Why couldn’t this happen before? Competition. If you raised your prices, your competitors would see an opportunity and you’d lose market share
Now competition has been consolidated away.
With the pandemic, corporations have accidentally entered into an experiment leading to new price discovery. Without competitors, all that’s in the way of increasing prices is consumers’ willingness to buy.
Why would it happen? Competition is only supposed to drive prices down in free markets with relatively high elasticity. When producer/retailer sees that inflation is perfectly good excuse to raise prices now to account for future cost increases without sacrificing demand, they do exactly that. And why would you raise prices by lower magnitude or even lower them when elasticity is so low that lowering prices literally hurts profits?
Smart people can argue why elasticities are so low across the market, but IMO low elasticity is one of the major drivers behind equilibrium working a little bit differently than you would expect from high school level economics.
If one company unilaterally increase their prices in a stable environment they will probably lose market share to their competitors.
I guess that when prices are rising sharply anyway, it's easier to raise them and it won't be noticed so much. And their competitors probably make the same calculation.
I don't think either of those theories is right. (1) doesn't explain the rise in corporate profits, and (2) is of course silly.
Here is my theory:
Consumers generally have an "acceptable" price range in their head for each product. When most retailers have prices within that range, it is really hard for a single company to raise prices above that range, as they'll lose a lot of business. But, COVID forced input prices to rise and fluctuate quite a bit. Once companies raised prices to account for input costs, consumers lost their sense of "normal". Then, companies were able to get away with charging prices even more, and could get away with raising prices above their competitors without losing any business.
You can't compare prices and profits. Increased demand and short supply can cause prices to rise. Prices. Not Profits. Profits are typically after costs of selling goods/services. If pandemic caused various factors to cost a lot more and that cost was passed onto consumers at a similar rate as in the past then profits should remain same-ish. Its possible and logical that companies raised prices during the pandemic due to some cost increase (parts, shipping, etc.) and then never lowered prices even though that cost increase faded away.
If over a long period of time there has been consolidation (aka acquisitions) in an industry and there are only a few conglomerates around, they essentially have a market to themselves and can do what they want without actually legally being considered a monopoly.
A) in a stationary scenario a company can't raise its prices arbitrarily because it will lose market share to its compatitors. Competition keeps prices low benefiting consumers while investors still get some profit. Capitalism works great!
B) on sudden changes, textbook conclusions can't be trusted because they are arrived at for stationary scenarios 99.99% of the times, at least that's how I think. You have to go case by case and make your best judgement. The current narrative is that as consequence of the pandemic, when you have "supply chains are collapsing" fearmongering, even if partially true, sellers figured that customers would be more tolerant to price raises, or at the very least, that their competitors would reason in the same way and so everyone can raise their prices and customers don't have a choice anyway. Personally I find it believable that companies would make such a calculation.
The current price changes are due to a lack of supply, which the market is rationing.
Remember firms will always try to charge a fortune for their stuff. It's only competition that stops that happening. Competition is excess supply, or at least excess supply capacity.
When competition stops being effective, prices go up.
Profit maximization attempts have changed; supply chain disruptions provided an opportunity for corporations to increase their prices in unison. Prior to the pandemic there was more risk in unilateral price increases but now companies can look at pricing velocity and effectively work as a cartel without engaging in explicit conspiracy.
I'd add "a lack of harm to their business when they did raise prices". Before, I believe there was a fear of backlash from the public if prices (and profits) went up too much.
But when Covid lockdowns forced temporary price increases, companies didn't see the backlash. And so they just continue to do it, knowing the average consumer has no choice in many cases.
Means plus opportunity. During COVID, there were legitimate shortages and supply chain disruptions that caused price spikes and (in some cases) additional profits. When these subsided, firms now had the opportunity to test whether holding prices at this newly elevated level would be tolerated. When the state failed to act to stop them, instead colluding with firms and the media to blame the price increases on thing like spent-and-gone stimulus and labor shortages, they saw they had a free hand to keep prices (and profits) as is. There was no guarantee that this would play out this way until it did, which these monopolies then took advantage of to keep prices artificially high.
In a lot of industries you have a company that's a price leader. If they raise prices their competitors will also raise prices to increase profits instead of trying to take away market share from the price leader. They'll do that because it's trivial to do vs the risk and logistical hassle of trying to increase production. Remember the price leader can instantly drop prices again which could put you underwater.
You can’t raise prices in a vacuum. If the market has adequate competition, then raising prices will lead to a loss in sales as customers go to other businesses. With consolidation, which GP mentioned, there isn’t enough competition to keep prices down.
Nothing keeps you from raising prices. However, just because people have more money does not mean competition will stop. In fact competition might increase and prices go down, as there is more money to be made and risks/costs go down.
I suspect what happened was rising prices because of the pandemic and the war showed companies they can increase prices without also suffering a significant decrease in sales. After all, when virtually all prices are going up, where are consumers going to go?
>The question is why they are able to raise prices now to levels they couldn't before, and as always the answer is a mix of government-created moats and monetary inflation.
The study authors have a different answer about why than you do, though. What they are claiming is that in concentrated markets (like most markets are), shocks like the pandemic allow for firms to raise prices beyond their increased costs, and so increase profits. They have a very interesting graph of after tax profit margins showing that firms in the US are more profitable now than they have been for 70 years, in fact.
What’s stopping anyone, anywhere from raising their prices by some arbitrary amount? There are lots of examples of inelastic goods that most people would continue to buy if the prices went up. Why aren’t the prices on those things higher? Generally the answer is competition, and there is still competition among landlords even if everyone suddenly has more disposable income.
Now competition has been consolidated away.
With the pandemic, corporations have accidentally entered into an experiment leading to new price discovery. Without competitors, all that’s in the way of increasing prices is consumers’ willingness to buy.
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