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Counterpoint: during COVID, supply costs of all types -- labor, transportation, raw materials -- were far less predictable than ever before. Therefore, a "risk
by listenallyall 3y ago
Counterpoint: during COVID, supply costs of all types -- labor, transportation, raw materials -- were far less predictable than ever before. Therefore, a "risk premium" was embedded into prices.
You're the CEO -- for the past 5 years, costs rose steadily 2-4% annually, and you raised prices 3% each year. Now Covid hits, everything is in chaos, you expect costs to rise somewhere between 5 and 15%. Of course, there is also the possibility that you won't be able to access one specific ingredient at all, or that one element will spike in price. Now -- as CEO, how much do you raise prices? Just the average between 5 and 15, or do you err on the side of safety and raise prices 15%, or even more?
- xcv123 3y agoPerfect excuse to raise prices and make more profit than necessary, disguised as a "risk premium". Regulators would need to audit this.
- listenallyall 3y agoa) what profit is "necessary"? a business's goal is to maximize profit. b) risk premiums exist in every form of economics. it's why, typically, stocks return more than bonds over time, for example. Why would regulators be interested in auditing companies for acting rationally?
- xcv123 3y agoNecessary to cover increased costs and manage actual risk. Where there is a lack of competition or opportunity for collusion companies can and do exploit the situation rationally. Just because it is rational doesn't make it legal or ethical.
- listenallyall 3y agoA minute ago you dismissed the concept of a risk premium and claimed regulators needed to step in. Now it's ok for businesses to manage actual risk?
- xcv123 3y agoWhy is this so difficult for you to understand? This is not complicated. I am not dismissing the concept of a risk premium. I am saying they can exploit the concept of a risk premium to justify an excessive increase in prices, beyond what is reasonable. Companies can collude to set higher prices and blame inflation. Antitrust laws and regulations exist for a reason. Companies have been cheating since the beginning of the history of companies.
- listenallyall 3y ago> I am not dismissing the concept of a risk premium You wrote: disguised as a "risk premium" Saying something is just a disguise for something else and, for additional emphasis, putting air quotes around it is an unmistakable dismissal of the concept. Hard to imagine how you could have been more clear.
- xcv123 3y agoSo there is a risk premium, and then there is a "risk premium". Neither is a dismissal of the concept itself. It's about the intentions of the companies.