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It's a great question, and the answer is that you're missing the change in demand. Let's say Foot Locker tries to keep the same absolute profit $50 and retails

It's a great question, and the answer is that you're missing the change in demand. Let's say Foot Locker tries to keep the same absolute profit $50 and retails the shoes for $125 instead of the previous $100. Now demand goes down, because more people will skip a new pair of sneakers. So Foot Locker's absolute profit goes down. But they still have the same fixed retail space, advertising, and labor as you said. So to try to keep their profitability, they need to increase the price more, which reduces demand even more, but it settles somewhere higher. And the place it settles (where total absolute profit is maximized) tends to be around the same 100% markup as before. It doesn't need to be exactly the same, but as a general rule of thumb, these things do tend to work in proportional terms rather than absolute terms. And we're fortunate they do, because when manufacturing costs fall, that means absolute profit per unit can fall as well (while percentage remains the same), because it's made up for by more people buying.

rvnx 2y ago
There is also the fact that with each USD you can buy less and less as a private person. So to have the same quality of life, you expect higher returns. Which mean that you will choose to invest into companies that offers a better return, and for that, these companies will have raise their prices, which in turn, spirals into additional price raises.
- crazygringo 2y ago
  That's not the fundamental cause, though. Companies can't just raise prices to achieve whatever return they want, because once you go above the profit-maximizing price, the fall in demand outweighs additional revenue per item, and once you go above competitor's prices, demand similarly falls. Yes investors look for maximal returns, but those are limited. Fundamentally the ceiling is set by demand and by your competitor's prices.

rvnx 2y ago

There is also the fact that with each USD you can buy less and less as a private person. So to have the same quality of life, you expect higher returns. Which mean that you will choose to invest into companies that offers a better return, and for that, these companies will have raise their prices, which in turn, spirals into additional price raises.

crazygringo 2y ago
That's not the fundamental cause, though. Companies can't just raise prices to achieve whatever return they want, because once you go above the profit-maximizing price, the fall in demand outweighs additional revenue per item, and once you go above competitor's prices, demand similarly falls. Yes investors look for maximal returns, but those are limited. Fundamentally the ceiling is set by demand and by your competitor's prices.