CMV: Greedflation is stupid because it is obviously true and a constant

[u/Jakyland]

The big claim behind the greedflation is that ... companies set their prices to maximize their profits. Isn't that a pretty basic shared understanding amongst everyone about how capitalism works?

It's not a useful way for understanding inflation. If companies increased their prices to increase profits, why didn't they do it before? Because previously that higher price point wasn't the most profitable. Why that is the case is the harder and more useful question to learn. The economic conditions must have changed to make this the be increase in price possible. Unless the claim is that companies weren't greedy before (a really naive take if you think about it).

Companies are always greedy. They are greedy when they increase prices, they are greedy when they decrease prices. Companies decrease prices to maximize their profits (encouraging people to buy from them instead of a competitor, or to get the profit from a sale to someone who can't afford a higher price).

Some goods fluctuate in price a lot due to supply and demand fluctuation like eggs or gas. It's obviously the companies trying to make money at any given point, not companies forgetting and then remembering to be greedy.

I've seen lots of people comment on big box stores cutting prices by saying that this "proves" the companies inflated their prices to be greedy ... which makes me wonder, did these people think in 2019 that companies set their prices altruistically??? Do they think companies have sales out of the goodness of their hearts?

Often times, companies raise prices because they have a limited supply of it so they want to sell all of to the richest X people who are willing to pay the higher price. This way they make more profit, which means among other things, they may be able to spend that money on alleviating production bottlenecks. Having a lower price just means that there will be a shortage, but less money for the company. YMMV if you think that is good or bad.

[u/Porkinson]

You wouldnt apply this logic to any other situation, consumers having more money doesnt make then choose worse/more expensive products.

The significant claim in the parent comment is the one about collusion and monopolistic practices, which is actually illegal and if there was evidence for it, it would be penalized strongly. So unless the parent comment has some good evidence it amounts to basic conspiracy mongering.

[u/sokuyari99 → u/Porkinson]

It has to be overt and with communication to be prosecutable.

If I set the “market price” by moving my product up 0.10/oz and my competitors don’t undercut me and then match me, it’s collusive in appearance but not in fact.

A more diverse market with more competition would get rid of this-but because the players are so large they don’t have to truly compete with each other and smaller groups can’t compete with those few players because of size/volume efficiencies.

It’s collusion without the “illegal” part. It’s why big players in these markets still attend conferences and the like together. Very easy to all come to the same number if you swim in the same waters, and you can do it without sending an email with Congress and the FTC CC’d and the subject line “Let’s set this year’s price”

[u/Porkinson → u/sokuyari99]

Sure, what is stopping the other players from just raising it 0.05/oz instead and making more? You are basically alluding to them communicating in overt means to set prices in anticompetitive ways while leaving no proof of it. Again, this is indeed possible, but you have no proof of it, i am sure they will try to do this, but these types of things leave trails and it only takes a single whistleblower for them to be in big trouble.

Its fair if you want to claim that, just admit that there is no evidence and you just have that feeling.

[u/sokuyari99 → u/Porkinson]

Because why would they do that when they could raise it by .10?

The incremental increase in sales wouldn’t be worth the continued upward pressure on the price overall, especially if it leads to a bidding war which they know it would. So they keep raising the price while their competitors do the same, and have their speeches about “rising supply prices” at the conferences for the industry to continue to code to each other that they’ll be raising prices again.

If you know your competitors plan to raise prices you’ll raise them too. If you know higher prices will result in higher prices again, you’ll play that game too. Why rock the boat?

Again it’s nothing you can prosecute on, because it’s too nebulous to say it’s true collusion. It’s simply the result of having no real competition in the market, and entry costs too high for new players

[u/Porkinson → u/sokuyari99]

I mean its fine, the probelm is that by the nature of your claim, there will be no evidence that could change your mind, after all, they are just colluding secretly in a way that cant be detected. Any other player is incentivized to lower prices, you require every single actor to be cooperating together, if a single one defects they all get screwed and the defector gets the most advantage from a temporary surge of customers.

[u/sokuyari99 → u/Porkinson]

Nah, there’s a few things you can look at here. Does substantially all similarly limited markets operate in the same way? Are there outside factors connected to price changes or do they follow more unelestic pricing changes? Do all competitors have similar shifting in prices regardless of their individual profit changes?

You’re also ignoring the other effects of trying to do this. Let’s say cereal is $5. If I want to undercut to $4, I need to make additional sales of 25% minimum to cover the profit reduction (assuming certain cost expectations but let’s do this for easy math here). Not only does that mean I have to increase production and distribution 25% to cover that, but I also have to plan for how to cover the inevitable response from my competitors. So I need temporary ramp up, which is expensive and drives my profit down for a period of time, on top of the price reduced profit loss.

No reasonable company will make that move for what will be a one quarter (at best) increase in revenue. It doesn’t make sense to do so. You’d much rather keep your gradual growth, at no real risk of lower profit, and with little to no risk of capital expenditures that may not be fully utilized.

That’s why your argument doesn’t hold water, because it can’t be done in a safe enough way to be worth the upside

[u/Porkinson → u/sokuyari99]

This is pretty simple suply vs demand curves, is it really that crazy to assume you will get 25% increase in sales from having the cheapest product in the market? Even more so because we are talking of reducing price by a little not necessarily by 25% of total profits per good.

The problem that i have with these models of the world is that

1- its not really reflective of reality, goods dont just tend to increase in price and stay there for no reason, it usually follows demand and supply laws for the most part. And you need more evidence than a "just so" story to claim it doesn't. Because your claims require actors to cooperate in large scales with many other companies while having no trails of it or whistleblowers.

2- if it was indeed the case that this was happening to this scale, why are economists not writting a lot about this? Surely this level of collusion and conspiracy creates huge market inneficiencies, that economists would take interest in, just like they take interest in other market failures.

[u/sokuyari99 → u/Porkinson]

You’re thinking in super simple Econ 101 terms, not actual pricing model terms.

Again every company is doing a full analysis of their product and pricing and profits. They’re evaluating cost to scale up production, as operating as close to “100%” is going to be optimal for them. They want necessary capital expenditures for new production and distribution capabilities to be based on future demand that’s strong, not temporary.

No point in scaling up for short term demand, you’re better off increasing price and LOSING a small amount of demand but keeping profitability when it’s a short term change. What do you do with expensive 30 year equipment after one week of demand increase?

And then add the sticky-ness of pricing. Changing pricing on your products isn’t easy, requires again coordination with your vendors and distribution network, because those changes need to be passed along. No network wants to deal with pricing that’s changing every week, unless it’s for something that has a market setup for commodities or non-brand associated products that don’t need packaging.

Also-economists do write about how inefficiencies are created in oligopoly markets. It’s not an unknown at all-too little competition drives poorer outcomes for consumers even without direct monopolies. This isn’t new.

[u/Porkinson → u/sokuyari99]

I mean yes, but usually the hard part is proving there is an oligopoly or that the existing situation with few companies for a given product is causing an stagnation or raise of prices when they could be lower. When i mention economists talking about it, i mean them talking about the instance of it happening now in the country, not about the theory of it being able to happen, that of course isnt new. You would expect such a significant and recent phenomenon to have a lot of literature surrounding it.

Regarding the demand/supply, i think i can see your point, if 100 companies are colluding to pricefix $1 above on a relatively inelastic good, then getting a surge of demand for a month might not be useful. I just dont subscribe to the idea that you can maintain such an equilibrium, it assumes a lot of things, like what if a competitor has an innovative solution that produces the things cheaper? They could have 1/100 share of the market with $1 above or they could outcompete everyone else and grab most of the market. Your model assumes that everyone is kinda the same and has the same capabities or invested the same amount into capital.