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Supply constraints typically lead to higher prices and higher margins. The fact that the margins have gone up does not somehow imply that the higher prices are

by NickM 3y ago

Supply constraints typically lead to higher prices and higher margins. The fact that the margins have gone up does not somehow imply that the higher prices are something other than inflation.

eddtests 3y ago
Why does it cause such higher margins?
- psychoslave 3y ago
  Because the middle man typically see there an opportunity to extort more money?
- Miraste 3y ago
  The rather soulless economics answer is that the companies want to make the same profit as before the inflation, so they need higher margins on individual sales to make up for the reduction in volume. Since demand doesn't drop, this is a feasible strategy.
  - vkou 3y ago
    That answer doesn't make sense, because surely, companies want to increase their profits regardless of whether inflation is happening or not. The real answer is that when inflation is happening, it provides an easy excuse for raising prices far beyond the cost of your inputs. Everyone expects prices to go up, so they don't balk at yours going up faster than inflation.
    - Miraste 3y ago
      The idea is that the company normally prices their products at the intersection of supply and demand, where there is maximum profit. When supply is artificially constrained, they raise prices to the corresponding spot on the curve. This is not as profitable as before, but it's the new local maximum. It's one of those simple macro-econ models that sound good, but never play out in real life because humans aren't calculators. The reality is a mix of both, probably more of your explanation.
- WalterBright 3y ago
  It takes a while for the river of money helicoptered into the economy to spread its inflation out evenly.
  - eru 3y ago
    That theory only works if people are morons who can't anticipate long expected (price) developments.
- Retric 3y ago
  Supply drops mean price increases. Goods have multiple inputs but don’t see equal increases across the board. Ie rent isn’t going up in a grain shortage. Critically higher profit margins doesn’t necessarily translate to higher profits because you’re selling fewer goods.
- gwbas1c 3y ago
  Because a lot of companies are using "inflation" as an excuse to raise prices. Remember, prices generally are a function of the cost the market will bear. If the general public will pay more for something, why not rise the price? If everyone is rising their prices at the same time, you have less pressure to compete on prices.
- bluesign 3y ago
  Imagine you buy for X, and sell to some supermarket for Y, and they pay you in T time. Optimum Y is not related to X, but the price when you replace the stock. ( let's say X2 ) When supply has problems, or economy is unpredictable, it is harder to predict X2, so usually your estimation is a bit off. So you have to have bigger margin to cover for this estimation error. ( assume the worst )
  - throwaway019254 3y ago
    So they increase margin to cover for uncertainty and incorrect estimations. And in case the original estimations were right, the higher profit is just unintended consequence.
    - AstralStorm 3y ago
      Since it's not market optimal, after they note the extra profit, why don't they lower the prices or hire more workforce or expand? Or at least share the windfall with employees indirectly boosting the economy total, including their own position? (Yes, equilibrium economics is a joke even when law of big numbers is involved.)
- deleted 3y ago
  [deleted]
vasco 3y ago
Temporarily and in a localized way, yes. For example, if there's a natural disaster, and the people in power aren't dumb, they'll let prices float instead of putting caps in place, and everyone will be incentivised to rent big trucks full of water bottles and sell it for 20-50x the normal price. For the affected people it makes sense because now they can drink water, and if the prices were controlled nobody would make the drive. Eventually enough people do the drive or the disaster passes and prices normalize. At the moment it's hard to explain what is happening but it might be more complex than just "nothing to see here". I've come to realize that reality is more nuanced than Milton Friedman made it out to be (and he did too later in life).
- true_religion 3y ago
  I guess all people in power must be dumb because every county has laws against grifting necessary essentials in a natural disaster. It’s possible your point does apply to normal price shifts when supply for something like electronics becomes constrained but right now your example detracts from understanding that.
  - lobocinza 3y ago
    > I guess all people in power must be dumb Some are smart psycopaths. The issue isn't dumb in power but dumb people voting. People get outraged by price gouging so populists create laws against it. Even though those laws don't make economic sense they make political sense. Most of the time IMO state agents will just ignore price gouging because they know it is a necessary evil but if the need arises they can always intervene in prices, say they are doing something and save face. But this destroys the economy if done often. It's not black and white.
    - true_religion 3y ago
      I think it makes more economic sense for the government to directly subsidize necessities by shipping them in and controlling the price or giving them away for free. This is what FEMA does in the US. What does not make sense is a world where people have to buy disaster issuance just to make sure they can afford water when a hurricane strikes.
tommiegannert 3y ago
From my perspective, you're saying the same thing as the parent: both prices and margins have gone up. Then you're stating the definition of inflation. Parent's comment was (implicitly) about 50% of this inflation being avoidable and thus surprising, because margins didn't necessarily have to go up to keep business going. It was just a seized opportunity. If you can show that margins unavoidably always go up during inflation because of some fundamental mechanism, then that would be a refutal of the parent argument.
- deleted 3y ago
  [deleted]
- marcosdumay 3y ago
  Margins almost always increase anyway. I'm not sure anybody fully understands the mechanism (for the most studied phenomenon of economics, inflation is quite badly understood), but that doesn't change the fact. Anyway, if you run the Keynes model for macroeconomics, the average margin increases very naturally when the money supply increases. It increases even more if the new money is injected in the economy by well distributed government spending. Still, that's one model we have that kinda works, but it's so full of problems that you can't take its predictions for granted.
jahewson 3y ago
From the original article: > consumer goods companies are not cooperating in efforts to cut the price of thousands of staples despite a fall in the cost of raw materials.

by NickM 3y ago

Supply constraints typically lead to higher prices and higher margins. The fact that the margins have gone up does not somehow imply that the higher prices are something other than inflation.

eddtests 3y ago

Why does it cause such higher margins?

psychoslave 3y ago
Because the middle man typically see there an opportunity to extort more money?
Miraste 3y ago
The rather soulless economics answer is that the companies want to make the same profit as before the inflation, so they need higher margins on individual sales to make up for the reduction in volume. Since demand doesn't drop, this is a feasible strategy.
- vkou 3y ago
  That answer doesn't make sense, because surely, companies want to increase their profits regardless of whether inflation is happening or not. The real answer is that when inflation is happening, it provides an easy excuse for raising prices far beyond the cost of your inputs. Everyone expects prices to go up, so they don't balk at yours going up faster than inflation.
  - Miraste 3y ago
    The idea is that the company normally prices their products at the intersection of supply and demand, where there is maximum profit. When supply is artificially constrained, they raise prices to the corresponding spot on the curve. This is not as profitable as before, but it's the new local maximum. It's one of those simple macro-econ models that sound good, but never play out in real life because humans aren't calculators. The reality is a mix of both, probably more of your explanation.
WalterBright 3y ago
It takes a while for the river of money helicoptered into the economy to spread its inflation out evenly.
- eru 3y ago
  That theory only works if people are morons who can't anticipate long expected (price) developments.
Retric 3y ago
Supply drops mean price increases. Goods have multiple inputs but don’t see equal increases across the board. Ie rent isn’t going up in a grain shortage. Critically higher profit margins doesn’t necessarily translate to higher profits because you’re selling fewer goods.
gwbas1c 3y ago
Because a lot of companies are using "inflation" as an excuse to raise prices. Remember, prices generally are a function of the cost the market will bear. If the general public will pay more for something, why not rise the price? If everyone is rising their prices at the same time, you have less pressure to compete on prices.
bluesign 3y ago
Imagine you buy for X, and sell to some supermarket for Y, and they pay you in T time. Optimum Y is not related to X, but the price when you replace the stock. ( let's say X2 ) When supply has problems, or economy is unpredictable, it is harder to predict X2, so usually your estimation is a bit off. So you have to have bigger margin to cover for this estimation error. ( assume the worst )
- throwaway019254 3y ago
  So they increase margin to cover for uncertainty and incorrect estimations. And in case the original estimations were right, the higher profit is just unintended consequence.
  - AstralStorm 3y ago
    Since it's not market optimal, after they note the extra profit, why don't they lower the prices or hire more workforce or expand? Or at least share the windfall with employees indirectly boosting the economy total, including their own position? (Yes, equilibrium economics is a joke even when law of big numbers is involved.)
deleted 3y ago
[deleted]

vasco 3y ago

Temporarily and in a localized way, yes. For example, if there's a natural disaster, and the people in power aren't dumb, they'll let prices float instead of putting caps in place, and everyone will be incentivised to rent big trucks full of water bottles and sell it for 20-50x the normal price. For the affected people it makes sense because now they can drink water, and if the prices were controlled nobody would make the drive. Eventually enough people do the drive or the disaster passes and prices normalize. At the moment it's hard to explain what is happening but it might be more complex than just "nothing to see here". I've come to realize that reality is more nuanced than Milton Friedman made it out to be (and he did too later in life).

true_religion 3y ago
I guess all people in power must be dumb because every county has laws against grifting necessary essentials in a natural disaster. It’s possible your point does apply to normal price shifts when supply for something like electronics becomes constrained but right now your example detracts from understanding that.
- lobocinza 3y ago
  > I guess all people in power must be dumb Some are smart psycopaths. The issue isn't dumb in power but dumb people voting. People get outraged by price gouging so populists create laws against it. Even though those laws don't make economic sense they make political sense. Most of the time IMO state agents will just ignore price gouging because they know it is a necessary evil but if the need arises they can always intervene in prices, say they are doing something and save face. But this destroys the economy if done often. It's not black and white.
  - true_religion 3y ago
    I think it makes more economic sense for the government to directly subsidize necessities by shipping them in and controlling the price or giving them away for free. This is what FEMA does in the US. What does not make sense is a world where people have to buy disaster issuance just to make sure they can afford water when a hurricane strikes.

tommiegannert 3y ago

From my perspective, you're saying the same thing as the parent: both prices and margins have gone up. Then you're stating the definition of inflation. Parent's comment was (implicitly) about 50% of this inflation being avoidable and thus surprising, because margins didn't necessarily have to go up to keep business going. It was just a seized opportunity. If you can show that margins unavoidably always go up during inflation because of some fundamental mechanism, then that would be a refutal of the parent argument.

deleted 3y ago
[deleted]
marcosdumay 3y ago
Margins almost always increase anyway. I'm not sure anybody fully understands the mechanism (for the most studied phenomenon of economics, inflation is quite badly understood), but that doesn't change the fact. Anyway, if you run the Keynes model for macroeconomics, the average margin increases very naturally when the money supply increases. It increases even more if the new money is injected in the economy by well distributed government spending. Still, that's one model we have that kinda works, but it's so full of problems that you can't take its predictions for granted.

jahewson 3y ago

From the original article: > consumer goods companies are not cooperating in efforts to cut the price of thousands of staples despite a fall in the cost of raw materials.