because it's not a very good business. They keep margins extremely low for not entirely rational reasons, which is why most of their profit now comes from AWS. AWS meanwhile does have competitors.
    - ultrarunner 3y ago
      That would be true if not for regulatory burdens that larger companies can afford to shoulder. We just watched a progression from "OpenAI has no moat" to OpenAI begging Congress for regulations to stop them from killing grandma. If you can't get a foothold in the market there's no point in acquiring you.
- comboy 3y ago
  In ideal world. Stuff like groceries are such a rigged market that (well I'm sure somebody already wrote a book about it, recommendations?) it puts financial institutions to shame. Just a few brands own most of the stuff you buy [1] and then supermarkets have deals with those. Both protect each other. I mean market finds its way, people can move to small stores and non-branded products if it gets bad enough, but to paraphrase, market irrationality can outlast people's well being. I'm not in favor of some more regulations which usually only help big players, but corporations power steadily climbs and I expect it to become bigger than those of governments. New big companies, some decent competition, come from places when there was none. They hardly ever can push themselves into existing markets. They create new ones. But we still need groceries, gas, electricity etc. 1. https://www.reddit.com/r/coolguides/comments/elzqf2/eleven_companies_that_own_nearly_every_product_in/ https://www.reddit.com/r/coolguides/comments/elzqf2/eleven_c...
  - Spivak 3y ago
    Sure, but that assumes that people will do nothing in the long term that affects their spending behavior and will just eat the cost indefinitely. If groceries tomorrow cost 10x I would not suddenly be spending 10x my current grocery bill. Luxury purchases like snacks, soda, premade sauces, candy, off-season produce, would be on the chopping block. Anything non-perishable would be bought in bulk during sales and wholesale clubs. And for people who are already scraping by it would result in a 10x grocery bill which they can now not pay. There's only so much money you can squeeze from a stone in the long run. Rising prices like this changes consumer behavior but can't make money appear out of nowhere. Since food is one of the easiest ways to belt-tighten rising prices across the board has the risk of reducing the wallet share food producers have.
  - badpun 3y ago
    > Just a few brands own most of the stuff you buy [1] and then supermarkets have deals with those. Both protect each other. I buy almost exclusively store brands. Probably less than 5% of my grocery spending goes to name brands.
    - asdff 3y ago
- chalst 3y ago
  This is how it works in a reasonably competitive economy. The economy is not competitive for the EU markets that matter and this means time beyond what you call short term doesn't see many new entrants. Unless by long term you mean waiting until the EU has a competitive economy. That's not what most economists do.
- xyzelement 3y ago
  I came here to make the same point - you are spot on. Companies raise prices whenever they can and lower them whenever they have to. Which is true for everyone - we demand higher wage when we can get away with it and suck it up with lower comp when we can't. To your point, companies can't max out the prices whenever they want (or an apple would cost a hundred dollars - why not?) They have to deal with a world of consumers and competitive response. As a consumer, my response to a raised price could very often be to drop demand (I like apples but not at a $100 per) which then punishes the overall revenue of the supplier. It also draws competition (I wasn't gonna plant an apple orchard in my back yard but now that apples are super valuable, I will. And I am going to undercut your $100 apples to get the business.) In general this process has worked to generate an affordable plenty for us. Lamenting something at a narrow point in time is myopic.
rightbyte 3y ago
> Companies do not price goods based on the goodness of their hearts. Governments etc. argue that employees should not demand higher pay to match inflation to avoid a "spiral" out of the goodness of their hearts. If employers catch the absolute currency value increase of inflation the employee employer balance is shifting.
- ajsnigrutin 3y ago
  Governments can argue whatever they want, workers still demand more pay and (more often) change jobs to where they get paid more. The last years has been massive for worker movements, atleast here in my region.
  - ChuckNorris89 3y ago
    It's difficult in Europe. Most companies aren't paying more, I've been interviewing for 3 months, so there's nowhere to go to for more money. If they can collectively jack up prices to bump the inflation, they can also collectively put a ceiling on wages.
- nabla9 3y ago
  >Governments etc. argue As they should. that's how it works and they are correct. Employees should argue against that and demand more if they dare. The job of Central bank is to increase interest rates until unemployment rate increases to the level where employees don't dare ask more. Unemployment reduces both demand and wage growth. That will slow down inflation but it also baits recession. Economy is a dynamic system with feedback loops.
  - ClumsyPilot 3y ago
    > Central bank is to increase interest rates until unemployment rate increases I might be old fashioned, but last time I checked, government's job was not to drive down living standards. Maybe their job is to ensure that a resource-show like rising energy prices does not hit, by majing economy rsillient and relying on diverse suppliers
gsatic 3y ago
Consumers have 3 inch chimp brains. Even the Kardashians have worked out how to exploit those brains. Don't live in some day dream about what modern marketing can make the chimp brain do.
- pmontra 3y ago
  I'm not sure about that. It's more likely that each of us has a lot of different stuff to care about, more and more as we transition to adulthood, families, etc, and it's not economical (as in time+energy) to care too much about prices and wages as long as we can get what we care about. When the money run short, it changes.
  - gsatic 3y ago
    It doesn't change. Have you checked how much credit card debt exists? How and why did that happen? People are easy to game.
    - pmontra 3y ago
      If they still have credit they are not short on money by definition. When (where) people have no credit, they spend only what they must or less than that.
cortesoft 3y ago
This is exactly my reaction whenever I see things like this. Profit margins are not the DRIVER for any of these market changes, they are the end result of all the various factors at play.
- jjoonathan 3y ago
  The profit motive & margins fund lobbyists and political campaigns to change policies that absolutely drive these market changes. We could choose to have anti-trust measures with teeth. We could choose to tax assets. We could have progressive corporate taxes to encourage smaller company sizes and more public transparency. There are so many things we could choose, but the ones that we do choose are the ones that shareholders lobby into place to generate ROI. This is either a feature or a bug, depending on whether your income flows through line 1 or line 7 of your 1040.
  - evancox100 3y ago
    All of those things are independent from nominal price/wage increases. If higher pay was such an unalloyed good, why doesn't the government just pass a law saying "Whatever amount you were getting paid on 6/26/23, now you're getting paid double that, and you have twice as much money in your bank account."? Because no one would actually be better off. Prices would instantly double. It's just a change of units, like going from getting paid in $ to getting paid the same amount in ¢.
    - juve1996 3y ago
      > Because no one would actually be better off. Prices would instantly double. It's just a change of units, like going from getting paid in $ to getting paid the same amount in ¢. This is so basic but so many people miss it. I have continually explained this to my parents. It doesn't matter how good your 401k is doing if it leads to eggs being $12 a dozen in your retirement.
      - autoexec 3y ago
        Historically, that hasn't happened when worker's wages increased. Prices do tend to go up (they always do) but not to the degree that it makes the wage increases worthless. When minimum wages go up, workers lives improve. Also, when companies don't have an excuse, consumers simply won't pay $12 for a dozen eggs. Every consumer has some idea of what things are worth and if a company tries to jack prices up for no reason consumers feel cheated and stop paying. There's zero reason why companies can't all just triple their prices right now, except that if they did, people wouldn't pay and their profits would drop. Companies constantly test consumer's acceptance of price increases and usually only increment their prices slowly so that the next generation they rip off doesn't know any better having always grown up with the slightly higher prices. The supply shortages of the pandemic broke the system. It gave every company an excuse for price gouging, and at first, much of that was legitimate supply/demand and consumers were understanding. Then as the supply of goods came back they started using the inflation narrative (complete with "printed money" excuse) to justify further increasing prices, but now we have a growing pile of evidence that they were lying and were just pocketing the extra money. Naturally, and rightly, people are starting to feel ripped off.
jjoonathan 3y ago
> Companies do not price goods based on the goodness of their hearts. Yes, but let's remember this next time they are whinging about taxes, labor rights, and anti-trust measures, k?
froidpink 3y ago
> Some of these higher profits will be passed on upstream Profits by definition are not passed upstream, as profits are what remains after you take out costs from revenue. Anything that gets passed upstream comes from costs
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ajsnigrutin 3y ago
The problem here, especially if the prices are rising higher than wages is, that sooner or later the basic necessities (food, shelter, ...) reach a level, where people can barely pay them, and all the other industries suffer, because consumers don't have any leftover money for luxuries, gadgets, etc. Some prices (mostly services) can be adjusted, some could be (rents, housing, mostly by rezoning and building more), but due to "reasons" (mostly local and national governments holding back) they aren't (until someone compares the average pension to average rent and instead buys a sniper gun and finds the responsible politician). Some prices are also stuck due to politicians doing their dick-measuring competitions ending in sanctions for countries that have stuff other countries need, and industries shutting down because that stuff became too expensive there. On the other hand, we did print A LOT of money in the last few years, and blaming everyone else except (also) the ones who have the power to print is just stupid.
- makomk 3y ago
  It is probably not possible for people to carry on buying luxuries, gadgets etc at the same levels as before without others being forced to do without the basic necessaties. Remember, this all started out with an energy crisis: there was not really enough to supply all the factories in China running flat out as people caught up with their consumption along with everything else, and then Russia throttled back their exports and made things worse. That shortage of energy directly caused prices to increase until demand could actually be satisified, which directly made things like food more expensive. You couldn't just fix this by forcing the companies to charge less, even though the money is ending up as profits, because energy and fuel just isn't available in sufficient quantities without Russia. There's also a shortage of workers in most developed countries too, which means that any labour used to provide luxuries directly impacts the amount available to produce the basic necessaties like housing and healthcare as well.
  - revelio 3y ago
    The sharp rise in inflation predates any kind of energy crisis. Inflation kicked off in 2021. https://tradingeconomics.com/united-states/core-inflation-rate https://tradingeconomics.com/united-states/core-inflation-ra... Energy didn't become a major issue until Ukraine was invaded. Inflation was triggered by all the money printed during COVID getting into the economy once it opened up again.
mo_42 3y ago
Technically, the companies guess the price elasticity of a product. This tells them how a price change influences demand. Then, it’s a simple calculation to choose the right price.
poomer 3y ago
I find this an extremely odd and uninterpretable article for this reason. When people say that "x drives y" they usually mean that "x causes y". And inflation is by definition price hikes. So article seems to be saying that "corporate profits causes price hikes", which is meaningless since the causal direction should be in the reverse (price changes cause profit changes). The fact that labor costs (which are part of a company's profit calculation) are considered a separate "driver" makes this even more confusing.
rektide 3y ago
I don't disagree with anything here but it feels like it tiptoes around saying what's actually happening, which is that there isn't an effective competitive market anymore. You say that prices go up because they can, and that's not wrong, but historically there were other providers also competing. It feels like there has been massive consolidation across industries, and that this centralization has created uncompetitive markets, where consumers don't have any option but to accept a providers price & profit increase. That feels like the new thing, the new trouble: only the very large are left. Competition does not renew: even if there are fat profit margins waiting to be had, the risk of trying to start a new competitor is too high, too likely to get crushed, has too many personal risks (trying to provide healthcare for your family, not go bankrupt, etc). The markets have ossified into a state where this ruin you speak is possible.
AndrewKemendo 3y ago
Yes and the first step to solving the problem is acknowledging it. In order to change some thing you have to prove that it’s happening. In the case of “What underlying structure creates society’s problems,” increasingly more research is pointing to inequality itself and lack of democratic participation/ownership in the economy. These are the foundational factors driving poverty and precarious economic conditions for an increasing proportion of the population. The Lions share of corporate profits go to existing shareholders and only rarely employees, and even rarer do employees compose the majority of shareholders (you have no shareholder power as a FAANG employee different than any other retail investor - namely, none) So no it’s not irrelevant. It’s very relevant if people want to actually have power in determining how the organizations they join are operated.
- matrix_overload 3y ago
  The answer is competition. Most of markets nowadays are dominated by 2-5 big players with the CEOs going to the same golf club. Wink-wink, nudge-nudge, prices go up, nobody can do nothing. If we had 50 competing players, there would be enough incentive for a hungry challenger to lower prices and undercut the competition. Except, over a decade of leveraged acquisitions and antitrust regulators being asleep at the wheel killed the most remote chances of this happening in our lifetime.
  - vjk800 3y ago
    The problem with competition is, what happens after someone wins it? This is essentially what has happened in many markets; lots of small companies have been killed by or conglomerated into giant ones that rule the market. Sometimes antitrust regulation can't even help with this; what if there are no acquisitions, just one company doing stuff better killing all competition?
    - hunson_abadeer 3y ago
      Then when they jack up prices, it creates an incentive for new companies to enter that field and make the same item for less. A better question might be: what hinders this process today? Capital disparity plays a role (a wealthy company can perhaps make a competitor a buyout offer they can't refuse, or temporarily lower prices to try to kill them), but another major cause is excess regulation and the weaponization of intellectual property.
ke88y 3y ago
From a textbook economic perspective you are, of course, correct. And your conclusion that we shouldn't hate the player is also correct! But that doesn't mean that we can't hate the game. Capital-isms and market competition are two very different things. Currently we have A LOT of capitalism AND very uncompetitive markets. What we need are competitive markets, and the -isms hawked by the multi-generational holders of Capital be damned. (Which, these days, put far less stress on competition than they typically did in the late 20th century. See: Venture Capital-ists clamoring for regulation in greenfield markets, on the explicit basis that too much competition is dangerous!) What does this look like? Primarily: 1. Stronger anti-trust laws, 2. more anti-trust enforcement, 3. assurance that labor markets are efficient, 4. lowering the barriers to entry for new competition, and 5. substantially shifting the tax burden in the meantime.
- mrguyorama 3y ago
  Nobody is ever forced to "play the game" so you absolutely SHOULD hate the player. They are choosing the play a game that hurts others and rewards them.
  - ke88y 3y ago
    Hating holders of capital isn't effective, either rhetorically or as a policy motivator, at least in the west, at least for now. I mean this in the descriptive sense, not as a moral or personal opinion. Stronger anti-trust, stronger worker's rights, more equitable ownership of firms/real property/capital, etc. -- none of this requires hate, and most of it is actually entirely consistent with the bedrock principles of late 20th century Capital-isms.
    - mrguyorama 3y ago
      Funny, because the way the US got most of it's worker rights and protections was pretty violent strikes in the early 1900s. It used to be reasonable for your union to have arms, and be shot at by the pinkertons. Employers, I don't care why, choose to do whatever it takes to keep me paid poorly and without power, and not hating that is just pathetic.
refulgentis 3y ago
Nah, this is an ECO101 take - a simplifying assumption for modelling. You spend the rest of the degree learning history & how to model when you don't have the simplifying assumptions
hayst4ck 3y ago
We are experiencing tacit collusion: https://en.wikipedia.org/wiki/Tacit_collusion https://en.wikipedia.org/wiki/Tacit_collusion Economic power, and therefore political power, is concentrating in fewer and fewer hands which allows them to exercise force over competition rather than to compete with competition. Competition is the back pressure on "greedflation" which is a name that implies greed (which is good in capitalism) is the root cause of increasing prices rather than lack of competition (regulatory capture/citizens united). It boils down to consumer/labor power. Labor power represents the ability to make companies compete through regulation or to put the profit these companies reap into labors pockets instead of owners pockets, which is not just a shift of economic power, but of political power. Wages have nothing to do with your labor and everything to do with your market power. Companies collude behind the scene to suppress wages: https://news.ycombinator.com/item?id=29834753 https://news.ycombinator.com/item?id=29834753 There are companies that sell "market data" which tells companies how much labor should cost. Unions are the answer to oligopolies and oligarchy. Unions are what you can do, not what somebody else needs to do, or what the government needs to do. Unions are a vehicle of force. Unions are like the 2nd amendment. You can use both to fight tyranny, and in the process put yourself at risk. Trying to make the powerful less powerful requires risk because the powerful will use their power to keep their power. These oligopolists (https://en.wikipedia.org/wiki/Oligopoly https://en.wikipedia.org/wiki/Oligopoly) are exercising tacit "collective bargaining" but people who earn money in proportion to time seem unable to do their own collective bargaining. Until there is back pressure on corruption, which requires exercises of power against the corrupt, we can expect things to get worse and worse and those with power to be able to leverage the rules of society to grant themselves more power.
abeppu 3y ago
Just because firms don't prefer to think about pricing in terms of cost-plus doesn't mean that their actual costs are "irrelevant". If people feel that a company is pricing their goods unfairly, shouldn't they move their spending elsewhere? If companies with healthy and growing margins fire people with memos citing challenging economic headwinds, shouldn't people call BS? If companies raising their prices dramatically for the same goods, and perhaps for products which were developed decades ago and simultaneously lobby against regulations which they say risk stifling "innovation", shouldn't people tell their representatives exactly why those corporations are not credible? The idea that discussing widening margins is "irrelevant" because companies adjust prices based on consumers' price sensitivity seems exactly backwards to me: the fact that profits are so high indicates that consumers have been overly-credulous and ought to be more price sensitive. And zooming out, the accelerated transfer of wealth from consumers to shareholders happens because we consumers collectively allow it. Reporting which highlights the rising profits relative to other factors can be part of what enables a course-correction.
- soco 3y ago
  You can only be price sensitive when you have a real choice. And I'm talking oligopoly here, impossible to shake in just two years since covid hit with the extra pressure.
- sznio 3y ago
  >the fact that profits are so high indicates that consumers have been overly-credulous and ought to be more price sensitive. How do I become more price sensitive to food prices? I already had to start eating less and worse.
alexpotato 3y ago
Going to add a slightly devil's advocate view here. I used to be the conference directory for a college club sport (specifically, paintball). Part of my job was to find paintball fields to host college events. It's important at to say that the organization that funded these events was 501(c)(3) aka "non-profit" and we therefore were trying to minimize costs. Something we ran into was this scenario: - Fields knew we were college focused and a non-profit - They would generally, out of the goodness of their hearts, charge us at cost or even below cost for our events - This would sometimes mean turning away hosting events or players with better margin. You could argue that the fields received great free advertising by hosting events so it wasn't a net loss for them. - That being said, we sometimes saw events coming back the next year saying "it wasn't worth it to host your event" - This was a problem given that there were only limited fields AND I had a full time job at the time so, ideally, we would use the same field every year - I would therefore add 10% to whatever cost the fields proposed to us as a "tip"/"return fee" to make sure they were happy Now, you could argue that my job was to make sure that we always received the lowest possible price given our constraints on field safety, size and location. I would argue that was ignoring the long term cost to the organization (and my time) to having to keep finding fields that would host us if we tried to minimize cost. I mention this b/c companies maxing out profit to whatever the customer can bear feels like an excellent short term strategy. If by doing so, they drive customers into debt and then bankruptcy etc, this seems like a net loss to everyone on the longer timescale. To finalize and maybe clarify: these discussion always seem to end up in a "well, companies maximize profits!" while ignoring the negative long term implications of that strategy.
- wnc3141 3y ago
  In labor economics, they refer to that slightly higher price (compared to the minimum clearing price) as an "efficiency wage" - it describes the same thing you describe above. Only note that this is a profit maximizing behavior - as companies pay out efficiency wages to avoid turnover costs or an unproductive workforce. https://en.wikipedia.org/wiki/Efficiency_wage https://en.wikipedia.org/wiki/Efficiency_wage https://www.investopedia.com/efficiency-wages-5206757#:~:text=In%20labor%20economics%2C%20efficiency%20wages,skilled%20workers%20do%20not%20quit https://www.investopedia.com/efficiency-wages-5206757#:~:tex....
smcleod 3y ago
If we accept this and are told the right thing to do is to spend less - then all that’s happening is the victim is being blamed and the burden of regulation is put on those most at risk. It’s like companies shifting the burden of their plastic waste onto consumers by telling them to recycle rather than providing a better, less polluting product.
yieldcrv 3y ago
corporate profits from higher prices wouldn't be profits if less people paid for them that’s true for essential goods as well, something would have happened to those people that couldn't pay but they do have money and can still pay that’s the other half of inflation
z3t4 3y ago
A huge problem are the cartels that are usually 2-3 companies that has almost all the market share. They increase the prices, which reduce demand, then they tell the producers to lower the production in order to keep the prices artificially high. If we want to keep the capitalist system governments need to address corruption, monopolies and cartels, and allow free trade between countries. Anything that hinders competition should be illegal. If you own a platform or network you must allow competitors to operate for a reasonable cost. Any mergers that would allow one player to grow beyond 5% market share should not be allowed. (in order to make sure that in any market there are at least 20 competitors). Anything that is anti-competitive should not be allowed. Only way to compete should be to make either a better, or a cheaper product. Our governments are a joke, they are charades and full of corruption.
- everforward 3y ago
  > Only way to compete should be to make either a better, or a cheaper product. I think this is a core part of the anti-competitive problem, though. Economies of scale mean that a company with a 50% market share is going to make the cheaper good, all else equal. We would effectively need to increase competition at the cost of increasing efficiency to make that work (e.g. by banning mergers of larger players).
ricardobeat 3y ago
> This is what has happened to car sales: the manufacturer didnt capture the difference, so the dealership captured it instead Only works because dealerships have a monopoly over local sales (i.e. not a free market). Otherwise everyone would be buying their car online without the markup.
berniedurfee 3y ago
“Some of these companies will go out of business.” Many of those companies will be producing superior products, niche products vital for a small market or are simply more focused on delivering value rather than leeching profit. The surviving companies in a rough market turn never seem to be the ‘best’ companies.
shermanyo 3y ago
> this permits companies to increase prices, and produce higher profits. Note, their upstream providers are doing the same, and some of these higher profits will be passed on upstream. No, upstream price increases are included as a part of their increased expenses. Any increase in profits is on top of this.
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foo-bar-bat 3y ago
Car sales in the US is not a useable example for any microeconomics discussion, let alone (notionally) generalized principles. Car dealers are one of a handful of infustries with an explicit exemption from federal antitrust law prohibiting price fixing and collusive monopolies. So, they made those, decades ago. And abuse them constantly. The way you can tell this is true is price any car or truck in the US for sale from dealer X. Then attempt to shop around for a better price from set of dealers Y-Z. You will find that within a convenient-to-you radius the same regional dealership operating co owns all of the dealerships for your preferred make/model. Then if you expand your search radius you will find that opco is owed by a larger holdco, which "oversees" supply and demand so your price. Not a free market. And not the manufacturers' doing, or their input suppliers, or inflation. It's a gov policy choice as abused by nearly a century of lobbying which some might call bribes. As I recall the other US industries with explicit antitrust exemptions are Major League Baseball... and domestic shipbuilding vis-a-vis domestic maritime commerce. This is famously why the Love Boat *had* to go to Mexico, because it was (presumably) foreign flagged and couldn't move between US poets without calling at a foreign port.

zozbot234 3y ago

> And this permits companies to increase prices, and produce higher profits. It's worth noting that this mostly reflects short-term pricing power. It takes a lot of time for new competitors to enter any industry. So we should expect these price increases to occur rarely and be somewhat time-limited as competition ultimately reestablishes itself.

cortesoft 3y ago
Maybe... but if competitors realize that the established companies can just lower prices once they enter the market, it might not make sense to enter the market at all.
coliveira 3y ago
Competition doesn't work correctly in modern economies because companies are allowed to buy their competitors. If you start competing with another company, they can essentially raise money to buy you and stop what would be the "normal" process. As a result, all theories that people have about how competition works don't apply as they think it should.
- dantheman 3y ago
  That can only go on for so long; if people see companies buying out competitors people will jump to create more and more competitors for the easy exit.
  - coliveira 3y ago
    Will they? Only if they can. Tech industries are example #1 for this behavior. At some point very few people can create a competitor for Amazon, Google, or Apple.
    - revelio 3y ago
      Apple has lots of competitors and doesn't even have dominant market share. Google is hard to compete with due to network effects, because they don't often miss tricks, and because they've invested so heavily in core R&D for so many years. The classical story about competition is that a big rich company becomes complacent and stops improving their products, opening a gap for new companies to enter, but Google hasn't really done that, they continue to tweak and try new things (arguments about search quality specifically for precise programmer queries aside). Amazon retail is hard to compete with because it's not a very good business. They keep margins extremely low for not entirely rational reasons, which is why most of their profit now comes from AWS. AWS meanwhile does have competitors.
  - ultrarunner 3y ago
    That would be true if not for regulatory burdens that larger companies can afford to shoulder. We just watched a progression from "OpenAI has no moat" to OpenAI begging Congress for regulations to stop them from killing grandma. If you can't get a foothold in the market there's no point in acquiring you.
comboy 3y ago
In ideal world. Stuff like groceries are such a rigged market that (well I'm sure somebody already wrote a book about it, recommendations?) it puts financial institutions to shame. Just a few brands own most of the stuff you buy [1] and then supermarkets have deals with those. Both protect each other. I mean market finds its way, people can move to small stores and non-branded products if it gets bad enough, but to paraphrase, market irrationality can outlast people's well being. I'm not in favor of some more regulations which usually only help big players, but corporations power steadily climbs and I expect it to become bigger than those of governments. New big companies, some decent competition, come from places when there was none. They hardly ever can push themselves into existing markets. They create new ones. But we still need groceries, gas, electricity etc. 1. https://www.reddit.com/r/coolguides/comments/elzqf2/eleven_companies_that_own_nearly_every_product_in/ https://www.reddit.com/r/coolguides/comments/elzqf2/eleven_c...
- Spivak 3y ago
  Sure, but that assumes that people will do nothing in the long term that affects their spending behavior and will just eat the cost indefinitely. If groceries tomorrow cost 10x I would not suddenly be spending 10x my current grocery bill. Luxury purchases like snacks, soda, premade sauces, candy, off-season produce, would be on the chopping block. Anything non-perishable would be bought in bulk during sales and wholesale clubs. And for people who are already scraping by it would result in a 10x grocery bill which they can now not pay. There's only so much money you can squeeze from a stone in the long run. Rising prices like this changes consumer behavior but can't make money appear out of nowhere. Since food is one of the easiest ways to belt-tighten rising prices across the board has the risk of reducing the wallet share food producers have.
- badpun 3y ago
  > Just a few brands own most of the stuff you buy [1] and then supermarkets have deals with those. Both protect each other. I buy almost exclusively store brands. Probably less than 5% of my grocery spending goes to name brands.
  - asdff 3y ago
chalst 3y ago
This is how it works in a reasonably competitive economy. The economy is not competitive for the EU markets that matter and this means time beyond what you call short term doesn't see many new entrants. Unless by long term you mean waiting until the EU has a competitive economy. That's not what most economists do.
xyzelement 3y ago
I came here to make the same point - you are spot on. Companies raise prices whenever they can and lower them whenever they have to. Which is true for everyone - we demand higher wage when we can get away with it and suck it up with lower comp when we can't. To your point, companies can't max out the prices whenever they want (or an apple would cost a hundred dollars - why not?) They have to deal with a world of consumers and competitive response. As a consumer, my response to a raised price could very often be to drop demand (I like apples but not at a $100 per) which then punishes the overall revenue of the supplier. It also draws competition (I wasn't gonna plant an apple orchard in my back yard but now that apples are super valuable, I will. And I am going to undercut your $100 apples to get the business.) In general this process has worked to generate an affordable plenty for us. Lamenting something at a narrow point in time is myopic.

rightbyte 3y ago

> Companies do not price goods based on the goodness of their hearts. Governments etc. argue that employees should not demand higher pay to match inflation to avoid a "spiral" out of the goodness of their hearts. If employers catch the absolute currency value increase of inflation the employee employer balance is shifting.

ajsnigrutin 3y ago
Governments can argue whatever they want, workers still demand more pay and (more often) change jobs to where they get paid more. The last years has been massive for worker movements, atleast here in my region.
- ChuckNorris89 3y ago
  It's difficult in Europe. Most companies aren't paying more, I've been interviewing for 3 months, so there's nowhere to go to for more money. If they can collectively jack up prices to bump the inflation, they can also collectively put a ceiling on wages.
nabla9 3y ago
>Governments etc. argue As they should. that's how it works and they are correct. Employees should argue against that and demand more if they dare. The job of Central bank is to increase interest rates until unemployment rate increases to the level where employees don't dare ask more. Unemployment reduces both demand and wage growth. That will slow down inflation but it also baits recession. Economy is a dynamic system with feedback loops.
- ClumsyPilot 3y ago
  > Central bank is to increase interest rates until unemployment rate increases I might be old fashioned, but last time I checked, government's job was not to drive down living standards. Maybe their job is to ensure that a resource-show like rising energy prices does not hit, by majing economy rsillient and relying on diverse suppliers

gsatic 3y ago

Consumers have 3 inch chimp brains. Even the Kardashians have worked out how to exploit those brains. Don't live in some day dream about what modern marketing can make the chimp brain do.

pmontra 3y ago
I'm not sure about that. It's more likely that each of us has a lot of different stuff to care about, more and more as we transition to adulthood, families, etc, and it's not economical (as in time+energy) to care too much about prices and wages as long as we can get what we care about. When the money run short, it changes.
- gsatic 3y ago
  It doesn't change. Have you checked how much credit card debt exists? How and why did that happen? People are easy to game.
  - pmontra 3y ago
    If they still have credit they are not short on money by definition. When (where) people have no credit, they spend only what they must or less than that.

cortesoft 3y ago

This is exactly my reaction whenever I see things like this. Profit margins are not the DRIVER for any of these market changes, they are the end result of all the various factors at play.

jjoonathan 3y ago
The profit motive & margins fund lobbyists and political campaigns to change policies that absolutely drive these market changes. We could choose to have anti-trust measures with teeth. We could choose to tax assets. We could have progressive corporate taxes to encourage smaller company sizes and more public transparency. There are so many things we could choose, but the ones that we do choose are the ones that shareholders lobby into place to generate ROI. This is either a feature or a bug, depending on whether your income flows through line 1 or line 7 of your 1040.
- evancox100 3y ago
  All of those things are independent from nominal price/wage increases. If higher pay was such an unalloyed good, why doesn't the government just pass a law saying "Whatever amount you were getting paid on 6/26/23, now you're getting paid double that, and you have twice as much money in your bank account."? Because no one would actually be better off. Prices would instantly double. It's just a change of units, like going from getting paid in $ to getting paid the same amount in ¢.
  - juve1996 3y ago
    > Because no one would actually be better off. Prices would instantly double. It's just a change of units, like going from getting paid in $ to getting paid the same amount in ¢. This is so basic but so many people miss it. I have continually explained this to my parents. It doesn't matter how good your 401k is doing if it leads to eggs being $12 a dozen in your retirement.
    - autoexec 3y ago
      Historically, that hasn't happened when worker's wages increased. Prices do tend to go up (they always do) but not to the degree that it makes the wage increases worthless. When minimum wages go up, workers lives improve. Also, when companies don't have an excuse, consumers simply won't pay $12 for a dozen eggs. Every consumer has some idea of what things are worth and if a company tries to jack prices up for no reason consumers feel cheated and stop paying. There's zero reason why companies can't all just triple their prices right now, except that if they did, people wouldn't pay and their profits would drop. Companies constantly test consumer's acceptance of price increases and usually only increment their prices slowly so that the next generation they rip off doesn't know any better having always grown up with the slightly higher prices. The supply shortages of the pandemic broke the system. It gave every company an excuse for price gouging, and at first, much of that was legitimate supply/demand and consumers were understanding. Then as the supply of goods came back they started using the inflation narrative (complete with "printed money" excuse) to justify further increasing prices, but now we have a growing pile of evidence that they were lying and were just pocketing the extra money. Naturally, and rightly, people are starting to feel ripped off.

jjoonathan 3y ago

> Companies do not price goods based on the goodness of their hearts. Yes, but let's remember this next time they are whinging about taxes, labor rights, and anti-trust measures, k?

froidpink 3y ago

> Some of these higher profits will be passed on upstream Profits by definition are not passed upstream, as profits are what remains after you take out costs from revenue. Anything that gets passed upstream comes from costs

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ajsnigrutin 3y ago

The problem here, especially if the prices are rising higher than wages is, that sooner or later the basic necessities (food, shelter, ...) reach a level, where people can barely pay them, and all the other industries suffer, because consumers don't have any leftover money for luxuries, gadgets, etc. Some prices (mostly services) can be adjusted, some could be (rents, housing, mostly by rezoning and building more), but due to "reasons" (mostly local and national governments holding back) they aren't (until someone compares the average pension to average rent and instead buys a sniper gun and finds the responsible politician). Some prices are also stuck due to politicians doing their dick-measuring competitions ending in sanctions for countries that have stuff other countries need, and industries shutting down because that stuff became too expensive there. On the other hand, we did print A LOT of money in the last few years, and blaming everyone else except (also) the ones who have the power to print is just stupid.

makomk 3y ago
It is probably not possible for people to carry on buying luxuries, gadgets etc at the same levels as before without others being forced to do without the basic necessaties. Remember, this all started out with an energy crisis: there was not really enough to supply all the factories in China running flat out as people caught up with their consumption along with everything else, and then Russia throttled back their exports and made things worse. That shortage of energy directly caused prices to increase until demand could actually be satisified, which directly made things like food more expensive. You couldn't just fix this by forcing the companies to charge less, even though the money is ending up as profits, because energy and fuel just isn't available in sufficient quantities without Russia. There's also a shortage of workers in most developed countries too, which means that any labour used to provide luxuries directly impacts the amount available to produce the basic necessaties like housing and healthcare as well.
- revelio 3y ago
  The sharp rise in inflation predates any kind of energy crisis. Inflation kicked off in 2021. https://tradingeconomics.com/united-states/core-inflation-rate https://tradingeconomics.com/united-states/core-inflation-ra... Energy didn't become a major issue until Ukraine was invaded. Inflation was triggered by all the money printed during COVID getting into the economy once it opened up again.

mo_42 3y ago

Technically, the companies guess the price elasticity of a product. This tells them how a price change influences demand. Then, it’s a simple calculation to choose the right price.

poomer 3y ago

I find this an extremely odd and uninterpretable article for this reason. When people say that "x drives y" they usually mean that "x causes y". And inflation is by definition price hikes. So article seems to be saying that "corporate profits causes price hikes", which is meaningless since the causal direction should be in the reverse (price changes cause profit changes). The fact that labor costs (which are part of a company's profit calculation) are considered a separate "driver" makes this even more confusing.

rektide 3y ago

I don't disagree with anything here but it feels like it tiptoes around saying what's actually happening, which is that there isn't an effective competitive market anymore. You say that prices go up because they can, and that's not wrong, but historically there were other providers also competing. It feels like there has been massive consolidation across industries, and that this centralization has created uncompetitive markets, where consumers don't have any option but to accept a providers price & profit increase. That feels like the new thing, the new trouble: only the very large are left. Competition does not renew: even if there are fat profit margins waiting to be had, the risk of trying to start a new competitor is too high, too likely to get crushed, has too many personal risks (trying to provide healthcare for your family, not go bankrupt, etc). The markets have ossified into a state where this ruin you speak is possible.

AndrewKemendo 3y ago

Yes and the first step to solving the problem is acknowledging it. In order to change some thing you have to prove that it’s happening. In the case of “What underlying structure creates society’s problems,” increasingly more research is pointing to inequality itself and lack of democratic participation/ownership in the economy. These are the foundational factors driving poverty and precarious economic conditions for an increasing proportion of the population. The Lions share of corporate profits go to existing shareholders and only rarely employees, and even rarer do employees compose the majority of shareholders (you have no shareholder power as a FAANG employee different than any other retail investor - namely, none) So no it’s not irrelevant. It’s very relevant if people want to actually have power in determining how the organizations they join are operated.

matrix_overload 3y ago
The answer is competition. Most of markets nowadays are dominated by 2-5 big players with the CEOs going to the same golf club. Wink-wink, nudge-nudge, prices go up, nobody can do nothing. If we had 50 competing players, there would be enough incentive for a hungry challenger to lower prices and undercut the competition. Except, over a decade of leveraged acquisitions and antitrust regulators being asleep at the wheel killed the most remote chances of this happening in our lifetime.
- vjk800 3y ago
  The problem with competition is, what happens after someone wins it? This is essentially what has happened in many markets; lots of small companies have been killed by or conglomerated into giant ones that rule the market. Sometimes antitrust regulation can't even help with this; what if there are no acquisitions, just one company doing stuff better killing all competition?
  - hunson_abadeer 3y ago
    Then when they jack up prices, it creates an incentive for new companies to enter that field and make the same item for less. A better question might be: what hinders this process today? Capital disparity plays a role (a wealthy company can perhaps make a competitor a buyout offer they can't refuse, or temporarily lower prices to try to kill them), but another major cause is excess regulation and the weaponization of intellectual property.

ke88y 3y ago

From a textbook economic perspective you are, of course, correct. And your conclusion that we shouldn't hate the player is also correct! But that doesn't mean that we can't hate the game. Capital-isms and market competition are two very different things. Currently we have A LOT of capitalism AND very uncompetitive markets. What we need are competitive markets, and the -isms hawked by the multi-generational holders of Capital be damned. (Which, these days, put far less stress on competition than they typically did in the late 20th century. See: Venture Capital-ists clamoring for regulation in greenfield markets, on the explicit basis that too much competition is dangerous!) What does this look like? Primarily: 1. Stronger anti-trust laws, 2. more anti-trust enforcement, 3. assurance that labor markets are efficient, 4. lowering the barriers to entry for new competition, and 5. substantially shifting the tax burden in the meantime.

mrguyorama 3y ago
Nobody is ever forced to "play the game" so you absolutely SHOULD hate the player. They are choosing the play a game that hurts others and rewards them.
- ke88y 3y ago
  Hating holders of capital isn't effective, either rhetorically or as a policy motivator, at least in the west, at least for now. I mean this in the descriptive sense, not as a moral or personal opinion. Stronger anti-trust, stronger worker's rights, more equitable ownership of firms/real property/capital, etc. -- none of this requires hate, and most of it is actually entirely consistent with the bedrock principles of late 20th century Capital-isms.
  - mrguyorama 3y ago
    Funny, because the way the US got most of it's worker rights and protections was pretty violent strikes in the early 1900s. It used to be reasonable for your union to have arms, and be shot at by the pinkertons. Employers, I don't care why, choose to do whatever it takes to keep me paid poorly and without power, and not hating that is just pathetic.

refulgentis 3y ago

Nah, this is an ECO101 take - a simplifying assumption for modelling. You spend the rest of the degree learning history & how to model when you don't have the simplifying assumptions

hayst4ck 3y ago

We are experiencing tacit collusion: https://en.wikipedia.org/wiki/Tacit_collusion https://en.wikipedia.org/wiki/Tacit_collusion Economic power, and therefore political power, is concentrating in fewer and fewer hands which allows them to exercise force over competition rather than to compete with competition. Competition is the back pressure on "greedflation" which is a name that implies greed (which is good in capitalism) is the root cause of increasing prices rather than lack of competition (regulatory capture/citizens united). It boils down to consumer/labor power. Labor power represents the ability to make companies compete through regulation or to put the profit these companies reap into labors pockets instead of owners pockets, which is not just a shift of economic power, but of political power. Wages have nothing to do with your labor and everything to do with your market power. Companies collude behind the scene to suppress wages: https://news.ycombinator.com/item?id=29834753 https://news.ycombinator.com/item?id=29834753 There are companies that sell "market data" which tells companies how much labor should cost. Unions are the answer to oligopolies and oligarchy. Unions are what you can do, not what somebody else needs to do, or what the government needs to do. Unions are a vehicle of force. Unions are like the 2nd amendment. You can use both to fight tyranny, and in the process put yourself at risk. Trying to make the powerful less powerful requires risk because the powerful will use their power to keep their power. These oligopolists (https://en.wikipedia.org/wiki/Oligopoly https://en.wikipedia.org/wiki/Oligopoly) are exercising tacit "collective bargaining" but people who earn money in proportion to time seem unable to do their own collective bargaining. Until there is back pressure on corruption, which requires exercises of power against the corrupt, we can expect things to get worse and worse and those with power to be able to leverage the rules of society to grant themselves more power.

abeppu 3y ago

Just because firms don't prefer to think about pricing in terms of cost-plus doesn't mean that their actual costs are "irrelevant". If people feel that a company is pricing their goods unfairly, shouldn't they move their spending elsewhere? If companies with healthy and growing margins fire people with memos citing challenging economic headwinds, shouldn't people call BS? If companies raising their prices dramatically for the same goods, and perhaps for products which were developed decades ago and simultaneously lobby against regulations which they say risk stifling "innovation", shouldn't people tell their representatives exactly why those corporations are not credible? The idea that discussing widening margins is "irrelevant" because companies adjust prices based on consumers' price sensitivity seems exactly backwards to me: the fact that profits are so high indicates that consumers have been overly-credulous and ought to be more price sensitive. And zooming out, the accelerated transfer of wealth from consumers to shareholders happens because we consumers collectively allow it. Reporting which highlights the rising profits relative to other factors can be part of what enables a course-correction.

soco 3y ago
You can only be price sensitive when you have a real choice. And I'm talking oligopoly here, impossible to shake in just two years since covid hit with the extra pressure.
sznio 3y ago
>the fact that profits are so high indicates that consumers have been overly-credulous and ought to be more price sensitive. How do I become more price sensitive to food prices? I already had to start eating less and worse.

alexpotato 3y ago

Going to add a slightly devil's advocate view here. I used to be the conference directory for a college club sport (specifically, paintball). Part of my job was to find paintball fields to host college events. It's important at to say that the organization that funded these events was 501(c)(3) aka "non-profit" and we therefore were trying to minimize costs. Something we ran into was this scenario: - Fields knew we were college focused and a non-profit - They would generally, out of the goodness of their hearts, charge us at cost or even below cost for our events - This would sometimes mean turning away hosting events or players with better margin. You could argue that the fields received great free advertising by hosting events so it wasn't a net loss for them. - That being said, we sometimes saw events coming back the next year saying "it wasn't worth it to host your event" - This was a problem given that there were only limited fields AND I had a full time job at the time so, ideally, we would use the same field every year - I would therefore add 10% to whatever cost the fields proposed to us as a "tip"/"return fee" to make sure they were happy Now, you could argue that my job was to make sure that we always received the lowest possible price given our constraints on field safety, size and location. I would argue that was ignoring the long term cost to the organization (and my time) to having to keep finding fields that would host us if we tried to minimize cost. I mention this b/c companies maxing out profit to whatever the customer can bear feels like an excellent short term strategy. If by doing so, they drive customers into debt and then bankruptcy etc, this seems like a net loss to everyone on the longer timescale. To finalize and maybe clarify: these discussion always seem to end up in a "well, companies maximize profits!" while ignoring the negative long term implications of that strategy.

wnc3141 3y ago
In labor economics, they refer to that slightly higher price (compared to the minimum clearing price) as an "efficiency wage" - it describes the same thing you describe above. Only note that this is a profit maximizing behavior - as companies pay out efficiency wages to avoid turnover costs or an unproductive workforce. https://en.wikipedia.org/wiki/Efficiency_wage https://en.wikipedia.org/wiki/Efficiency_wage https://www.investopedia.com/efficiency-wages-5206757#:~:text=In%20labor%20economics%2C%20efficiency%20wages,skilled%20workers%20do%20not%20quit https://www.investopedia.com/efficiency-wages-5206757#:~:tex....

smcleod 3y ago

If we accept this and are told the right thing to do is to spend less - then all that’s happening is the victim is being blamed and the burden of regulation is put on those most at risk. It’s like companies shifting the burden of their plastic waste onto consumers by telling them to recycle rather than providing a better, less polluting product.

yieldcrv 3y ago

corporate profits from higher prices wouldn't be profits if less people paid for them that’s true for essential goods as well, something would have happened to those people that couldn't pay but they do have money and can still pay that’s the other half of inflation

z3t4 3y ago

A huge problem are the cartels that are usually 2-3 companies that has almost all the market share. They increase the prices, which reduce demand, then they tell the producers to lower the production in order to keep the prices artificially high. If we want to keep the capitalist system governments need to address corruption, monopolies and cartels, and allow free trade between countries. Anything that hinders competition should be illegal. If you own a platform or network you must allow competitors to operate for a reasonable cost. Any mergers that would allow one player to grow beyond 5% market share should not be allowed. (in order to make sure that in any market there are at least 20 competitors). Anything that is anti-competitive should not be allowed. Only way to compete should be to make either a better, or a cheaper product. Our governments are a joke, they are charades and full of corruption.

everforward 3y ago
> Only way to compete should be to make either a better, or a cheaper product. I think this is a core part of the anti-competitive problem, though. Economies of scale mean that a company with a 50% market share is going to make the cheaper good, all else equal. We would effectively need to increase competition at the cost of increasing efficiency to make that work (e.g. by banning mergers of larger players).

ricardobeat 3y ago

> This is what has happened to car sales: the manufacturer didnt capture the difference, so the dealership captured it instead Only works because dealerships have a monopoly over local sales (i.e. not a free market). Otherwise everyone would be buying their car online without the markup.

berniedurfee 3y ago

“Some of these companies will go out of business.” Many of those companies will be producing superior products, niche products vital for a small market or are simply more focused on delivering value rather than leeching profit. The surviving companies in a rough market turn never seem to be the ‘best’ companies.

shermanyo 3y ago

> this permits companies to increase prices, and produce higher profits. Note, their upstream providers are doing the same, and some of these higher profits will be passed on upstream. No, upstream price increases are included as a part of their increased expenses. Any increase in profits is on top of this.

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foo-bar-bat 3y ago

Car sales in the US is not a useable example for any microeconomics discussion, let alone (notionally) generalized principles. Car dealers are one of a handful of infustries with an explicit exemption from federal antitrust law prohibiting price fixing and collusive monopolies. So, they made those, decades ago. And abuse them constantly. The way you can tell this is true is price any car or truck in the US for sale from dealer X. Then attempt to shop around for a better price from set of dealers Y-Z. You will find that within a convenient-to-you radius the same regional dealership operating co owns all of the dealerships for your preferred make/model. Then if you expand your search radius you will find that opco is owed by a larger holdco, which "oversees" supply and demand so your price. Not a free market. And not the manufacturers' doing, or their input suppliers, or inflation. It's a gov policy choice as abused by nearly a century of lobbying which some might call bribes. As I recall the other US industries with explicit antitrust exemptions are Major League Baseball... and domestic shipbuilding vis-a-vis domestic maritime commerce. This is famously why the Love Boat *had* to go to Mexico, because it was (presumably) foreign flagged and couldn't move between US poets without calling at a foreign port.