Increasingly Unmeasurable Consumer Welfare When Governments Market Meddle

          Currently, both U.S. presidential candidates tout the benefits of having government intervene in commercial markets.  Former President Trump wants to impose tariffs, up to 20%, on foreign goods deemed below cost, so-called predatory pricing and dumping.  Vice President Harris wants price caps on food to foreclose gouging.

           I am skeptical whenever governments try to manage aspects of a market economy even with noble intentions, such as remedying so-called market failures.  Markets rarely fail.  Consumers and elected officials do not like certain market outcomes and unanticipated manipulations. Consumer/voter sentiment considers a market outcome wrong, unfair, or distorted and candidates for elective office better pay attention and “fight” to make thing right.

           Former President Trump wants to level the competitive playing field in a variety of markets, such as steel, solar panels, clothing, and electric vehicles, by imposing a surcharge he asserts will have to be paid by exporting companies that have achieved a lower cost of doing business advance thanks to government subsidies, cheaper labor, and other distortions. Vice President Harris wants to punish greedy corporations that have achieved high profit margins, no longer justified by higher costs and lower demand occurring during the Covid pandemic.

           Curiously, there is little analysis of what constitutes a government-imposed market intervention that can actually remedy a prior intervention (by another government) that has distorted the marketplace and created new winners and losers.  Price dumping companies acquire market share abroad, based on a price discount made possible by a government benefactor. Losers include U.S. companies without access to a government subsidy and their employees who might lose a well-paying job, and opportunity to realize the American Dream.

           Markets get distorted and lots of stakeholders have both legitimate and opportunistic reasons to complain and “vote their pocketbook.” Anyone unemployed, or no longer able to operate a profitable business, can blame imports and the arrival of illegal aliens willing to work for less pay. Anyone looking at the rising cost of food might believe corporations are gouging, despite the economic gospel that above cost pricing encouraging market entry and enhanced competition.

           It looks like there are lots of fallacies, false assumptions, and wishful thinking in play.  I have devoted a career trying to find the truth in telecommunications markets.  What enormous, distorted reality I have seen. I especially loath the gospel truth that all mergers and acquisitions “enhance competition and consumer welfare,” No one seems obligated by courts and the court of public opinion to explain how the marketplace improves.

           The Chicago School advocates point to lower prices, but often one cannot determine actual cost of doing business.  For example, how can one determine the actual cost of providing wireless broadband, when carriers bundle, “at no additional charge” streaming video.  For an industry with very high initial sunk costs, the cost of providing an additional unit of service approaches zero. Accordingly, consumers have no clue whether an attentional text message is properly priced at 5 cents by a reseller, but bundled in with unlimited voice and data.

           If an economic assertion is touted long enough and loud enough by credible speakers, then it becomes true no matter how illogical and bogus.

           For example, what happens when a market consolidation does not trigger market entry and the assumed increase in competition? In telecommunications there are extremely high barriers to market entry in light of the high sunk investment costs and regulatory decisions that often create a scarcity in a mission critical component such as radio spectrum.

           The Chicago School doctrine that mergers can enhance consumer welfare is based on the premise that a concentrated market will not result in higher prices.  But what is the correct price in a concentrated market?  Vice President Harris has generated much pushback, if not contempt, for her foolish economic thinking. Why have Chicago School mandarins avoided similar disdain when new market entry does not occur, prices exceed any measure of ongoing inflation, and there is ample proof that competitive markets in other countries offer consumers a clearly better value proposition?

           Right now, voters are told that tariffs will not raise product costs, governments can identify and sanction price gouging, and mergers are a wonderful event for consumers.

           Do these gospel truths make sense to you?

 

         

Market Forces Preempted by Rising Risk and Regulation?

             This might not be the best time for the U.S. Chamber of Commerce to make the case that rising risk and regulation are harming the marketplace and consumers.  See Public Policy Risks Soar Amid Growing Trend to Regulate Rather than Legislate and Partisan Approach to Lawmaking.  A content analysis of companies' 10-K filings with the Securities and Exchange Commission quantifies a rise in risk disclosures, with increases in key works such as data privacy, immigration issues, labor, and intellectual property.

             The Chamber appears intent on persuading the court of public opinion that life is getting riskier and harder for business. 

             It appears to me that Business America has largely foisted risk onto consumers, and counterintuitively their profit margins have increased despite frequent complaints that regulation raises the cost of doing business, squelches innovation, and reduces employment.

             I cannot find an airfare or hotel booking that permits cancellation without a risk premium doubling the non-refundable rate.  Similarly, if risk is so harmful, how can businesses, in a variety of market segments, find it possible to increase revenues and profit margins?  Even the Wall Street Journal notes this anomaly.  See Why Is Inflation So Sticky? It Could Be Corporate Profits

             I was indoctrinated by my UPenn and UVa training that market forces are largely unimpeachable.  In most cases yes, but just now, even some people at the "Diary of the American Dream" (a former marketing slogan for the Journal) see companies able to game the system.  Apparently, we consumers can become numbed by the constant drumbeat that inflation is unavoidable when markets become disrupted by supply chain and other extraordinary circumstances. The Chamber of Commerce wants to include in the emergency rationale upward price pressure created by added risk and government regulation.

             No one in the Chicago School seems able and willing to concede that sometimes market self-discipline fails.  How can these true believers explain the success achieved in keeping prices and margins extraordinarily high by blaming risk and the government even when the underlying emergency triggers have ended?  Now there are too many truck drivers at west coast ports chasing after declining loads.  No bottleneck in the supply chain anymore.

             Sticky, slimy, unclean, but surely not invisible hands at play.

The We’re Doing You a Favor Marketplace

             Countless vendors incessantly remind us how they must operate in “competitive marketplace,” with extraordinary challenges to price and availability of service.   Right now, they act like their doing us a big favor even by delivering a more expensive product, offering a substantially reduced value proposition.

            Have you noticed how many products have lower weights with decimal points?  Folgers now offers a coffee can with a massive 10.3 ounces.  P&G reduced the Crest tube from 6 ounces to 5.7 ounces.  My pet peeve: pretzel vendors reduced the standard pound bag to 14.25 ounces, and now have a vegetable fiber ingredient.  That’s code for sawdust, the use of which reduces the flour they have to include in their “artisan” product.

            How much money does a producer save when substituting high fructose corn syrup for sugar?  How much consumer rage does National Car ignore when the company does not honor a reservation, never responds to a complaint, doubles the daily rental rate, and offers no assurance that it will not ever again leave a frequent renter high and dry?

             At some point, one would think that the infallible marketplace would work through shortages and logistical headaches.  Apparently not this time.  Somehow chip fabricators just cannot get around to meeting increased demand.  U.S. port facilities never seem able to work through a backload, even with the extraordinary sacrifice of agreeing to work on weekends.

             I saw a poster in State College offering $48 an hour for carpenters.  I never earned that much as a university professor. 

             Oh that ruthlessly efficient marketplace.

Walmart The Price Gouger

When it comes to pricing, the conventional wisdom considers Walmart the regular low price leader, much like Southwest Airlines.  Think again.

These companies are no less willing to exploit gouging opportunities when available.  

Consider this rip off.  In June Walmart charged 50 cents for a gallon of spring or drinking water that my wife prefers when traveling.  Apparently, chlorinated water can wreck your bacterial balance among other bad things. A few days ago, Walmart charged 67 cents for this product, a 11+ percent increase reasonably attributable to pandemic costs, etc. 

Now Walmart is charging 98 cents, nearly a 100% increase.  

Walmart would be hard pressed to provide any cost plus basis for such a substantial increase in price in such a short period of time.  Sadly, there appears to be no way the so-called marketplace can discipline and punish such price gouging as insufficient numbers of people will cote with their feet and seek the 80 cent option available at Food Lion.

In this greedy, rip off, make up for lost profits environment, buyer beware,