Inflation. That might be the most important word in the future of America right now, so it’s worth taking a few moments to understand it a little better. I think I can help by talking today about how prices are set. Well….in reality, technology has changed business so radically that prices are never really “set” anymore. And that has changed the way we should think about prices, and inflation, forever.
Fifteen years ago I wrote a best-selling book called Gotcha Capitalism. Back then, consumers were already enraged by hidden fees and tack-on charges that seemed to make even the simplest transaction more complex and more costly. In that book, I predicted the death of the price tag (there’s even a short film about it!).
We’ve reached that moment now, and I think that’s one reason everyone is so confused about inflation and prices.
In Gotcha Capitalism, I joked that asterisks had become the 27th letter of the alphabet, and I made the serious charge that fine print was wreaking havoc with free markets and destroying the American way of life. Even back then, it was hard to know what your cell phone bill would be every month, or what the out-the-door price of a new car would be, or even what your mortgage bill might be next year.
Things are far worse today. Increasingly, prices are dynamic. That means the same thing you are buying online right now might cost less or more five minutes from now, or five seconds from now. This isn’t science fiction: grocery stores are experimenting with digital shelf tags that change thousands of times per day based on AI-driven conclusions about who is shopping.
I can’t overstate how dramatically this changes the old supply-and-demand construct for price setting. Free markets and fair pricing require perfect information on all sides of a transaction. The information advantage that corporations have when setting prices now is overwhelming. It’s as if pricing robots know that your kid is screaming, so they know you’ll pay 20 cents more for that box of cereal just to get out of the checkout line. Every trip to the store is now like a Math Bowl competition between PhD’s and first graders. People who believe the price of cereal has exploded because of pandemic-era stimulus checks are ignoring some pretty obvious drivers of “inflation.”
Gotcha Capitalism, the AI-version, is only one fundamental change to the way markets work. Greedflation, forged in the fire of the pandemic, is another.
Greed has always driven free markets; as long as there’s a fair fight, as long as greedy people on all sides of a transaction have roughly the same bargaining power, markets work brilliantly. If demand goes up because consumers have more money, prices go up, and you get inflation. But when corporate profits soar even as prices rise — when price hikes far surpass production costs increases — something else is going on. But believe me, corporations are hoping consumers don’t figure this out for a long, long time.
For decades, American corporations have been devouring each other in a race towards the bottom that means there are few, if any, competitors for most products you buy. As an airline, you fight for routes where travelers have only a single choice. In fact, they teach this is business schools now. Find a market, eliminate or acquire all competitors, then jack up prices. As Matt Stoller chronicles at his “Big” newsletter, evidence of consolidating, and coordinated price fixing, is everywhere in our economy once you know how to look. In a really twisted form of Gotcha Capitalism, apartment rental companies use third-party software to help them collude on rents but hide behind algorithms in a tactic that — feels a lot like what airlines do.
Still, raising prices always comes with a risk. But what if the risk is eliminated? What if suddenly “everyone is doing it!” The pandemic provided a great opportunity for those who want to exploit their massive information advantage and lack of competitors. It was an incredible natural experiment on a phenomenon that’s come to be known as “rockets and feathers.” Prices rise much faster than they fall, a fact that almost completely contradicts the old supply and demand view of pricing.
Years ago, “classical” economists would giggle at people like me who would write variations on this same story: There’s a big but temporary disruption to U.S oil supplies, perhaps because of a hurricane in the Gulf or saber rattling in the Middle East … and within hours, prices at the pump rise 20, 30, or 40 cents per gallon. Like a rocket, some say. But when the crisis passes, it takes days, weeks, or even months for prices to fall back to pre-crisis levels. They’d fall like a feather. “Greed,” yelled one side of the argument; “supply and demand” yelled economists.
The “less filling, taste great” argument eventually became so tiresome that a conservative economist named Sam Peltzman set out to study the phenomenon in order to shut up the complainers. Well, Peltzman discovered that, for once, “the person in the street is right and we are wrong.” Rockets and feathers is real, his research told him.
With the pandemic, the entire economy went through a rockets moment. Prices went up on everything, just about overnight. There were multiple factors. Yes, raw materials costs went up. Yes, labor costs went up. Yes, there were supply chain disruptions. All these things tell part of the pandemic inflation story. But soaring corporate profits tell a clear story right now — we are living in feather time. Companies are milking high prices for all they are worth. More than half of inflation last year should be blamed on feathers, rather than supply and demand, according to one study.
Making matters much worse: corporations have supercomputers, algorithms, and AI to help them squeeze every last feather-fueled penny out of this moment. We are now living in the golden age of Gotcha Capitalism.
What should we do? The fix is in, and fixing that won’t be easy. But I’ll say this with certainty: Fixing this isn’t communism. Dynamic pricing and junk fees really do threaten our way of life. If you hate buying plane tickets, wait until everything you buy feels like a plane ticket. Individual consumers cannot change this landscape. Government rules will have to re-create the kind of transparency that’s required for a free market to operate. Price tags that mean what they say must be resurrected. Antitrust regulators must be empowered to ensure every industry is ripe with competition, so bad actors can be punished by market forces. Companies using algorithms must be forced to make them public so they cannot discriminate behind a digital curtain. The Federal Trade Commission and other economic cops on the beat must be allowed to censure and fine misbehaving companies that trade on fake reviews, or false claims, or hidden fees.
Don’t be scared by those who suggest an effort to fix broken markets and hold corporations accountable will lead to scarcity. We already have that. Remember after Hurricane Maria hit Puerto Rico and U.S. hospitals were hit with a saline solution shortage?
Yes, price fixing is bad. But fixing price tags is good; the work must begin immediately. If you are worried about inflation, if you are angry at the price of cereal, fight against Gotcha Capitalism and empower those who will take up that fight.
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