I do not understand Paul Krugman here:
Yes, there’s a profit-maximizing price, but the cost to a business of charging somewhat less than its profit-maximizing price is small, because lower margins would be offset by increased sales. (To be formal about it, the losses caused by deviating from the optimal price are second-order.) This wiggle room means that corporate pricing may be strongly influenced by intangible considerations, like fear of alienating buyers. . . . Given this reality, it’s not foolish to suggest that some corporations have seen widespread inflation as an opportunity to jack up prices by more than their costs have increased without experiencing the usual backlash.Paul Krugman, Do Democrats Have a Technocrat Problem?, N.Y. Times (Feb. 22, 2022).
I agree that corporations don’t have to worry about experiencing the usual backlash. Because they are experiencing way, way more than the usual backlash, and not just from consumers, as shown in the poll to which Krugman cites, but also from, you know, The White House.
I mean, if you asked me what the worst time ever would be to jack up prices, I would say that it’s in the middle of a global pandemic in which any price increase is going to be viewed by a surly public as price gouging.
But I guess that’s just me.
There’s something else I don’t get about this argument.
Monopoly power is the power over price that comes from artificial scarcity; it comes from firms voluntarily holding something back. But firms are producing and selling more than ever before, at least if the amount of stuff transiting through ports is any measure. Savannah, for example, was recently operating 50% above pre-pandemic levels.
How can firms be holding something back while increasing their output by anywhere near that order of magnitude?
It’s possible that they could go even further but purposefully aren’t. But we have almost no true monopolies in this country in the sense of single firms alone serving entire markets. The meatpacking market that is so concerning the Biden Administration is concentrated, but it still has four large players.
How does a group of three or four firms ramping up output to meet surging demand still manage to hold something back, especially when the true extent of demand is unknown (as it always is) and holding back by too much while other firms continue to increase supply is a recipe for a catastrophic loss of market share?
The answer is: by actually coordinating output directly with each other—forming a cartel—just as we often see firms that are trying to reduce output in response to declining demand meet to try to manage the reductions in a mutually profitable way.
But no one seems to be alleging that American industry is cartelizing. Antimonopolists want to break up large firms, not bust cartels.
It’s much more likely that the price increases are what they appear to be: driven by scarcity.
I’m also a bit confused about this:
And perhaps an even more important point, cracking down on excessive industrial concentration and market power would help reduce inflation, regardless of the role market power played in causing inflation in the first place. As an old line puts it, you don’t have to refill a flat tire through the hole.
Antitrust cases last a long time. The Department of Justice sued AT&T in 1974. The company was broken up in 1982. If inflation is still 7% in 2030, it will have become structural, and only another Saturday Night Massacre will save us.
There are plenty of good reasons to want to eliminate monopoly pricing, and industrial deconcentration is one way to do that. But reducing inflation isn’t one of those reasons. I’m all for faster antitrust enforcement, but the reality is that the courts and inflation move at very different speeds.
And that’s before we even consider that antitrust action is a one-time fix. You can only deconcentrate the economy once. But inflation is a perennial problem. Once all those antitrust cases have gotten prices down ten years from now, antitrust won’t have anything to offer in combating the next inflation, either.
Even if Krugman is right about market power and the current inflation, what being right here gets progressives is almost nothing. Here’s how Krugman puts it:
Nobody sensible would argue that opportunistic exploitation of market power is the main factor behind recent inflation. But contrary to what some people might want you to believe, economic theory by no means rules out the possibility that it may be a factor.
It cannot be ruled out that monopoly is a factor in inflation? The progressive movement I signed up for pursues policies that it knows make a difference. Like taxing the rich. Not stuff that “can’t be ruled out as being a factor.”
And Krugman is usually all about the big stuff. So why not one, but two columns now trying to defend the possibility that monopoly might matter albeit not as much as other things?
Sadly, I think that’s because antimonopolism has eaten the progressive mind over the past few years.
It’s no longer mere policy serving as a means to an end.
It’s now ideology. An end in itself.
Progressives know that Goliath must be slain, and they are going to insist on it, no matter what, even if the most that can be proven about Goliath is that he can’t be ruled out as a secondary cause of the economic problems we care about.