New information coming to light in Amazon and meat price-fixing antitrust cases shows inflation is probably being driven by consolidation in the form of data sharing.
Indeed, the sense that as consumers we feel we are being treated unfairly is a powerful emotion that overcomes all of the data that point to a robust and growing economy. Keep up the good work. I love your newsletter.
There is an important distinction here. Monopoly power is not inherently inflationary. The theory is better framed as arguing that monopoly power serves as a dangerous amplifier of monetary conditions--accelerating deflation through input and labor pricing power during economic contractions and then accelerating inflation during times of economic expansion via raising prices. Arguing monopoly power is inherently inflationary is a weaker position than arguing it is a destabilizing force in either cycle. This framing makes intuitive sense, as competition is what brings a free market economy into equilibrium. Monopolies create disequilibrium.
In the way back (late 1990's) I worked at a company that made electron microscopes to measure traces on silicon wafers. Very specialized, complicated and expensive instruments. But must haves to make good chips.
We competed with a Japanese company that played games with pricing and playing chicken with the worlds largest Semiconductor manufacturer at the time (one guess who it was...)
The contract with that company had a "most favorable nation" clause that meant that the Japanese company couldn't sell their instruments to anyone else for less money.
A total bullshit term, because we had tons of evidence where they undercut us (and their pricing at this large Semi mfg company). But there wasn't a damn thing we could do about it.
We brought in a "consultant" to help us with pricing. A quarter of a million dollars later the verdict was in: "Raise prices until people complain (stop ordering) then back off a little"
That was the net-net. I never again revered any consultant.
Your research and writing just proved me correct in an ongoing debate I have with a friend over why prices increase. It's not just demand. I am a small business owner with basic duopoly market share in some cases and we can charge almost anything we want in those instances and there is nothing the customer can do. They need their machine running and making a profit.
I would also like to comment on the Fed and our technocrats that know nothing of how the real world works. Your second paragraph sums up the double speak, double think, hippocratic lunacy that these fools throw at us. In 2021 Jay Powell told everyone that he was going to run the economy hot because poor people were getting left behind and that the Fed was morally obligated to do something about it. They were shooting for 4% inflation and were going to leave it there for awhile. They accomplished 4%, and then some, and now all you here is that poor people are making too much money. Labor over Capitol now and they need to stifle "The Wage Growth Sprial". First of all, inflation destroys the living standards of the poor. They are better off at 0% inflation, and secondly, the only way to stifle wage growth, in a labor short world, is to KILL the economy. It's insane and nobody calls them out on this. Our so called financial reporters huddle up in masses to hear their prophet Jay speak and nobody thinks to ask how everything he has been saying since March of 2022 is 100% contradictory to what he said in March of 2021.
Thanks Matt. Idiot economists like to pretend that markets work perfectly frictionlessly without transaction costs and information asymmetry (it looks nice that way in models!).
Firms recognize times of market power and raise prices accordingly (which is not simply magical supply and demand balance).
it is a well-known fact that, for example, oil/gas price increases that started with the pandemic made profits for not very real reasons, and close to 90% of all the extra profits have gone right into the pockets of the executives and shareholders, which clearly shows the increases were mostly unnecessary, and just a privilege of power that is not well regulated because money has ruled Congressional action since the 1880's and even more so today.
I have an Econ degree but wouldn’t consider myself an economist. One problem with economists is they often neglect to include the imperfect data that each side has in a transaction. Naturally, with monopolies or oligopolies, they are going to have more data than the consumer.
As for another industry that seems to use software to increase prices, I’ve noticed when I price out a plan ticket then go back to purchase it sometimes an hour later, the price has changed if I didn’t search using the privacy feature on my browser. This doesn’t happen when I do use the privacy feature. Wonder why that would happen 🤔
Thank you for having the courage to use the f word. Fairness is what 99% of us want. If we could make the national debate about how to achieve it, right and left might talk again.
Summers and the like still want to think of themselves as scientists. Stop! please. Economists are political sociologists. They throw around some fancy math equations like they are scientists, but they are not. In the old days back before WW II nobody really listened to them, they knew they were full of it.
Matt writes in part: “What’s fascinating is that here again, an economist would look at these markets and see competition and multiple rivals renting out apartments, but they would miss that there’s a cartel, or rather a set of regional cartels coordinated by a software platform, operating to boost prices and margins.”
As an economist I don’t think the profession’s ability to see everything as markets working as they should is dangerous horseshit.
The big boys like Summers & Furman plead theory theory theory. But what they call a theory is so flawed. There’s a huge literature on all of this & economics goes on in its autistic bubble.
Thinking of the mandatory tip screens as fundamentally unfair is an interesting way of framing it. It isn’t fair that the easiest option (pressing a button instead of manually entering a number) starts at 20%, regardless of industry. It isn’t fair to the sellers either. Sure, they’re ultimately benefiting from the set-up, but consumer ire is directed at them, not Square.
There is a difference between ongoing inflation and once for all price level increases. What you are describing is the latter.
For this reason you are never (maybe that is too strong) going to find an economist who does not think inflation is a monetary policy problem. After all, the rate of inflation is also the rate at which the value of money is decreasing. Even cost-push or wage push inflation requires monetary authorities to (whether directly or indirectly) increase the money supply to set the conditions for another round of wage increases. Now this could be happening for the reasons you mention since it is inflation adjusted profits businesses are pursuing. Price fixing is illegal because it harms consumer welfare, but it would have to be the Fed’s response to it that causes the inflation.
Here's something that I don't understand: you write that economists "would miss that there’s a cartel, or rather a set of regional cartels" - is it them willfully refusing to see what is right there? Why do they miss it?
I think the concern is that massive growth in the number of job openings is bad because it’s already outstripping the number of workers looking for jobs, which is going to drive wages up, which is going to drive costs up, which is going to drive prices up; and they are already high. And the concern about profit margins is not somehow bad. That is a key way companies generate the funds to reinvest and expand (i.e. being able to better meet consumer needs - as any expansion in goods, product lines, or quality that doesn’t entice people to spend more at the company evidently is not meeting a need), which generally necessitates hiring more workers, and how they attract outside financing - which includes approximately 50% of the population if I recall, as most people have some skin in the stock market whether in the form of a Robinhood account or a 401k.
greedflation
I think the bits of evidence you brought up are indicative of a search to validate the narrative. We have infinite amounts of information available at our disposal; if you want to find an anecdote to confirm your thesis (which, to be fair, you effectively did with the landlord cartel software) in the information age you certainly can. I certainly don’t think price fixing is good for anyone, but I think the greedflation narrative misses the point that the market price isn’t just arbitrarily set by companies, but rather is the result of supply and demand dynamics. Companies have always had an incentive to ensure they are charging the highest price consumers will stomach. In times of depressed demand that means they have to lower prices and accept lower margins, and in times of higher demand they get higher profit margins. You can’t criticize one half of the equation while spurning the other half; as they are two sides of the same coin. Except for goods with inelastic demand (e.g. goods that people have to buy regardless of price, like water and electricity), people pay what they think a good is worth. If someone thinks a good is too expensive they will either not buy it or buy it from a competitor. And if they are continuing to buy a good in spite of a higher price, they evidently value it at more than the prior price. Naturally, this does not apply to goods with inelastic demand, but your thesis only makes sense if all goods have inelastic demand, which simply is not the case. Moreover, the reason rapid wage growth has adverse impacts, particularly when it is driven by demands to keep up with inflation, is because people have more money to spend, so they are going to be less price sensitive and they will keep paying elevated prices for goods, incentivizing companies to keep raising prices because, again, consumers evidently value them at a higher price.
And to address “tacit” collusion on prices, that has always been the case to some extent - and it is not necessarily a bad thing. If 4 companies are charging the same price for the same product none of them benefits from charging more for it because it will result in consumers simply buying the identical product for less (why would I pay more for a product I can easily pay less for?). That is basic game theory.
It also seems incredibly tenuous to coalim that firms all offering the option to tip is the result of coordinating prices. In theory it may be true to an extent but it seems over the top, like a forced narrative, and contrived. From a small business owner’s perspective if people are going to pay tips when offered the ability to do so, why would you not do that? And if there is an avenue for you to spend less on labor costs while your workers earn more than they would if earning a flat hourly base rate, why would you not do that?
And concerning your point about why people think inflation is up despite this not being the case, policymakers are looking at inflation on a year over year basis. They are looking at this year’s prices in terms of last year’s prices. But consumers are looking at it in comparison to pre-covid levels. Prices can be really high and also down on a year to year basis. You also ignore that the tips people pay are optional (except, in practice, of course at places where it is expected like restaurants). It is simply not true that people are just boxed in to paying higher prices because of tips. They can just choose not to. Your assessment of pricing dynamics looks exclusively at the role of firms and entirely ignores the role and agency of the consumers, the people actually deciding whethe they will pay a given price. These pricing dynamics, and specifically that firms have an incentive to maximize profits have always existed. The reason people feel that they are getting screwed over is in part because of the low barriers to entry into the ideas economy that has resulted in an influx of specious narratives that lack any technocratic (i.e. informed and dispassionate) grounding.
These strike me as attacks on the principals that underpin the free market (e.g. businesses being profit maximizing entities that price according to what people will pay). The rising prominence in this sort of thinking has increasingly caused me to speculate that perhaps many of the great empires throughout history failed because they grew complacent and assumed that they had outgrown the engine that produced their success and that they did not have to keep working for it. This belief that they/we had become post-human somehow and had generated an immunity to the fundamental dynamics of existence where suffering and strife are the rule and not the exception. There are certainly detractors to the free market but a world without it is a dismal and primative one. You cannot just carve out all of the good things about life and seek to banish everything else. There are complex interdependencies between things and the bad is often crucial to the structural integrity of the good.
Indeed, the sense that as consumers we feel we are being treated unfairly is a powerful emotion that overcomes all of the data that point to a robust and growing economy. Keep up the good work. I love your newsletter.
There is an important distinction here. Monopoly power is not inherently inflationary. The theory is better framed as arguing that monopoly power serves as a dangerous amplifier of monetary conditions--accelerating deflation through input and labor pricing power during economic contractions and then accelerating inflation during times of economic expansion via raising prices. Arguing monopoly power is inherently inflationary is a weaker position than arguing it is a destabilizing force in either cycle. This framing makes intuitive sense, as competition is what brings a free market economy into equilibrium. Monopolies create disequilibrium.
The part on Agri, and their *consulting*...
In the way back (late 1990's) I worked at a company that made electron microscopes to measure traces on silicon wafers. Very specialized, complicated and expensive instruments. But must haves to make good chips.
We competed with a Japanese company that played games with pricing and playing chicken with the worlds largest Semiconductor manufacturer at the time (one guess who it was...)
The contract with that company had a "most favorable nation" clause that meant that the Japanese company couldn't sell their instruments to anyone else for less money.
A total bullshit term, because we had tons of evidence where they undercut us (and their pricing at this large Semi mfg company). But there wasn't a damn thing we could do about it.
We brought in a "consultant" to help us with pricing. A quarter of a million dollars later the verdict was in: "Raise prices until people complain (stop ordering) then back off a little"
That was the net-net. I never again revered any consultant.
Great post Matt!
Your research and writing just proved me correct in an ongoing debate I have with a friend over why prices increase. It's not just demand. I am a small business owner with basic duopoly market share in some cases and we can charge almost anything we want in those instances and there is nothing the customer can do. They need their machine running and making a profit.
I would also like to comment on the Fed and our technocrats that know nothing of how the real world works. Your second paragraph sums up the double speak, double think, hippocratic lunacy that these fools throw at us. In 2021 Jay Powell told everyone that he was going to run the economy hot because poor people were getting left behind and that the Fed was morally obligated to do something about it. They were shooting for 4% inflation and were going to leave it there for awhile. They accomplished 4%, and then some, and now all you here is that poor people are making too much money. Labor over Capitol now and they need to stifle "The Wage Growth Sprial". First of all, inflation destroys the living standards of the poor. They are better off at 0% inflation, and secondly, the only way to stifle wage growth, in a labor short world, is to KILL the economy. It's insane and nobody calls them out on this. Our so called financial reporters huddle up in masses to hear their prophet Jay speak and nobody thinks to ask how everything he has been saying since March of 2022 is 100% contradictory to what he said in March of 2021.
Thanks Matt. Idiot economists like to pretend that markets work perfectly frictionlessly without transaction costs and information asymmetry (it looks nice that way in models!).
Firms recognize times of market power and raise prices accordingly (which is not simply magical supply and demand balance).
it is a well-known fact that, for example, oil/gas price increases that started with the pandemic made profits for not very real reasons, and close to 90% of all the extra profits have gone right into the pockets of the executives and shareholders, which clearly shows the increases were mostly unnecessary, and just a privilege of power that is not well regulated because money has ruled Congressional action since the 1880's and even more so today.
I have an Econ degree but wouldn’t consider myself an economist. One problem with economists is they often neglect to include the imperfect data that each side has in a transaction. Naturally, with monopolies or oligopolies, they are going to have more data than the consumer.
As for another industry that seems to use software to increase prices, I’ve noticed when I price out a plan ticket then go back to purchase it sometimes an hour later, the price has changed if I didn’t search using the privacy feature on my browser. This doesn’t happen when I do use the privacy feature. Wonder why that would happen 🤔
Thank you for having the courage to use the f word. Fairness is what 99% of us want. If we could make the national debate about how to achieve it, right and left might talk again.
Summers and the like still want to think of themselves as scientists. Stop! please. Economists are political sociologists. They throw around some fancy math equations like they are scientists, but they are not. In the old days back before WW II nobody really listened to them, they knew they were full of it.
Matt writes in part: “What’s fascinating is that here again, an economist would look at these markets and see competition and multiple rivals renting out apartments, but they would miss that there’s a cartel, or rather a set of regional cartels coordinated by a software platform, operating to boost prices and margins.”
As an economist I don’t think the profession’s ability to see everything as markets working as they should is dangerous horseshit.
The big boys like Summers & Furman plead theory theory theory. But what they call a theory is so flawed. There’s a huge literature on all of this & economics goes on in its autistic bubble.
Thinking of the mandatory tip screens as fundamentally unfair is an interesting way of framing it. It isn’t fair that the easiest option (pressing a button instead of manually entering a number) starts at 20%, regardless of industry. It isn’t fair to the sellers either. Sure, they’re ultimately benefiting from the set-up, but consumer ire is directed at them, not Square.
There is a difference between ongoing inflation and once for all price level increases. What you are describing is the latter.
For this reason you are never (maybe that is too strong) going to find an economist who does not think inflation is a monetary policy problem. After all, the rate of inflation is also the rate at which the value of money is decreasing. Even cost-push or wage push inflation requires monetary authorities to (whether directly or indirectly) increase the money supply to set the conditions for another round of wage increases. Now this could be happening for the reasons you mention since it is inflation adjusted profits businesses are pursuing. Price fixing is illegal because it harms consumer welfare, but it would have to be the Fed’s response to it that causes the inflation.
Here's something that I don't understand: you write that economists "would miss that there’s a cartel, or rather a set of regional cartels" - is it them willfully refusing to see what is right there? Why do they miss it?
This is really fantastic work Matt. I am so glad you are on this beat.
I think the concern is that massive growth in the number of job openings is bad because it’s already outstripping the number of workers looking for jobs, which is going to drive wages up, which is going to drive costs up, which is going to drive prices up; and they are already high. And the concern about profit margins is not somehow bad. That is a key way companies generate the funds to reinvest and expand (i.e. being able to better meet consumer needs - as any expansion in goods, product lines, or quality that doesn’t entice people to spend more at the company evidently is not meeting a need), which generally necessitates hiring more workers, and how they attract outside financing - which includes approximately 50% of the population if I recall, as most people have some skin in the stock market whether in the form of a Robinhood account or a 401k.
greedflation
I think the bits of evidence you brought up are indicative of a search to validate the narrative. We have infinite amounts of information available at our disposal; if you want to find an anecdote to confirm your thesis (which, to be fair, you effectively did with the landlord cartel software) in the information age you certainly can. I certainly don’t think price fixing is good for anyone, but I think the greedflation narrative misses the point that the market price isn’t just arbitrarily set by companies, but rather is the result of supply and demand dynamics. Companies have always had an incentive to ensure they are charging the highest price consumers will stomach. In times of depressed demand that means they have to lower prices and accept lower margins, and in times of higher demand they get higher profit margins. You can’t criticize one half of the equation while spurning the other half; as they are two sides of the same coin. Except for goods with inelastic demand (e.g. goods that people have to buy regardless of price, like water and electricity), people pay what they think a good is worth. If someone thinks a good is too expensive they will either not buy it or buy it from a competitor. And if they are continuing to buy a good in spite of a higher price, they evidently value it at more than the prior price. Naturally, this does not apply to goods with inelastic demand, but your thesis only makes sense if all goods have inelastic demand, which simply is not the case. Moreover, the reason rapid wage growth has adverse impacts, particularly when it is driven by demands to keep up with inflation, is because people have more money to spend, so they are going to be less price sensitive and they will keep paying elevated prices for goods, incentivizing companies to keep raising prices because, again, consumers evidently value them at a higher price.
And to address “tacit” collusion on prices, that has always been the case to some extent - and it is not necessarily a bad thing. If 4 companies are charging the same price for the same product none of them benefits from charging more for it because it will result in consumers simply buying the identical product for less (why would I pay more for a product I can easily pay less for?). That is basic game theory.
It also seems incredibly tenuous to coalim that firms all offering the option to tip is the result of coordinating prices. In theory it may be true to an extent but it seems over the top, like a forced narrative, and contrived. From a small business owner’s perspective if people are going to pay tips when offered the ability to do so, why would you not do that? And if there is an avenue for you to spend less on labor costs while your workers earn more than they would if earning a flat hourly base rate, why would you not do that?
And concerning your point about why people think inflation is up despite this not being the case, policymakers are looking at inflation on a year over year basis. They are looking at this year’s prices in terms of last year’s prices. But consumers are looking at it in comparison to pre-covid levels. Prices can be really high and also down on a year to year basis. You also ignore that the tips people pay are optional (except, in practice, of course at places where it is expected like restaurants). It is simply not true that people are just boxed in to paying higher prices because of tips. They can just choose not to. Your assessment of pricing dynamics looks exclusively at the role of firms and entirely ignores the role and agency of the consumers, the people actually deciding whethe they will pay a given price. These pricing dynamics, and specifically that firms have an incentive to maximize profits have always existed. The reason people feel that they are getting screwed over is in part because of the low barriers to entry into the ideas economy that has resulted in an influx of specious narratives that lack any technocratic (i.e. informed and dispassionate) grounding.
These strike me as attacks on the principals that underpin the free market (e.g. businesses being profit maximizing entities that price according to what people will pay). The rising prominence in this sort of thinking has increasingly caused me to speculate that perhaps many of the great empires throughout history failed because they grew complacent and assumed that they had outgrown the engine that produced their success and that they did not have to keep working for it. This belief that they/we had become post-human somehow and had generated an immunity to the fundamental dynamics of existence where suffering and strife are the rule and not the exception. There are certainly detractors to the free market but a world without it is a dismal and primative one. You cannot just carve out all of the good things about life and seek to banish everything else. There are complex interdependencies between things and the bad is often crucial to the structural integrity of the good.