Monopoly Induced Inflation
By now, everyone, no matter how disconnected they are from politics, has heard about the dangers of inflation. But, you can count me in the group of economists that isn’t actually all that worried about it. It’s a long explanation, and if you’d like to hear it, let me know, and I can lay out the reasons why I think inflation problems will go away by spring. For now, I’ll explain just one aspect of the problem—how too much corporate power over markets has caused inflation.
I’ve said it so much that by now it’s practically The Constituent tagline—free markets and competitive markets are not the same. The United States has too long focused on creating a free market, which has actually led to less capitalism. This concentration of power is a big part of the problem when it comes to inflation. If inflation were, at its core, solely a market issue, we would see input prices—the amount companies pay for materials to make their stuff—going up, which would force them to raise prices of their end products to cover these costs. Prices go up, and corporations profit margins don’t drastically change.
Instead we see this.
Yes, you’re seeing that right. Despite everything you’ve heard over the last two years, corporations have never been better off. Inflation isn’t cutting into their bottom line—it’s padding it. Because many corporations—particularly those with more market power—are using inflation as an excuse to raise prices, and laughing all the way to the bank. I’m not saying input prices aren’t going up—they are—but the data is clear that any price increases businesses are seeing are far smaller than the price increases they are creating.
One company after another is using some trend of public opinion, often generated by too much commentary about economics from media types on all sides who aren’t economists (I’m looking at you Tucker Seven-Dollar-Bacon Carlson).
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Why is this happening? Well, Tucker Carlson’s seven dollar bacon is actually perfect example.
As Matt Stoller has been detailing, the number of meat packing companies has been shrinking. This means the entire packing and processing industry is now dominated by just a handful of companies. These dominant firms are able to bid down the price they pay to ranchers, and then charge grocery stores more for meat—including bacon. The problem got so bad that Walmart even jumped into the packing and processing industry, grabbing the margins for themselves, rather than pay them to the other middlemen.
It’s a gruesome tale, at least as far as economics can be gruesome, of forced contracts and killing off auction markets (the base definition of a competitive market) to drive up profits. I won’t go into any more detail because Stoller has already done it. Go read it. It’s amazing.
The same thing is happening with gas prices. On November 17th President Biden asked the Federal Trade Commission to look into why the spread between oil prices and gas prices has grown, citing potential illegal conduct by gas companies. Then, a week later, he said this:
Now, take a look at oil prices past mid November. Pretty steep drop. Part of this is due to his announcement of releasing 50 million barrels of oil from the strategic reserve, plus more from other countries. But, this doesn’t tell the whole story—in the week between the FTC directive and the oil reserve announcement prices had already fallen. Now oil prices are back down to roughly the same pre-pandemic level, and gas prices have already started to drop.
This is the dynamic playing out all over the economy. Prices are rising far beyond any increase in input costs, and companies are raking in profits.
In a competitive market this doesn’t really happen. If there are 100 meat packers, instead of four or five, then one company paying ranchers too little for their livestock will lose business because there are so many other companies to which the ranchers can go. If one company charges too much for their meat after it’s processed and packed, grocery stores buy from another company. The other company keeps prices low—where supply and demand dynamics would put them—and gets more business at the expense of the other companies. The other companies have to lower their price, or get beaten out by their competition.
But, if there are only a handful of companies there isn’t really much competition. Unless you have billions of dollars available, like Walmart did, you can’t really start another meat processing company to compete and take business from the big guys—especially if they force grocery stores into single source contracts.
These dynamics are at play across markets—not just meat or gas. It’s why corporate profits are so high even when they claim inflation is a problem for them. It’s a bit like if you were playing the Monopoly board game, and once someone bought a whole row, they were able to charge whatever prices they wanted, knowing it is impossible not to land on their row.
This isn’t some special secret that only economists know. Businesses know it too. They know that if the U.S. government is lax on it’s anti-monopoly enforcement they can rake in huge profits by distorting the markets. As I wrote a while back, the Biden administration is seriously not having it. This is the first time in my lifetime—in fact, the lifetime of about half of all Americans—that the U.S. government is getting serious about enforcing competitiveness. If you’re one of the Biden-hating types, reread that sentence to say, the first time the U.S. government is planning to increase capitalism within markets.
And big businesses hate it. They are gearing up to be as menacing as possible to the FTC and any other federal agency that might stand in their way of creating monopolies that harm competitiveness and consumers.
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If you’ve read all of this so far as an anti-corporation screed, please reconsider. I’ve been clear that increasing capitalism is the the best outcome here. This monopolistic inflation is just one more instance where a lack of competition—ie: a lack of capitalism—has led to market manipulation.
Not all of the increase in prices can be chalked up to greedy monopolies, however. The dynamics of supply and demand would lead us to expect some price increases. The pandemic put a hard speed limit on service based markets. Unable to go do stuff, Americans chose to buy more stuff. The shift from spending on services to spending on stuff changes the supply and demand intersection. Given the pandemic, with all its work stoppages and supply chain disruptions, it was difficult for companies to produce more stuff. So, when people who were spending some of their money on services shifted that spending to buying stuff, the amount of demand for stuff increased while the supply couldn’t. More people wanting the same amount of stuff naturally leads to higher prices.
And, despite inflation, this is what is happening. People are buying more stuff. The rate of increase in stuff bought is higher than the rate of inflation, which means that despite higher prices, people are still buying more than they used to. If the supply of stuff can’t keep up, then this has to lead to some price increases.
Some business executives want people to believe the economy to be a zero sum game. I win or I lose. It’s part of why they are trying to harass the FTC. But this isn’t how economic theory works. In economics the most efficient outcome is called a Pareto Optimum. It’s a scenario where everyone is better off from a decision.
We are seeing some pareto optimization right now. Wages are rising, labor markets are more competitive than they have been in decades, businesses are making more profits, and people are still buying more stuff. Everyone is winning. But, as the FTC understands (and hopefully you do now!) the amount of winning would go up even higher with lower levels of monopoly power. Monopoly power which leads to unnecessary price inflation, and monopolists giving their own customers the middle finger.
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