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Why is inflation so sticky? It could be corporate profits

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Re: Why is inflation so sticky? It could be corporate profits

#81
post #3

It's a likely theory. But economics teaches us when a player overcharges, others will step in to undercut and take all the market share. So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.

> So, we're at a point where we need to admit that mantra isn't true in the modern age, or admit that we've done a terrible job at preventing effective monopolies/duopolies from forming.

It's objectively obvious that the latter is true, but why?

One of the reasons is regulatory capture. But another is that people have stopped believing the former.

Suppose there is a market with an existing duopoly that charges high prices and you're a rich investor who likes to make money. Popular theory says that you shouldn't enter that market because they'll just undercut you until you go out of business and then go back to charging high prices.

But how does that work? Once you've invested the money to enter the market, you're committed. The incumbents have to deal with that. If you charge slightly less than they do, they have four options. One is to ignore you and keep doing what they were doing, which would allow you to take a disproportionate share of the market. Another is to match your price. But then you still get a third of the market where you previously had none and you now have goodwill with customers because you finally caused the market price to move in the direction they like, so that's quite profitable for you. The third is to buy you out, which is you turning a profit again.

The last is to undercut you and launch a price war. But by then you've already paid to build the infrastructure needed to compete with them. It exists. Even if you were to give up, you would still have that infrastructure to sell to anyone who wanted to give it a go. And if the expectation is that prices would return to profitable levels at any point in the foreseeable future, there would be returns in doing that for anyone with money to invest. Which mitigates your risk. And means the incumbents can't eliminate the competition by doing this. They can only torpedo their own profitability. Their real options are to lose some of their market share to you or buy you out, both of which are profitable to you.

So who taught investors that doing this is not profitable?

Re: Why is inflation so sticky? It could be corporate profits

#82

Isn’t this reversing cause and effect? Corporations are able to raise prices because consumers are willing to pay higher prices. Corporations always want to make as much profit as they can. If consumers can pay more, you get inflation.

Competition should drive down prices even if consumers have deep pockets. This suggests that the US market has gotten less competitive. I wonder how much it has to do with ownership of competing firms by a few large index funds with concentrated voting power.

Don't forget supply and demand works on the capital side of the equation too, higher inflation means shareholders push for higher profits in the same way that high inflation causes workers to push for higher wages.

There's increasing supply of investments at higher rate of return, bond yields are close to 4% which means riskier investments need to pay more to compete.

Re: Why is inflation so sticky? It could be corporate profits

#83
post #23

Basic issue isn't excess of money. Basic issue is shortage in supply. Demand hasn't skyrocketed magically. The world over production levels were lowered to almost zero for couple of years. Interest rate hikes have wreaked a havoc of their own.

The supply shock was the initial reason. Then corporations figured out that they could make huge bank and kept rising prices -> inflation.

[deleted]

Re: Why is inflation so sticky? It could be corporate profits

#84
post #58

Their argument is basically that while normally a company raising prices would mean that some of their customers move to a competitor, in today's environment there is an implicit agreement that every company will keep prices high. So are they saying that the free market is basically not a thing anymore because of covid, and no company wants to get an edge over its competitors by undercutting on price despite having r…

I don't think it's about the free market not being a thing. It's that, in a context where every company is increasing prices and customers have resigned and accepted that reality, the increased profit from extra clients is less than the increased profits from higher prices.

Re: Why is inflation so sticky? It could be corporate profits

#85
1. Government prints massive amount of money.

2. Money supply increases, money value drops, definition of inflation, basic economics.

3. Economists and journalists: Is causing inflation?

Bs like this erodes public trust in experts and institutions, and we saw the results of that when people started resisting against covid vaccines. Eventually, public trust in US/FED/economists/journalists will drop to such a low level that USD will lose its value entirely.

Re: Why is inflation so sticky? It could be corporate profits

#86
post #58

Their argument is basically that while normally a company raising prices would mean that some of their customers move to a competitor, in today's environment there is an implicit agreement that every company will keep prices high. So are they saying that the free market is basically not a thing anymore because of covid, and no company wants to get an edge over its competitors by undercutting on price despite having r…

Good Odd Lots episode goes into this theory. [1] Basically companies found that by raising prices, they were able to increase profits despite shipping fewer units - and they wanted to see how much they could do so. When Pepsi had to leave Russia, which accounted for 4% of revenue, they just increased the price in the rest of the world to compensate without issue. And seeing that, Coke followed suit.

However at this point in the arc, companies are losing their ability to push prices. They won't pull them back or anything, but we are seeing reversion to the mean.

That stabilization should be sufficient to see much lower inflation levels moving forward.

[1] https://www.youtube.com/watch?v=UIpcfmAfOJo

Re: Why is inflation so sticky? It could be corporate profits

#87
post #65
post #58

Their argument is basically that while normally a company raising prices would mean that some of their customers move to a competitor, in today's environment there is an implicit agreement that every company will keep prices high. So are they saying that the free market is basically not a thing anymore because of covid, and no company wants to get an edge over its competitors by undercutting on price despite having r…

Anecdotal, but it feels like there are less competitors. So…

That is certainly part of the story yes. Especially in grocery. It's wild how much better a job restaurants did controlling their food costs than individuals could.

Re: Why is inflation so sticky? It could be corporate profits

#88

Earlier quoted context omitted.

Competition should drive down prices even if consumers have deep pockets. This suggests that the US market has gotten less competitive. I wonder how much it has to do with ownership of competing firms by a few large index funds with concentrated voting power.

Don't forget supply and demand works on the capital side of the equation too, higher inflation means shareholders push for higher profits in the same way that high inflation causes workers to push for higher wages. There's increasing supply of investments at higher rate of return, bond yields are close to 4% which means riskier investments need to pay more to compete.

Absolutely. But for competitors to raise margins bilaterally requires cooperation, because each side can take market share by keeping prices low.

I just wonder if the cooperation might come in the form of, say, one powerful shareholder of both competitors making calls to the boards of directors of both competing companies.

Unexpected consequence of passive investing?

Re: Why is inflation so sticky? It could be corporate profits

#89

Earlier quoted context omitted.

And yet despite 15 years of stimulus we have had persistently low inflation for all except the last 2 years or so, the first half of which was very clearly driven by supply chain issues. It’s almost like even if stimulus has had an impact it’s not the only, or even the primary driver.

Inflation is never linear, and tends to over/under shoot. Under normal circumstances, supply chain issues (otherwise known as supply reduction) results in demand being priced out of the market. But we didn’t do that. We gave stimmie checks, and gas cards, and increased unemployment benefits, and paused loan repayments. When there’s not enough of thing X it means some people won’t get thing X. Giving people money to m…

Japan had the same monetary policy for the same period of time and saw zero inflation.

It's not monetary policy. There's no reason to think that 15 years later some magical thing happened to flush all the pressure that had built up out of the pipes.

It was due to a combination of fiscal stimulus, yes, to a degree - and also supply chain issues, a land war in Europe, shutdowns in China, and myriad other confounding factors. There's been a lot of perfect storms lately.

Re: Why is inflation so sticky? It could be corporate profits

#90
post #58

Their argument is basically that while normally a company raising prices would mean that some of their customers move to a competitor, in today's environment there is an implicit agreement that every company will keep prices high. So are they saying that the free market is basically not a thing anymore because of covid, and no company wants to get an edge over its competitors by undercutting on price despite having r…

It only works for a while, then customers start switching to cheaper brands and they reduce prices again. See this article: https://www.reuters.com/business/retail-consumer/tide-maker-... which has more detail on this.
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