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Isn’t this reversing cause and effect? Corporations are able to raise prices because consumers are willing to pay higher prices. Corporations always want to mak

Isn’t this reversing cause and effect? Corporations are able to raise prices because consumers are willing to pay higher prices. Corporations always want to make as much profit as they can. If consumers can pay more, you get inflation.

baryphonic 3y ago
The phenomenon you describe has a name, "demand-pull inflation." It even has a Wikipedia page.[0] [0]https://en.m.wikipedia.org/wiki/Demand-pull_inflation https://en.m.wikipedia.org/wiki/Demand-pull_inflation
mitthrowaway2 3y ago
Competition should drive down prices even if consumers have deep pockets. This suggests that the US market has gotten less competitive. I wonder how much it has to do with ownership of competing firms by a few large index funds with concentrated voting power.
- rossriley 3y ago
  Don't forget supply and demand works on the capital side of the equation too, higher inflation means shareholders push for higher profits in the same way that high inflation causes workers to push for higher wages. There's increasing supply of investments at higher rate of return, bond yields are close to 4% which means riskier investments need to pay more to compete.
  - mitthrowaway2 3y ago
    Absolutely. But for competitors to raise margins bilaterally requires cooperation, because each side can take market share by keeping prices low. I just wonder if the cooperation might come in the form of, say, one powerful shareholder of both competitors making calls to the boards of directors of both competing companies. Unexpected consequence of passive investing?
    - doublespanner 3y ago
      Only if the competition thinks the increase in share is worth more than the increase in per unit profit. And depending on the industry, there might not be much more to be gained by scaling up. Going from 45% to 60% of the market might not be more profitable than an extra few percent per unit.
      - lores 3y ago
        That's hitting the nail squarely. If your margin is 5%, going to 10% is far better and far easier than doubling your market share.
        mitthrowaway2 3y ago
        Perhaps, but that's sort of like pointing to the prisoner's dilemma and saying "clearly, the best and easiest option for both prisoners is to both cooperate, thus achieving the best outcomes for both". We usually expect that competitors would try to compete, and going from 5% to 10% market share would result in getting undercut so badly that you lose far more customers than the higher margins are worth. It's not so easy to hand-wave the reasons why that hasn't happened here.
        doublespanner 3y ago
        Well no, there is no real dilemma, because unlike the prisoners you can change your choice at any time. You can do research and make a decent guess at the units sold at a price point of you only make a small increase, and then your competition does the same, and as long as you can all keep pushing the price each small increase is absorbed. This is essentially a mechanism for discovering inflation, it continues step by step until people stop buying.
        mitthrowaway2 3y ago
        The "and then your competition does the same" is precisely what I'm talking about. If their input costs have not gone up, there's no reason they need to do follow in step rather than take your customers away. It doesn't matter whether it happens gradually. Multilateral increase in margins demonstrates a lack of competitiveness between competitors.

baryphonic 3y ago

The phenomenon you describe has a name, "demand-pull inflation." It even has a Wikipedia page.[0] [0]https://en.m.wikipedia.org/wiki/Demand-pull_inflation https://en.m.wikipedia.org/wiki/Demand-pull_inflation

mitthrowaway2 3y ago

Competition should drive down prices even if consumers have deep pockets. This suggests that the US market has gotten less competitive. I wonder how much it has to do with ownership of competing firms by a few large index funds with concentrated voting power.

rossriley 3y ago
Don't forget supply and demand works on the capital side of the equation too, higher inflation means shareholders push for higher profits in the same way that high inflation causes workers to push for higher wages. There's increasing supply of investments at higher rate of return, bond yields are close to 4% which means riskier investments need to pay more to compete.
- mitthrowaway2 3y ago
  Absolutely. But for competitors to raise margins bilaterally requires cooperation, because each side can take market share by keeping prices low. I just wonder if the cooperation might come in the form of, say, one powerful shareholder of both competitors making calls to the boards of directors of both competing companies. Unexpected consequence of passive investing?
  - doublespanner 3y ago
    Only if the competition thinks the increase in share is worth more than the increase in per unit profit. And depending on the industry, there might not be much more to be gained by scaling up. Going from 45% to 60% of the market might not be more profitable than an extra few percent per unit.
    - lores 3y ago
      That's hitting the nail squarely. If your margin is 5%, going to 10% is far better and far easier than doubling your market share.
      - mitthrowaway2 3y ago
        Perhaps, but that's sort of like pointing to the prisoner's dilemma and saying "clearly, the best and easiest option for both prisoners is to both cooperate, thus achieving the best outcomes for both". We usually expect that competitors would try to compete, and going from 5% to 10% market share would result in getting undercut so badly that you lose far more customers than the higher margins are worth. It's not so easy to hand-wave the reasons why that hasn't happened here.
        doublespanner 3y ago
        Well no, there is no real dilemma, because unlike the prisoners you can change your choice at any time. You can do research and make a decent guess at the units sold at a price point of you only make a small increase, and then your competition does the same, and as long as you can all keep pushing the price each small increase is absorbed. This is essentially a mechanism for discovering inflation, it continues step by step until people stop buying.
        mitthrowaway2 3y ago
        The "and then your competition does the same" is precisely what I'm talking about. If their input costs have not gone up, there's no reason they need to do follow in step rather than take your customers away. It doesn't matter whether it happens gradually. Multilateral increase in margins demonstrates a lack of competitiveness between competitors.