Okay, so our friend Eric here is making a few claims that go as follows:
1. Things are expensive now
2. They are expensive because of monopoly pricing
3. We don’t hear about it because the news is also controlled by monopoly pricing.
To be honest, the claim that ‘things are expensive now’ is both a nebulous concept and also an incredibly expansive one to prove. How would you go about attempting to prove such a thing? Also, what is ‘now’ in reference to and what is the comparison point? Was there a point N years prior where things were ‘cheap’ (where I guess there was more price competition)? So, let’s take the meat question first — there are several ways you could attack the question but here’s one “how much does the typical consumer spend on meat compared to how much they typically spend in total?”:
So it’s actually been going much lower! We used to spend about 5.5% of our expenses on meats and now it’s less than 2.5%. It should also be noted that we we are consuming more meat than we used to:
This certainly doesn’t support the claim that meat is more expensive than it used to be. What about air travel?
In total, we spend about the same % of our consumption on air travel as we have historically BUT…
we travel about 3.5x more than we used to. This similarly doesn’t make the case that airline travel has become more expensive. Now, there’s not hyper detailed (and for a long date range) data for specifically cereals (which I believe they mean .. breakfast cereals, not cereals as in ‘corn/wheat’ commodities) but that should actually give you pause because the question is “everything is so expensive”. It’s a fraught exercise to try and prove an epically large statement ‘everything is expensive’ with data from ‘here’s this one thing which represents a super small part of everything we purchase’. Let’s do the exercise with all food:
The percentage of our consumption that we utilize for food has fallen from 20% in the 1960s to less than 8% today. Now, it’s hard to make a ‘per capita food consumption’ plot because .. how do you measure that? calories? weight? How do you mix foods? Still the USDA’s Economic Research Service attempts to do so and, it should not surprise you, that we consume more now than we did previously:
Now, this is only one way you might prove this but probably the best. Still, let’s recall exactly why economists hate monopolies:
In the plot above, if there were perfect competition, the price of the good/service should be where marginal demand (D, purple line) = marginal cost (red line). This is for the simple reason that no one would choose to meet demand beyond their marginal cost (losing money along the way). In that setup, the new price would be where I’ve put “R” and the new quantity is where I’ve put “Q”. However, the purpose of a firm is to maximize profits so, you’ll notice that the new profits, crudely drawn below will be much smaller (smaller areas of the box):
In other words, a monopoly will achieve higher profits through selling a small quantity of products but by charging a much higher price. This is a more formalized way of stating what I think would be obvious to most — a monopoly should have a very high profit margin (the exact amount of course is determined by the real shape of these lines — like the actual cost to produce and the demand). To make sure we’re clear — the ‘full price competition’ will have a new price (R) I put in and a new quantity (Q) which I put in but the monopoly would have a price P* from the plot and a quantity Q* and I’m simply pointing out that Q* is less than Q (less quantity) while P*> R (higher price). So, exorbitant profit margins (profits themselves are insufficient because you can sell a WHOLE LOT of things at a very small profit margin and still end up with a LOT of profit $s — i.e. Walmart). So what are the profit margins associated with these industries?
Food:
airlines:
Soft drinks:
and cereals fall under the food sub industry so I’ll just put Kellogg (the first one that came to mind here) as well:
Now, there’s not a hard science to this since profit margins, and what they’d be in perfect competition, range a lot too. Companies which compete in volatile markets will typically require high profit margins since an investor must be rewarded for taking risk in order to invest. Still, I find it hard to believe that profit margins in the 4%-8% range would scream ‘Monopoly Pricing’ from the rooftops. That seems consistent with where a consumer staples’ company’s profit margin would be in a competitive market.
Let’s take a quick aside here and mention that our friend Eric here is suggesting that something illegal is occurring for two reasons. 1. The Sherman Antitrust Act abolishes monopolies and 2. even coordination in pricing among an oligopoly (which is more directly being implied here) is also against the Sherman Antitrust Act. The Federal Trade Commission monitors and assesses monopolies quite actively with some major landmark cases historically.
Of course, a lot of this is more art than science but I similarly don’t think they’ve been asleep at the wheel. Last year they sued Amazon for instance and, interesting in that it applies directly to Eric’s complaints, they sued to stop further concentration in food (Kroger merger with Albertsons) and airlines (Jet Blue merger with Spirit). The FTC effectively caused the deal to be cancelled as Jetblue terminated in face of a likely loss in courts:
So, in effect, beyond the expansive nebulous and unsupported claim that ‘things are expensive’ and beyond the cherry picking of a few cases to try and suggest that the unsupported claim is because of monopoly/oligopoly, he’s also implying that illegal activities are happening and the Federal Government is woefully incompetent or complicit. I think you have to make a much better case if you’re going to try and make that claim. You can find all the current and recent cases here:
https://www.ftc.gov/legal-library/browse/cases-proceedings
Now, I didn’t, and I won’t, fact check the claims of concentration, partially because I don’t have unlimited time (nor do readers) but also because I wouldn’t be surprised if the number were accurate. One thing you’ll notice about all four industries/examples .. is that they are economies of scale businesses. What are economies of scale?
While it’s probably a near universal phenomenon that, as you grow, you can reduce expenses proportionally (you don’t need to add another accountant if you open up another store kind of idea), there are some industries where that effect is very strong. Think of car manufacturers, airlines, even Amazon. Compare this with someone who operates a number of hair salons. That person, if they choose to expand business, basically will very nearly replicate the same proportion of costs as their other shops (new lease, new stylists, new inventory, etc.). The presence of only a small number of firms in areas where there are clear and apparent benefits to reducing costs based on scale does not, by itself, suggest monopoly pricing. Why, for instance, have airlines been such perpetual profit losers (and terrible investments) for decades. For instance, here’s what would’ve happened if you invested in the airlines industry vs in the S&P500 starting with $100:
Let’s take airlines as a proof of point for Eric’s contention:
- Yes there’s concentration but that makes sense because it’s an economies of scale business
- However, perpetual losses in the industry over long horizons and tight profit margins make the claim of oligopoly/monopoly behavior exceedingly unlikely
- Airline travel is almost for sure not ‘more expensive’ — we travel a large multiple more often for about the same percent of our consumption than we did previously
- I don’t think the FTC is asleep at the wheel as we just saw a major merger in that industry be effectively blocked
Let me formalize the economies of scale question a bit more by hearkening back to the monopoly pricing theory we covered earlier:
There’s an implied assumption in this analysis that C (the firm’s costs per unit) don’t change. The point of economies of scale is that the proportional costs do change as you increase quantity. Formalized in the plot above, C moves down to my C* as Q moves up to my Qn. For the same reasons why economists dislike monopoly pricing, they like economies of scale. Namely, that it should result in a higher quantity produced at a lower cost. The real question here is the profit margin since the price charged in the new scenario I drew here is NOT C* (which implies zero profit margin) but C* plus the profit margin. Hence, you have the part art/part science FTC question where they should be supportive of economies of scale businesses having higher concentrations so long as the pricing behavior doesn’t appear to suggest monopoly pricing which, as demonstrated above, it doesn’t appear to be the case and .. this is why we continue to be able to consume more with less of our budgets than we could historically.
In fact, there are carveouts for ‘Natural Monopolies’ in the law. Electric and utility companies are examples of these. There’s SUCH a strong proportional cost reduction (partially due to the law of thermodynamics actually) that everyone would pay substantially higher costs (with worse harm to the climate) if we tried to make everyone’s electricity be supplied by a super competitive market. Recognizing the need and clear benefits that a single provider can give is the reason why we balance those industries’ monopolies with heavy regulation.
Alright, let’s not forget the last claim made by Eric .. that we don’t hear about this because the news is also an oligopoly. I mean … maybe, but it’s a bit of a stretch. One could argue that, if they ‘reported on all the other oligopolies and people got upset and demanded change’ that that could threaten their own monopoly pricing power since a newly empowered FTC which wasn’t asleep at the wheel could also apply new regulations to them and ruin their good time. Of course, that’s a bit of a loose connection and would require 6 (according to Eric) editors quashing news stories of journalists .. and none of the non 6 smaller news companies being interested in highlighting that or unable to (and important to note that that should be a positive FOR those small companies if it disrupts their competition’s monopoly pricing power) .. and also, the owners of at least some of those companies are actual public companies so it’s not even like we can find 6 news tycoons who explicitly tell their 6 chief news editors to not publish .. It’s a lot to believe is my point. Not that editors don’t quash stories all the time, not that there aren’t rich owners of news organizations with power, it’s simply one of those conspiracies which requires a lot of coordination among a lot of people to work and makes it difficult to believe that’s the case.
