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Comment by lkrubner | 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."

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.

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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/

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