Don't forget monopsony. Walmart and Amazon don't make their money by gouging customers but by gouging suppliers, allowing them to drive myriads of smaller firms out of business with unbeatably low prices. I recall seeing an article on the bill of parts for an Amazon Echo smart speaker. The conclusion was that Amazon were making no money on the equipment, which is very good value for the consumer. But it ties them into a profitable and monopolistic service ecosystem, with music, audiobooks, streaming videos, and online shopping. Amazon's AI home assistant Alexa has just two rivals, Google Assistant and Apple's Siri. The barriers to entry are now very high.
Now, if they introduce a "buy a share in Coles/Woolworths loyalty card" then customers might be induced to support zero taxation for the major shareholders the way tradie investment in rental homes brings wider support for special tax breaks and other advantages to large corporate developers and landlords at the expense of people who want to buy their own homes.
"Contrary to the dominant economic model – in which inflation begins in the labor market, with higher wages being passed on to prices ..."
The sooner the Phillips Curve dies (again) the better. I assume that Australia i similar to the US in that the shocks were to certain goods prices (and not others) requiring the central bank, to engineer inflation to facilitate RELATIVE price changes when some prices are sticky downward. Of course wages will lag.
I'd also imagine that in a smaller economy, even one open to trade, there is just less inter-firm competition, preventing a bigger challenge to competition policy, and even I suppose implying that some sectors are "natural monopolies" that would not be in a larger economy.
Retail electricity supply shows severe lack of competition. There's only slight discounting below the high (to compensate for the 2022 power orice shock) default iffer in Victoria.
The best solution is to encourage competition - in some cases international competition. Banking and the airlines are examples of the latter. In retailing Aldi and Costco are having an impact. As you know, John, there are a incentive issues associated with regulating a monopolist's price or their margins. It isn't as simple as Fels makes it out to be.
Profit maximisation is not a new evil. It has been around for thousands of years. And it’s market power that determines the level of profit maximisation. The higher incidence of hoarding ever since the GFC, has made things worse. Firms no longer maximise profits only in the short term. Since 2008 large firms have used hoarding to maximise profits in the medium to long term. Apple Inc for example had a cash hoard in the hundred of billions after 2008. Simply put they became their own lender of last resort. This meant that they could seize business opportunities quickly and do any r&d to consolidate their market power.
The solution to all this price gouging and hoarding does NOT lie in the hands of the federal government. It is built into the market system. Simply put, ex post changes to competition will happen under globalisation. The rise of mass production dominance outside the G20 countries will see an undercutting of prices in the long run. The firms that price gouge today will be the first to lose market share. They will no longer be lean and mean. They will eventually fail. This has already happened since 2008. Ask yourself: Where is most of the world’s steel made today compared to where it was made in 1984?
This is only one example of price gouging undermining long term competitiveness for super profitable firms.
Of course this is all in the long run.
As John Maynard Keynes once rightly pointed out: We will all be dead in the long run.
If something is to be done in the short term in Australia then it is all up to the state governments. They have constitutional power to fix prices. One lesson we older economists learnt from the Prices and Incomes Accord I, II, III and IV was that the federal government has no constitutional power over prices. Oh by the way, we now also know that state governments can impose their own income tax. Acting as a block they could tax the super profits of large firms. Their over-reliance on mining royalties will not last; and a super profit tax is a perfect replacement. The fact that most state governments do not have the courage to introduce such a tax today should not discount its use in more desperate fiscal circumstances.
Price gouging is real and ever present. But it is, in the long run, prejudicial to the long term survival of firms. The trick is to convince large firms that it is in their long term interests to moderate price rises.
What about more competition John such as Government permitting other airlines landing slots, entry to our market etc? And on, infrastructure, take a long hard look at how well our regulatory authorities perform as well as their powers, including price controls where appropriate.
Don't forget monopsony. Walmart and Amazon don't make their money by gouging customers but by gouging suppliers, allowing them to drive myriads of smaller firms out of business with unbeatably low prices. I recall seeing an article on the bill of parts for an Amazon Echo smart speaker. The conclusion was that Amazon were making no money on the equipment, which is very good value for the consumer. But it ties them into a profitable and monopolistic service ecosystem, with music, audiobooks, streaming videos, and online shopping. Amazon's AI home assistant Alexa has just two rivals, Google Assistant and Apple's Siri. The barriers to entry are now very high.
Yes, I make this point often.
Now, if they introduce a "buy a share in Coles/Woolworths loyalty card" then customers might be induced to support zero taxation for the major shareholders the way tradie investment in rental homes brings wider support for special tax breaks and other advantages to large corporate developers and landlords at the expense of people who want to buy their own homes.
"Contrary to the dominant economic model – in which inflation begins in the labor market, with higher wages being passed on to prices ..."
The sooner the Phillips Curve dies (again) the better. I assume that Australia i similar to the US in that the shocks were to certain goods prices (and not others) requiring the central bank, to engineer inflation to facilitate RELATIVE price changes when some prices are sticky downward. Of course wages will lag.
I'd also imagine that in a smaller economy, even one open to trade, there is just less inter-firm competition, preventing a bigger challenge to competition policy, and even I suppose implying that some sectors are "natural monopolies" that would not be in a larger economy.
Retail electricity supply shows severe lack of competition. There's only slight discounting below the high (to compensate for the 2022 power orice shock) default iffer in Victoria.
The best solution is to encourage competition - in some cases international competition. Banking and the airlines are examples of the latter. In retailing Aldi and Costco are having an impact. As you know, John, there are a incentive issues associated with regulating a monopolist's price or their margins. It isn't as simple as Fels makes it out to be.
Profit maximisation is not a new evil. It has been around for thousands of years. And it’s market power that determines the level of profit maximisation. The higher incidence of hoarding ever since the GFC, has made things worse. Firms no longer maximise profits only in the short term. Since 2008 large firms have used hoarding to maximise profits in the medium to long term. Apple Inc for example had a cash hoard in the hundred of billions after 2008. Simply put they became their own lender of last resort. This meant that they could seize business opportunities quickly and do any r&d to consolidate their market power.
The solution to all this price gouging and hoarding does NOT lie in the hands of the federal government. It is built into the market system. Simply put, ex post changes to competition will happen under globalisation. The rise of mass production dominance outside the G20 countries will see an undercutting of prices in the long run. The firms that price gouge today will be the first to lose market share. They will no longer be lean and mean. They will eventually fail. This has already happened since 2008. Ask yourself: Where is most of the world’s steel made today compared to where it was made in 1984?
This is only one example of price gouging undermining long term competitiveness for super profitable firms.
Of course this is all in the long run.
As John Maynard Keynes once rightly pointed out: We will all be dead in the long run.
If something is to be done in the short term in Australia then it is all up to the state governments. They have constitutional power to fix prices. One lesson we older economists learnt from the Prices and Incomes Accord I, II, III and IV was that the federal government has no constitutional power over prices. Oh by the way, we now also know that state governments can impose their own income tax. Acting as a block they could tax the super profits of large firms. Their over-reliance on mining royalties will not last; and a super profit tax is a perfect replacement. The fact that most state governments do not have the courage to introduce such a tax today should not discount its use in more desperate fiscal circumstances.
Price gouging is real and ever present. But it is, in the long run, prejudicial to the long term survival of firms. The trick is to convince large firms that it is in their long term interests to moderate price rises.
What about more competition John such as Government permitting other airlines landing slots, entry to our market etc? And on, infrastructure, take a long hard look at how well our regulatory authorities perform as well as their powers, including price controls where appropriate.
Tale of the Tape:
Wal-Mart [world's largest retailer with the greatest scale economies] has a gross margin of 4.4%
Woolworth's here: 6.5%
Walmart and WOW gp margin is about the same, ~24%. Net profit of WOW is 2.48%.
Walmart np is 0.28%