I wrote yesterday about the need for Democrats to take on the price gouging that’s driving some of this inflation. This piece takes a look at how monopoly power is contributing to the problem:
Larry Summers, the former US Treasury secretary and longtime Democratic economic advisor, has been adamant that the anticompetitive behavior of America’s corporate cartels and monopolies is not a cause of the recent inflation surge. Last month, he even claimed that Federal Trade Commission Chair Lina Khan’s push to crack down on illegal mergers and protect small businesses is “disturbing” and would actually increase prices.
But Summers is wrong. High corporate concentration, and the anticompetitive conduct it facilitates, does contribute to inflation. And there is no doubt that inflation is high right now. Last month, inflation jumped to 7.5%. In some industries, prices have surged even higher. But these increases cannot be fully explained by “normal” increases in the cost of raw material, production, labor, transportation, or by increased demand. In the US, many industries are controlled by just a few massive companies, and when only a few companies control a single industry, they have the power to push up prices arbitrarily because consumers have few other options for these goods.
While there are many components that go into soaring prices, Summers is wrong to dismiss corporate concentration as a contributing factor to our record-high inflation, and he is equally incorrect to dismiss the idea that taking action against America’s new monopolies and oligopolies would help drive down consumer costs.
Monopolistic power pushes up prices
Supply-chain chaos has caused shortages of a wide variety of items across the country, leading to prices of some goods to go up to match the increased demand. Hard-to-find at-home COVID-19 tests are a good example of this. When demand surges due to shortages, prices go up to match what consumers are willing to pay. But some corporations across the economy are taking advantage of the broader supply-chain crisis to raise prices significantly — even where no bottleneck or shortage seems to exist. Some companies, like Procter & Gamble, even brag about it openly to their shareholders.
Basic economics tells us that market power allows firms to raise prices. When there is a small number of companies producing a product, it’s easier for them to move in lockstep to raise prices without losing many customers to one another or to other products. Two companies can do this more easily than four companies, and four can do it more easily than eight. A temporary bottleneck or shortage can give consolidated firms the ability to raise prices significantly more than when the market had more active participants.
This consolidation often arises through company mergers. In his book “Controlling Mergers and Market Power,” economist John Kwoka has documented that our overly lax merger policy — which encourages the creation of megacorporations and reduces the number of firms competing in a given field — has led not to the efficiency gains that Summers expects, but to higher prices.
The beef industry is one of the more egregious offenders. A White House briefing report from September shows that half of the spike in grocery bills in the last year came from higher meat prices — beef prices alone have risen by 14% since the pandemic started. But is this increase due to higher prices paid to farmers? The data shows that wholesale prices have risen even as prices paid for cattle have at best stagnated. So the increase isn’t caused by farmers charging processors more for cattle
Another possibility is that prices increased not because meat-packers had to pay farmers more, but because the cost of processing meat increased due to COVID shutdowns and workers getting sick. But that doesn’t track either: Profits for meat processors hit record highs last year. One of the largest meat-processing companies, Cargill, saw a net income increase of 64% in 2021 — the most profitable year in its history. Profit margins for beef-packing companies also hit record highs during COVID. The White House report says it best: “While factors like consumer demand and input costs are affecting the market, it is the lack of competition that enables meat processors to hike prices for meat while increasing their own profitability.” Forty-five years ago, the four largest beef-packing companies controlled a quarter of the market — today they control more than 80%.
A similar situation is happening in the firearm-ammunition industry. According to Mark Oliva, director of public affairs for a firearm-industry trade association, “Ammunition for an AR-15 used to be about 33 cents a round … Now you’re looking at closer to almost a dollar a round.” One retailer similarly noted: “Before all this kicked off, we were selling 9mm — a good-quality brand, 50 rounds — for $15.99. Right now, I’ve got it from $39.99 to $49.99.”
While demand for ammunition has spiked in the last two years, a price increase this steep raises questions: Are these price increases caused only by higher demand, or are they in part related to the fact that there are only two major US manufacturers of ammunition — and they’ve been accused of colluding with one another? (Vista Outdoor, one of those manufacturers, saw massive profit margins last year.) Is their control over the market responsible for prices suddenly rising upward of 300%? We can’t know for sure unless we give the antitrust enforcers enough resources to take a serious look.
It is imperative that the Democrats take this up. The stock trading bill as well. If they want to turn this inflation problem around I am convinced that this is the ticket both on the substance and the politics.