Dollars and Jens
Friday, July 09, 2004
interest rate policy
I read today that Greenspan and Ferguson have been arguing that businesses "can absorb price increases with their profit margins", as it was put where I saw this; this makes me happier about having said it myself. At the same time, I wish I had a more clear sense of why I think they won't be able to pass those costs along.
One idea that's been slowly assembling itself in my head is based on something I emailed to my brother a few weeks ago, that it is precisely those companies that are in competitive industries that should be able to pass along cost increases, because their competitors will all be increasing prices as well, whereas the price a more protected company has been charging has been less connected to price in the first place and more connected to demand, which presumably is unaffected by the cost hikes. High profit margins suggest that competition hasn't yet been drawn in to a great extent. The way I say this — about competition being drawn in — is the classic reason that unsustainable profits are unsustainable: they draw competitors who will undersell you. This, too, would hold down prices.
So, there are my theories. Current prices are largely decoupled from costs by insufficient competition, and there will be more competition, holding down prices as costs rise. I'm still not convinced, but I'm talking myself into it; there will necessarily be an element of concern that I'm constructing models the way a drunk uses a lamppost: more for support than illumination.