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What pundits don’t get about the Harris “price gouging” proposal

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One week ago, Vice President Kamala Harris told a North Carolina audience that she planned to propose a federal ban on price gouging for food.

In criticizing Harris, the Washington Post editorial board demonstrated its lack of basic economic theory. Then various news organizations jumped from “price gouging” to “price controls” (a la Nixon). Now Cato Institute economist Scott Lincicome insists farm policy is the culprit behind food price increases.

1. Existing law

Thirty-seven states already have laws on the books that prohibit “price gouging” in the lay person’s understanding of that phrase. This type of prohibited price gouging concerns taking advantage of high demand or supply restrictions during an emergency (a hurricane is coming and then it landed).

Another lay definition of price gouging is charging an excessive price “because a corporation has the power to do so, aka Ticketmaster.”

That kind of price gouging can encompass anything from charging a lot during an emergency – the technical definition – to slapping a junk fee on a hotel bill after you’ve checked in, to surveillance pricing where a company charges you more because of what they know about you, to making it hard to cancel a subscription. Basically, being cheated by someone with power is being gouged.

Both are a form of monopoly power (sellers over buyers).

A federal law would end the patchwork of state laws and acknowledge that the firms with this much market power are national, not local.

2. About antitrust

In a meta sense, the federal government already has laws that prevent corporate economic plundering. They are called “anti-trust” laws and are supposed to provide some balance in market power between a small number of sellers (such as Walmart, Kroger and Albertsons) and a large number of buyers (most American households). Unfortunately for consumers, federal anti-trust efforts went dark under Ronald Reagan and have only truly been resurrected in the Biden-Harris administration.*

Europe has very strict rules “protecting free competition.” The U.S. has anti-trust laws on the books; politically, the White House has had insufficient political will to tackle corporate giants. Until the Biden Administration, which issued an executive order on competition in July 2021.

US President Joseph Biden issued an executive order (EO) on antitrust policy in July 2021 declaring: “We’re now 40 years into the experiment of letting giant corporations accumulate more and more power. I believe the experiment failed.”[1]. Over that period, price-cost markups have tripled[2]; the rate of new business formation fell by fifty percent[3]; In three quarters of U.S. industries, concentration is higher than two decades prior[4] and wages have decreased by more than fifteen percent in key sectors of the US economy[5]. The Biden Administration argues these are prima facie evidence of the need for action in antitrust policy.

To the extent that Harris might be referencing excessive prices due to market power, she is continuing Biden administration policy. Not cranking out something new. Or price controls.

One suggestion that excessive market power is a reality comes from research published two years ago that explores causes of inflation.

Between between 1960 and 1980, corporate markups averaged 26 percent above marginal cost (the cost of producing one more unit). In the 2010s that jumped to 56 percent above marginal cost. And in 2021, to 72 percent above marginal cost. I’m certain you are not surprised that the trend is driven by the firms with the most market share.

In our analysis, we find that firms increased their markups substantially in 2021, both to their highest level and with the largest single-year increase since 1955. Firm profitability, both before and after taxes, also increased to its highest levels. This sharp annual increase in markups was driven to a large degree by firms with markups in the top 25th percentile of the distribution.

This research skewers the argument used by the Federal Reserve: that inflation was labor-induced.

However, USDA trends suggest that overall market power in neglible, at least for food consumed at home.

US share disposable income on food

U.S. consumers spent an average of 11.2 percent of their disposable personal incomes on food in 2023, unchanged from 2022. However, there were notable shifts in the composition of food spending. From 2022 to 2023, consumers’ budget share allocated to food-at-home spending decreased from 5.6 percent to 5.3 percent, while the share allocated to food-away-from-home spending increased from 5.6 percent to 5.9 percent. In 2023, the share of income spent on food-away-from-home reached its highest point since the series began, reflecting the ongoing upward trend observed prior to the Coronavirus (COVID-19) pandemic.

3. Why food is different

The pundits misunderstand or ignore factors that make agriculture and food unique markets, especially when set alongside consumer goods like Apple Watches, a Toyota Prius or your favorite running or hiking shoes. The clearest example is this: when demand drops, manufacturers stop running assembly lines. Farmers have corn and peanuts in the field, beef cattle on pasture, chickens in a poultry barn. They cannot just stop.

Manufacturers can also store excess product in warehouses. Corn and peanuts have a narrow window of harvest and post-harvest viability. Cows are milked two or three times a day; milk is highly perishable. Likewise, chickens and beef cattle cannot be fed indefinitely. And once they are slaughtered, the life cycle of those products is fixed and narrow.

In the absence of farmer marketing cooperatives, farmers sell to a handful of firms with much more market power than any individual farmer. They are also on the short end when buying supplies.

At the wholesale level, “the four largest meatpackers accounted for 85% of steer and heifer slaughter and 67% of hog slaughter” in 2019.

For farmers, “two seed companies accounted for 72% of planted corn acres and 66% of planted soybean acres in the U.S. in 2018-20.”

As far as processed foods, we have many brands but far fewer corporations owning those brands. Looking at the top 10 brands of cereal:

  • General Mills: Cheerios (1), Honey Nut Cheerios (3), Cinnamon Toast Crunch (5), Lucky Charms (7)
  • Kellogg: Frosted Flakes (2), Froot Loops (6), Frosted Mini-Wheats (8)
  • Post: Honey Bunches of Oats (4), Fruity Pebbles (10)
  • Quaker: Life (9)

Coca-Cola owns 200 brands. PepsiCo owns more than 500 brands, including Quaker Foods (above) and Frito-Lay North America.

Then there’s shrinkflation. My half-gallon of milk (64 ounces) is now 59 ounces. And no, the price didn’t drop by about 9 percent!

According to USDA, the cost of food-at-home (versus food consumed outside the home) increased 5 percent in 2023 compared with 2022. This is twice the average, which was 2.5 percent per year for the prior 20 years.

Food price increases 2023

Firms with market power are using it to make prices sticky downward.

The average person has probably heard the phrase “anti-trust” less than a half dozen times.

But price gouging? That’s a familiar phrase that can be remedied by anti-trust action. Action already underway in the current administration.

Pundits and columnists are throwing ideas against a virtual wall, trying to find a “gotcha” that sticks. That’s what they do.

Don’t let them fool you here. A commitment to anti-trust, whatever the lingo, is something to be celebrated, not criticized.

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* Today the Department of Justice filed a lawsuit against RealPage, which takes information shared by competitng landlords, runs the data through a series of algorithms, then recommends rents.

The complaint alleges that RealPage contracts with competing landlords who agree to share with RealPage nonpublic, competitively sensitive information about their apartment rental rates and other lease terms to train and run RealPage’s algorithmic pricing software. This software then generates recommendations, including on apartment rental pricing and other terms, for participating landlords based on their and their rivals’ competitively sensitive information. The complaint further alleges that in a free market, these landlords would otherwise be competing independently to attract renters based on pricing, discounts, concessions, lease terms, and other dimensions of apartment leasing. RealPage also uses this scheme and its substantial data trove to maintain a monopoly in the market for commercial revenue management software. The complaint seeks to end RealPage’s illegal conduct and restore competition for the benefit of renters in states across the country.

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