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Comment by lkrubner | Hacker News Reader

When there is a supply-side shock, it can be paid by corporations or by consumers. Who it is paid by depends on how much competition there is. When there is a lot of competition, then corporations have to pay. When there is little competition, then the corporations can easily pass the price hike along to the consumers. So high profits and high inflation suggests an economy dominated by monopolies, that is, a lot of companies that are not facing much competition. That needs to be addressed.

The 1970s saw high inflation and low profits, suggesting that corporations were facing enough competition that they absorbed as much of the price shock as they could before they passed price hikes to the consumer.

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>So high profits and high inflation suggests an economy dominated by monopolies

Low unemployment points is a tight labor market, meaning there is also competition to get workers.

And the economy is hardly dominated by monopolies. Take a moment to tally where all of your money is spent, and see how many of those companies are anywhere near a monopoly. The vast majority of people's expenses is spent in competitive markets: housing, food, energy (no company is a monopoly in any of those markets - largest housing company has < 10% of market share, largest bank has < 20% of market, largest energy company has < 30% of market share).

Competition has decreased throughout the economy. There are several ways to measure this. New firm creation in the USA has been in steady decline since the 1970s, and the explosion of software startups has not been enough to offset the rapid disappearance of industrial startups. Or, to take another measure, in 1999 there were 8,000 companies listed on USA stock markets, but now there are only 3,400 companies. Consolidation has moved at a rapid pace.

Here is another take on the subject:

https://www.irishtimes.com/business/economy/paul-krugman-mon...

First you claim

>So high profits and high inflation suggests an economy dominated by monopolies,

then pivot to

>Competition has decreased throughout the economy.

Competition decreasing is a far cry proving "an economy dominated by monopolies," which is simply not true.

>Or, to take another measure, in 1999 there were 8,000 companies listed on USA stock markets, but now there are only 3,400 companies

That says more about stock markets than number of companies. Fortunately the Census Bureau tracks relevant facts (and there are more at the BLS), and their data puts literally millions more businesses in 2019 [1] (the last year they have data) than in 1999 [2].

And nothing in their data supports "suggests an economy dominated by monopolies".

Care to explain how you measure dominated? As is most of consumer money is spent there? As in the majority of businesses? As in what?

[1] https://www.census.gov/data/datasets/2019/econ/susb/2019-sus...

[2] https://www.census.gov/data/datasets/1999/econ/susb/1999-sus...

High profits and high inflation suggests an economy dominated by monopolies. You won’t get the combination of high profits and high inflation in eras when competition is running hot.

>High profits and high inflation suggests an economy dominated by monopolies

High inflation means values are simply bigger, with no other changes needed, so increased profits are exactly expected in high inflation (along with high revenues, high prices, high costs, high spending, .... that is the definition of inflation).

So your claim that larger numbers "suggests an economy dominated by monopolies" is demonstrably not true. It can merely be inflation with zero other changes.

I really don't see any way for the impact of a supply-side shock not to be passed on to consumers. After all, it inherently restricts the production of goods and services for them to consume, and that directly leads to consumers being worse off in real terms as the amount they can buy with their income drops. Not sure why this would be different from the 1970s, though it's likely more of the profits are ending up in Western economies rather than the Middle East this time around due to increased oil and gas production there and the supply side shock being a bit broader and more distributed throughout the economy.

"I really don't see any way for the impact of a supply-side shock not to be passed on to consumers."

Assume a company has gross margins of 100%, then they face a price surge in supplies, a price surge of 50%. If they are facing enough competition, they will pay the full cost of the price surge, lowering their gross margins to 50%. None of the price hike will be passed to the consumer.

This is economics 101, if the subject really interests you, there is plenty on the Internet that you can read on this subject.

It’s Econ 101, but you’re also doing the equivalent of a physics problem ignoring friction. Things are never quite that simple.

Here’s an example that I have from a good source: Early on in the pandemic grocery stores started charging more for one food company’s products. This is a major, national brand. They hadn’t raised prices and the stuff they make wasn’t the kind of thing that flew off shelves like bread and tortillas did back then.

For many months this continued until the company said “screw it” and raised their own prices to match.

Clearly the competition between grocery stores didn’t have an effect. While the food producing company might have worried about the higher prices leading to less sales they couldn’t really do anything about it and decided they might as well take the profits instead.

>Assume a company has gross margins of 100%,

First, gross margin is not net profit, which more accurately represents what a company could possibly absorb. Second, no industry has even gross margins near 100%; more accurate is around ~35% [1] .

Assume a company has actual net profits of 5% (more in line with actual net profits), and cost of goods (or labor) goes up 10-20% (and same for all their competitors, since all are sourcing goods in the same markets).

Then they pass cost on to consumers or go out of business.

This is a more accurate model using real world numbers from the current economy.

[1] https://cfohub.com/what-is-a-good-gross-profit-margin/

It would be a percentage thing. If I am the only competitor in the market, I can pass costs on to my consumers 100% because they can't really go anywhere else. I can also sneak in additional markup because prices are rising in other markets, labor costs, etc., so they probably won't notice. I've dominated the market, so opportunities to grow are more challenging (growing the market rather than taking market share). This provides an easier opportunity. End result is that my profit might increase.

If I have more competition, I might trade off taking some of the hit from my increased costs while still passing some on to the consumer to offer a lower overall price than my competition and potentially increase my market share, which ideally still leads to greater profits due to increased sales.

If you could pass the cost onto your customer 100%, then you would already have raised your prices, to collect even more profit. What actually happens is fuzzier... you increase your prices some, you lose some margin, customer purchases drop some, and everybody is generally worse off.

Except your supplier.

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