Is Corporate Greed Driving Inflation?
WOODS: And that brings us to a fundamental tension about the story of corporate greed causing inflation. Yes, businesses are often greedy, but does the sudden jump in inflation mean that corporations suddenly saw an uptick in greediness over the last two years?
FIONA SCOTT MORTON: The corporate greed piece is - economists don't use that terminology.
WOODS: This is Fiona Scott Morton, an economist focused on competition and antitrust at Yale University.
SCOTT MORTON: We say that firms are maximizing profit. Now, is that the same thing? Close - it means they're going to take every dollar that they can under the law. Did the profit-maximizing behavior of firms suddenly take a jump up in 2021? I don't have any evidence that that's the case. I haven't seen anyone argue that or model that. It doesn't seem very logical to me.
WOODS: Fiona pours cold water over the idea that these major leaps in inflation that we're seeing all across the economy are largely caused by uncompetitive markets.
SCOTT MORTON: When we think about the underlying causes of inflation, the big one is going to be the money supply, along with really unusual conditions such as a shortage of semiconductors that raises the price of cars.
WOODS: In other words, those really low interest rates, the government spending and also the supply chain issues that have been gumming up the economy for the last couple of years, those are the core underlying causes. Fiona says that monopolistic companies being greedy is not a large driver of inflation throughout the economy right now. And yet, Fiona is very clear that she does not agree with the opposite conclusion that uncompetitive markets had nothing to do with big price rises recently.
SCOTT MORTON: If somebody were to say the price increase in meat because of the pandemic has nothing to do with the market structure of meat, I actually think that's very unlikely to be true. I think the market structure of meat is for sure affecting how shocks are passed through.
WOODS: Take industries that are more concentrated, that have fewer players in them, like the meat industry. They might jack up prices higher than competitive industries during a pandemic.
SCOTT MORTON: In a concentrated market, one firm could announce it's going to raise prices because of inflation. And its rivals might look at that and say, oh, this is a good excuse to raise prices. They're raising prices, so we should match. And we should announce we're raising prices also. We call this tacit collusion. And in a setting like this one, where inflation might be giving firms permission to raise prices and then they follow each other, that could cause price increases.
WOODS: The standard definition of collusion involves businesspeople conspiring in the shadows, agreeing to keep prices high so that they don't have to compete with each other. And that is clearly illegal. But tacit collusion doesn't involve any actual conversations between companies, so it is much harder to prove and to prosecute.
SCOTT MORTON: So that's one possibility. I have not studied this. I don't have any sense of what the empirical evidence is, but that's a theory that I have seen out there.
WOODS: Now, Fiona raises a second point. Supply chains where there's just a few players may end up with bigger disruptions during a disaster, which could lead to higher prices sometimes. It's not about greed, per se. It's about resilience. So take the meat industry again. If you have one larger slaughterhouse instead of five small ones, then a single COVID outbreak might cause all meat production to stop in that one large slaughterhouse. But with more slaughterhouses, that risk is spread out.
SCOTT MORTON: So for those kinds of reasons, we think that competitive markets are generally more robust and stable and might do a better job at handling unforeseen shocks like COVID.
WOODS: So bottom line - companies raise prices when they can. That's what companies have always done. And what keeps them from doing it is usually competition. But even when we have uncompetitive markets like in the meat industry where prices are high, that is not the big driver of inflation in the economy right now. But that does not mean that it is a good thing to let monopolies keep their monopoly power. Fiona says it is good public policy to crack down. That means scrutinizing mergers, investigating possible collusion and splitting companies if needed.
SCOTT MORTON: Is it a good idea to do? Absolutely. Because it brings down prices in general because markups are lower when there's more competition. It raises quality. It raises innovation. It increases productivity. It increases the efficiency of the economy. So there's many, many ways in which antitrust enforcement and competitive markets benefit consumers. More vigorous antitrust enforcement is a long-run project. It's not going to change prices in 2022.
