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Comment by fxtentacle | Hacker News Reader

"With an additional million or two people out of work, the newly unemployed and their families would sharply cut back on spending, while for most people who are still working, wage growth would flatline. When companies assume their labor costs are unlikely to rise, the theory goes, they will stop hiking prices. That, in turn, slows the growth in prices."

That seems like a pretty whacky theory to me because it assumes that companies only increase prices when forced to do so, and not just because they can.

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Supply-Demand pricing is probably one of the most well studies aspects of modern economics.

There is a range of prices between the underlying costs+overhead to the price point where demand drops off.

In that range, several factors influence where a company sets its price.

In a case where a company produces a unique product on the market, then it will price in the higher end of the range where demand drops off.

On the other hand if multiple companies produce the identical product (a commodity market), then the competition all try to undercut the prices of one another and prices are more determined by the underlying input costs (such as labor and raw materials).

Few companies product something COMPLETELY unique and irreplaceable for long until other companies copy them, but most try to differentiate themselves somehow to enable higher pricing without competition. They obviously also try to reduce overhead and negotiate lower input prices to gain a pricing advantage and capture more market share.

Many companies exist in mature markets where commodity pricing dominates. In such cases, and in OPs case, the LACK of rising labor costs allow prices to remain low.

Only on social media do people think that companies price things from a purely ethical/greed based model. Efficient pricing is just one aspect of running a successful company.

Shrinkflation is very real and illustrates that companies still have some agency based on profit/greed in determining prices.

The alternative to shrinkflation is just raising the price (or raising it more). Yes, it's toying with sticky demand psychology, such that a plain price increase would produce a less favorable equilibrium for the seller, but I'd be surprised if it was a significant driver of inflation.

>That seems like a pretty whacky theory to me because it assumes that companies only increase prices when forced to do so, and not just because they can.

I see people post things like this, and I'm forced to conclude that you don't understand supply and demand.

Edit: Sure, monopoly pricing is real. But blaming monopoly pricing for inflation is dubious. You'd need an account of 1) how the goods in the CPI basket are monopoly priced and 2) why all these monopolies decided to raise prices now instead of 3 or 10 years ago. The standard account is much more plausible: Supply side crunch due to covid policies and geopolitical problems and sanctions. Increased demand due to the Fed dropping money out of helicopters for over a decade + (more acutely) covid handouts.

Economy is still a social science at large. Upping the prices to their theoretical limits might cause immense backlash whereas steady increases, either fixed yearly increases or a big increase due to "extraordinary forces", may have very different social effects.

Blindly mentioning 'supply and demand' is the same as saying 'calories in and out'. It's true, but it misses nuance.

Supply and demand are why companies can raise their prices. Suggesting companies only raise prices when they must is mistaken.

Further, increasing the number of workers in the economy increases supply and demand for some things, while the supply of other stuff is like video games is unlimited.

You're forgetting that there's a market at the other end too. Every business has a cost of capital, and if its returns are not in line with other similarly placed businesses, they will have to spend a lot more money to acquire capital.

That’s assuming they need to raise capital. However, most companies are flush with cash and will only become more profitable with increasing demand.

So much wrong with this line of thinking. 1) They're also facing increased costs. 2) Most companies are by no means "flush with cash". 3) Cash is fleeting but the need for capital is always hanging over your head. Even if you pride yourself on bootstrapping your business and not needing much in loans or additional investment, one or two bad quarters can quickly leave you with no choice but to get loans or sell equity.

Based on what evidence do you think companies aren’t flush with cash? Every indicator shows US companies have cash reserves vastly above historic levels.

This isn’t about year to year changes. Start looking back to say the 1990’s and the difference is huge.

> 1) how the goods in the CPI basket are monopoly priced

This actually is not as far-fetched as you're implying. for many types of commodity goods (baby formula, chicken, etc) there really are only 2-3 major suppliers left in operation. Agribusiness has taken over and consolidated many types of produce as well.

As we recently saw with baby food - disruptions localized to a single supplier can severely affect the entire product segment - this outcome can only occur in a highly-consolidated market. It wasn't like there was some problem at the baby farm and nobody could make babyfood, this was one supplier that took some lines offline and it caused national shortages.

And it's not just babyfood, it's meat production, meat processing, and many other food products besides. Smithfield controls a majority of the meat market for several types of products too.

"monopoly power" as regulated in the US has never required a literal monopoly situation and that would be incredibly unrealistic in a market economy. In practice, oligopoly pricing is sufficient to be very commanding if the participants decide to collude or to otherwise exert their power.

> 2) why all these monopolies decided to raise prices now instead of 3 or 10 years ago.

because consumers are generally primed to accept it right now, and there are legitimate supply-chain disruptions and increases to allow to you to handwave your increases away (price increases are far outpacing cost increases). If everyone else is increasing prices 20%, and your competitors probably are too... why not increase your prices too, even if you only needed 5-10%?

Never let a good crisis go to waste, and all that.

Supply and demand works on a idealized economy, but it's hardly true in the real world where there are cartels, monopolies, and other incentives to keep prices high even if there's supply.

Supply and demand works great in Econ 101 though.

Correct, because Econ 101 is based on an idealized economy that doesn't match the real world.

That's why you take Econ 102, which is an intro microeconomics course. It covers the different market types, like competitive, monopolistically competitive, duopolistic, and monopolistic, and it covers the concepts of positive and negative externalities, market failures, etc.

A lot of people here are acting like these are foreign concepts to an econ curriculum, when they're completely rudimentary. It's just ignorance.

It sounds like we're in agreement. From the GP's comment, which I was attempting to support, "[Supply and demand are] hardly true in the real world where there are cartels, monopolies, and other incentives to keep prices high even if there's supply."

Do you think that Robert Reich also doesn't understand supply and demand?

https://www.theguardian.com/commentisfree/2022/sep/25/inflat...

Robert Reich is a politico with a political agenda, and that article is in a US politics opinion section. Inflation is a major US electoral issue, and the Biden admin has tried to shift blame to greedy companies (not that it's necessarily fair to put the blame on the Biden admin, that's another issue altogether). And even if he were an economist (which he's not, despite the PPE degree), economists can be political hacks just like anyone else (Paul Krugman comes to mind).

I didn't ask what he was. I asked if he understood supply and demand.

As for what he actually is: a professor of public policy at UC Berkeley and a former 1-term secretary of labor. He was appointed to the latter position, not elected. Almost anyone with an interest in the world has their own "political agenda".

I'll spell it out more clearly for you, since you didn't seem to understand the implicit point: I sure hope a fellow like him understands supply and demand. I assume he does. But I think that understanding takes second seat to trying to convince people that greedy companies, not incompetent governments, are to blame for inflation. And he writes that (putting aside whether he also thinks it's true) in order to advanced a political agenda. That's why it's in a US politics op-ed section of a left-wing newspaper.

I don't care what his political agenda is, I care what the actual source of inflation is. I see a lot more evidence that a lot more of it is due to price gouging by corporations than the money supply or supply chain issues. I don't care where he writes it either. It's not as if the WSJ is going to publish an argument like this.

So maybe we can get away from "I hope <X> understands supply and demand" and actually tackle the evidence that has been presented by many economists and economic pundits regarding the relative contributors to the current inflation.

> That seems like a pretty whacky theory to me because it assumes that companies only increase prices when forced to do so, and not just because they can.

It comes across especially wacky to me as price hikes have outstripped wage hikes. Considering wages and purchasing power has flatlined for workers, but productivity has greatly increased, seems like there's a lot of people getting fleeced.

It sounds wacky because they're framing it in the worst possible light to generate populist outrage and get more clicks.

The goal of raising interest rates is to contract the money supply because it would disincentivizing lending. Increasing unemployment is an unfortunate side effect, but clearly not their intention.

Companies are increasing prices now. If they could have profitably increased them before, why did they wait until now?

Because genuine supply chain problem-induced price increases gave them cover to increase prices on things without supply chain problems.

And also because in late 2020/early 2021, it appeared that labor was about to get a bit uppity and wee bit more powerful than it had been, so price increases were a nice preemptive move to deal with upcoming compensation issues.

> Because genuine supply chain problem-induced price increases gave them cover to increase prices on things without supply chain problems.

Or maybe the supply chain problems bubbled out to affect more and more things? Or maybe there was an actual general devaluing of the currency? Might want to employ a razor here.

> And also because in late 2020/early 2021, it appeared that labor was about to get a bit uppity and wee bit more powerful than it had been, so price increases were a nice preemptive move to deal with upcoming compensation issues.

This reads as "the cabal of big capital got together and decided to raise prices across the board because they were worried about labor power". You realize this makes you sound like a conspiracy theorist right?

There's never any need for conspiracies or cabals when the interests of a given group are naturally aligned, and they are not large in numbers. Corporations can behave in their "own interest" and most times, they will find themselves acting in concert, without coordination.

> Or maybe the supply chain problems bubbled out to affect more and more things?

Shrinkflation is not explained by supply chain problems. My razor is that corporations will generally do whatever they believe they can get away with; "supply chain problems" gave them something approaching carte blanche to reprice anything they wanted.

It also doesn’t take into account 300k Boomers retiring per month. The Fed can’t print oil or housing, but it’s going to keep raising the benchmark rate while there’s a labor supply shortage. I am skeptical they can destroy jobs faster than workers take themselves out of the labor pool (through retirement and death), although driving down artificially high asset prices is a welcome result.

Look at a population pyramid for the US, it’s plain as day.

In a free market with healthy competition, a company can't just raise prices and increase its profit margins, because its competitors will keep their prices low and get all the business.

Thus, indeed, companies can only afford to raise prices when all other companies in their space are forced to do the same, for instance due to rising labor costs.

What portion of markets lack healthy competition?

If companies cannot raise prices due to higher unemployment then it may be an effective, albeit cruel, strategy.

Their ability to raise prices is depending upon consumers having the money to spend.

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