Inflation is providing cover for price fixing: economists
Economists and lawmakers are warning that high inflation is providing companies with an excuse to telegraph price increases during earnings calls, reducing market competition and compounding the pain for consumers.
“They’re profiteering, and they are using this moment and their monopoly power in many industries to raise prices on consumers,” Rep. Pramila Jayapal (D-Wash.) said in an interview, ahead of dozens of companies reporting second-quarter earnings this week.
The Department of Labor reported last week that consumer inflation is now at 9.1 percent annually — the highest level in 40 years. Food prices are up more than 10 percent, energy prices are up more than 40 percent and “core inflation” — everything besides food and energy — is up almost 6 percent.
The worldwide trend of high inflation, which has led to unrest and labor protests in numerous countries, is caused by larger disruptions in the global economy resulting from the coronavirus pandemic.
However, it is being exacerbated by companies in concentrated sectors essentially acting in cahoots to further price increases, economists argue.
“A bout of inflation creates an opportunity that didn’t previously exist for firms in concentrated industries to coordinate better their pricing decisions,” Hal Singer, managing director of Econ One Research and an adjunct professor at the Georgetown University McDonough School of Business, said in an interview.
“No price-fixing conspiracy in the modern world involves a written agreement where they sit down in a smoke-filled room and they say, ‘OK, we all go up by 10 percent.’ That’s not how it works. They’re not that dumb. What they’re doing is trying to coordinate in a way that defies scrutiny from the antitrust laws.”
Singer said one common coordinating tactic is earning calls.
“At the end of 2021 — I was livid — you’d hear these executives saying, ‘We plan on raising our prices by 17.24 percent next quarter.’ I thought to myself, I can’t believe the agencies are letting them get away with this. This is clearly an invitation to collude. If I’m a firm in a three-firm industry, and I commit via the airwaves to telling everyone I’m going up by 17.24 percent, that is a signal to my rivals that if they go up by anything less, they will not lose market share.”
During fast food chain Chipotle’s first-quarter earnings call, finance chief Jack Hartung said that his customers had shown “very little resistance” to price increases.
“Our transactions actually are up, even though we had pricing that was in that about 10 percent range,” Hartung told investors in April, according to market research firm Seeking Alpha. “The price increase is sticking just as expected. We don’t see any resistance.”
Industrial conglomerate 3M’s finance chief, Monish Patolawala, said on the company’s fourth-quarter 2021 earnings call in January that his “team has done a marvelous job in driving price. Price has gone up from 0.1 percent to 1.4 percent to 2.6 percent,” characterizing the trend as a “tailwind” to investors.
This sort of language about where prices are heading in the future comes close to the kind of price signaling identified as a no-no by the Department of Justice and the Federal Trade Commission (FTC).
According to the Justice Department and FTC’s guidelines for “collaborations” among competitors, “the potential for future competition between participants in a collaboration requires antitrust scrutiny.”
“Other things being equal, the sharing of information relating to price, output, costs, or strategic planning is more likely to raise competitive concern than the sharing of information relating to less competitively sensitive variables,” the agencies’ joint guidance says.
Yet it’s not easy for lawyers and regulators to go after disclosures made on public earnings calls, Georgetown’s Singer said.
“The problem is that it’s very difficult for a private plaintiff or an AG [attorney general] to go after a firm that has been careful enough to only attempt to collude via public announcements in the airwaves,” he said.
One court case that helped to establish that norm involved airlines Delta and AirTran, who were accused in a class-action lawsuit of violating the antitrust Sherman Act by using earnings calls to coordinate their pricing, making sure that neither company lost market share by undercutting the other.
According to a write-up on the case from the American Bar Association, the court “rejected the plaintiff’s contention that statements made by an AirTran executive during an earnings call constituted an ‘invitation to collude,’ ” deciding instead that corporate communications to shareholders usually can’t be considered as an opportunity for collusion.
Despite the ruling, the power and profitability of big companies during a period of high inflation is drawing the anger of many Democratic lawmakers.
“Look at Big Oil,” Rep. Peter DeFazio (D-Ore.), chairman of the House Transportation Committee and a co-founder of the Congressional Progressive Caucus, said in an interview. “On their earnings calls, they talked about their excess profits — excess profits — so they’re going to buy back $22 billion worth of stock that enriches the executives, enriches the stockholders. And people at the pump are paying.”
“You can start breaking up these monopolies, duopolies, cartels, whatever you want to call them. The last I heard, the Biden administration was trying to revive the antitrust division, but I haven’t heard much out of them. I don’t know what they’re up to,” he added.
While new antitrust laws pertaining to the tech sector have been introduced in the Senate, broader legislative efforts on the issue are few and far between. As a more immediate goal, Democrats are looking to tax windfall profits to recoup some of the excess profits, but these initiatives are hitting legislative snags, as well.
“I have a bill to have a windfall profits tax on the oil companies that’s very reasonably written,” DeFazio said. “They’d still be profitable, they’d still be making money. It would send a rebate check of $160 to every American over the age of 18. Unfortunately, my leadership has not seen fit to take it up.”
Republicans are generally less concerned about high profits for companies during high inflation, though some have joined Democrats in calling out the profit bonanza in the tightly concentrated meat packing and shipping industries, which has hurt some businesses in GOP constituencies.
And there’s growing consensus among academic economists that the market power of companies is getting bigger, allowing them to take more money from consumers.
Markups — the difference between the price of a good and what it costs to make — have risen from about 21 percent in 1980 to 61 percent today, according to an influential paper written by Jan de Loecker, Jan Eeckhout and Gabriel Unger.
The authors also found that the average profit rate has increased from 1 percent to 8 percent over the same period, showing that the economic power of companies over their customers is growing.
“What people don’t understand is the power of deterrence,” Singer said of potential collusion through earnings calls. “If the first CEO was hit with a lawsuit, like the announcement of an investigation, by the FTC, it would immediately chill and temper the enthusiasm of other CEOs to copy her. This should have been done a year ago.”