Great article Brian. You’ve spoken about perfectly competitive markets and how high profits don’t necessarily indicate market power, as well as the dynamics of monopolies. But what about duopolies? In Australia, our supermarket industry is highly concentrated, with Coles and Woolworths controlling around ~60% of the market. While there are smaller players like Aldi and independent retailers, their market share is much lower, and barriers to entry remain high (in part due to their ability to slash prices to deter competition). It may not be a pure duopoly, but for the sake of discussion, it’s close enough.
There are persistent public accusations of price gouging, yet research (e.g., e61) suggests strong consumer inertia: many shoppers don’t seem to be switching supermarkets even when alternatives exist (possibly implying lack of economising on part of the consumers). But broadly speaking, public frustration is fuelled by a perception that supply constraints have raised costs, which supermarkets are passing down to consumers, yet CEOs are still making multimillion-dollar pay checks -- perhaps implying rising margins. Now, I’m sceptical of the price gouging claims, but I can see why people believe it.
In your view, given this market structure, do sustained high profits in a duopoly primarily reflect true market power, or is consumer behaviour (the inertia I mentioned above) a bigger driver of reduced competitive pressure? I.e. how would you expect pricing dynamics to play out differently in a duopoly compared to a more competitive market?
I have to say, that well generally will put together, this ismissing a lot of important facts. Like calmain being the number one supplier of chicks that lead to layers producing. They almost completely control that market and have near complete control over the supply. They artificially restrict the supply so that they can create these shortages. How does economic theory capture that?
I've heard this argument about economics over and over again in agriculture. About how the consolidation isn't actually manipulative because they look at short-term impacts and say hey it matches economic theory and there's nothing wrong here. It's ridiculous. The evidence is overwhelming to the contrary. Get out of your classroom and get out in the real world and dig deeper. Not implying you don't, but what I'm reading suggest that maybe the case. Please by all means correct me. That's all I ask. I don't disagree with anything you're saying, I'm just saying you're not seeing the whole picture.
Yes, Cal-Maine control a large share of the market, this does not mean there is inherent artificial restrictions on supply and price gouging. The conspiracy style thinking of seeing a big company and automatically suspecting this huge coverup is ingrained, but that doesn’t mean you can accuse people of ‘not seeing the full picture’ without any actual evidence. A huge exogenous supply shock on the laying hens is clearly a cause for major price disruptions, it is the most basic way that prices work. Sometimes there isn’t a big conspiracy to cheat the economy, and prices simply do their job!
It would not seem a leap in business today witnessing the general obsession with short term extractive culture? We have mountains of evidence across industries showing just this? well it may be difficult to prove they aren't manipulating things, I find it hard to believe they wouldn't. It just doesn't seem credible. Do I have the receipts, no. But I also have eyes and ears and pay attention and these companies are notoriously abusing their market power over and over again. I've got no ax to grind against calmain, but the powers that monopolist can wield over the market inhibit the formation of new business competitors more than anything else, so even if you can't see the evidence in the data, you don't see new competition arising when you can be squashed like a bug if you have any success at all. This is not to say that big companies are inherently evil, but the temptation to utilize market power is too great for all but the most moral of men
"But if the logic it applies when moving from c’ to c, it applies exactly opposite if we move from c to c’."
This sentence could use a LOT of elaboration. Without it, it's a real stumbling block (for me, anyway). If I tried to write out clearly my conclusion as to what it means, I think I'd get a long paragraph.
“Eggs are a perfect example of inelastic demand” seems crazy to me. How are there not a lot of substitutes? You’ve talked a lot about identifying the relevant market in your other posts on anti trust. Eggs are food, just eat other food, right? Or even breakfast food, just eat a bowl of oatmeal or breakfast sausage or yogurt etc. I get restaurants being reliant on them, but that’s a derived demand. I guess I’m wrong per the evidence you provided, and as someone who almost never eats eggs I can’t relate. But this is hard to digest, something else seems to be at play.
Eggs are more like salt—demand changes little no matter how much prices increase (or decrease). Now if you don’t eat eggs you won’t have much empirical evidence of this fact, but unlike orange juice (which has many substitutes like milk or other juices—even water), there’s nothing like eggs. Yes, you can eat bacon without eggs but you’re more likely to reduce the number of eggs than substitute another food (and at double the price you may just pay the higher price).
Not sure I understand this. Elasticity of demand captures how much quantity demanded changes in response to a change in price. Inelastic demand implies that consumers are relatively insensitive to price changes, so why would you say “you’re more likely to reduce the number of eggs”. You’d be less likely to reduce the number of eggs you consume since you’re insensitive to changes in the price of eggs. Also please explain to me how milk is a substitute for orange juice but other food isn’t a substitute for eggs.
Eggs unlike salt are not completely inelastic. At some higher price even a lover of eggs will cut back his consumption.
Now as for milk being a substitute for orange juice, substitutes don’t have to be perfect (busses and trains and air travel). Liquids are that are consumed with a particular meal are easy to substitute for (water if all else fails).
One last example, if movie ticket prices increase consumers could read books from the library (or unwatched older movies found on TV)
Sheesh! Dude, that’s right there with “If they can’t eat bread let them eat cake”!!! Eggs are a staple for the reason that they are the least expensive source of protein! 🤦🏽♂️
Wow! We are approaching revolution times, it would just take for a well known politico to say the above to start the lynchings 🤣
Great article Brian. You’ve spoken about perfectly competitive markets and how high profits don’t necessarily indicate market power, as well as the dynamics of monopolies. But what about duopolies? In Australia, our supermarket industry is highly concentrated, with Coles and Woolworths controlling around ~60% of the market. While there are smaller players like Aldi and independent retailers, their market share is much lower, and barriers to entry remain high (in part due to their ability to slash prices to deter competition). It may not be a pure duopoly, but for the sake of discussion, it’s close enough.
There are persistent public accusations of price gouging, yet research (e.g., e61) suggests strong consumer inertia: many shoppers don’t seem to be switching supermarkets even when alternatives exist (possibly implying lack of economising on part of the consumers). But broadly speaking, public frustration is fuelled by a perception that supply constraints have raised costs, which supermarkets are passing down to consumers, yet CEOs are still making multimillion-dollar pay checks -- perhaps implying rising margins. Now, I’m sceptical of the price gouging claims, but I can see why people believe it.
In your view, given this market structure, do sustained high profits in a duopoly primarily reflect true market power, or is consumer behaviour (the inertia I mentioned above) a bigger driver of reduced competitive pressure? I.e. how would you expect pricing dynamics to play out differently in a duopoly compared to a more competitive market?
I have to say, that well generally will put together, this ismissing a lot of important facts. Like calmain being the number one supplier of chicks that lead to layers producing. They almost completely control that market and have near complete control over the supply. They artificially restrict the supply so that they can create these shortages. How does economic theory capture that?
I've heard this argument about economics over and over again in agriculture. About how the consolidation isn't actually manipulative because they look at short-term impacts and say hey it matches economic theory and there's nothing wrong here. It's ridiculous. The evidence is overwhelming to the contrary. Get out of your classroom and get out in the real world and dig deeper. Not implying you don't, but what I'm reading suggest that maybe the case. Please by all means correct me. That's all I ask. I don't disagree with anything you're saying, I'm just saying you're not seeing the whole picture.
Yes, Cal-Maine control a large share of the market, this does not mean there is inherent artificial restrictions on supply and price gouging. The conspiracy style thinking of seeing a big company and automatically suspecting this huge coverup is ingrained, but that doesn’t mean you can accuse people of ‘not seeing the full picture’ without any actual evidence. A huge exogenous supply shock on the laying hens is clearly a cause for major price disruptions, it is the most basic way that prices work. Sometimes there isn’t a big conspiracy to cheat the economy, and prices simply do their job!
It would not seem a leap in business today witnessing the general obsession with short term extractive culture? We have mountains of evidence across industries showing just this? well it may be difficult to prove they aren't manipulating things, I find it hard to believe they wouldn't. It just doesn't seem credible. Do I have the receipts, no. But I also have eyes and ears and pay attention and these companies are notoriously abusing their market power over and over again. I've got no ax to grind against calmain, but the powers that monopolist can wield over the market inhibit the formation of new business competitors more than anything else, so even if you can't see the evidence in the data, you don't see new competition arising when you can be squashed like a bug if you have any success at all. This is not to say that big companies are inherently evil, but the temptation to utilize market power is too great for all but the most moral of men
As someone who teaches high school economics, I really appreciate cogent, clear essays that apply Econ 101 models. Thanks for this!
Notes on the Cost of Eggs. https://shorturl.at/xTn1R
"But if the logic it applies when moving from c’ to c, it applies exactly opposite if we move from c to c’."
This sentence could use a LOT of elaboration. Without it, it's a real stumbling block (for me, anyway). If I tried to write out clearly my conclusion as to what it means, I think I'd get a long paragraph.
“Eggs are a perfect example of inelastic demand” seems crazy to me. How are there not a lot of substitutes? You’ve talked a lot about identifying the relevant market in your other posts on anti trust. Eggs are food, just eat other food, right? Or even breakfast food, just eat a bowl of oatmeal or breakfast sausage or yogurt etc. I get restaurants being reliant on them, but that’s a derived demand. I guess I’m wrong per the evidence you provided, and as someone who almost never eats eggs I can’t relate. But this is hard to digest, something else seems to be at play.
Eggs are more like salt—demand changes little no matter how much prices increase (or decrease). Now if you don’t eat eggs you won’t have much empirical evidence of this fact, but unlike orange juice (which has many substitutes like milk or other juices—even water), there’s nothing like eggs. Yes, you can eat bacon without eggs but you’re more likely to reduce the number of eggs than substitute another food (and at double the price you may just pay the higher price).
Not sure I understand this. Elasticity of demand captures how much quantity demanded changes in response to a change in price. Inelastic demand implies that consumers are relatively insensitive to price changes, so why would you say “you’re more likely to reduce the number of eggs”. You’d be less likely to reduce the number of eggs you consume since you’re insensitive to changes in the price of eggs. Also please explain to me how milk is a substitute for orange juice but other food isn’t a substitute for eggs.
Eggs unlike salt are not completely inelastic. At some higher price even a lover of eggs will cut back his consumption.
Now as for milk being a substitute for orange juice, substitutes don’t have to be perfect (busses and trains and air travel). Liquids are that are consumed with a particular meal are easy to substitute for (water if all else fails).
One last example, if movie ticket prices increase consumers could read books from the library (or unwatched older movies found on TV)
Sheesh! Dude, that’s right there with “If they can’t eat bread let them eat cake”!!! Eggs are a staple for the reason that they are the least expensive source of protein! 🤦🏽♂️
Wow! We are approaching revolution times, it would just take for a well known politico to say the above to start the lynchings 🤣
When you kill 10% of the chickens, the supply will go down and the price will go up.
David - could you clarify why monopoly power passes through only 50% of what?
Of the cost increase