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Comment by makomk | Hacker News Reader

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.

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"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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