Study finds market power drove pandemic food inflation

On earnings calls last week, major food brands bragged about their ability to keep raising prices. Soda and snack giant PepsiCo told investors that it raised prices 16 percent last quarter, bringing in 18 percent more profit. Nestle announced a 10 percent price hike and Unilever said its food brands cost 13 percent more. In all these cases, higher prices helped food giants increase profits even as their sales decreased.

Food giants keep raising prices even though well-publicized cost pressures, like fuel costs, rising wages and supply chain disruptions, have largely subsided. On Tuesday, the Wall Street Journal landed on an explanation for persistent food inflation that many consumer groups and economists (including the Open Markets Institute) provided months ago: corporate greed.

A new study by economists at the University of Massachusetts Amherst, made publicly available last week, backs this explanation. Authors Isabella Weber and Evan Wasner argue that “the U.S. COVID-19 inflation is predominantly a sellers’ inflation that derives from microeconomic origins, namely the ability of firms with market power to hike prices.” Or as one economist for insurance company Allianz told the Journal, “There is not enough competition in the food sector,” and corporations have been able to raise prices together without fear of losing sales to cost-cutting competitors.

Raising interest rates will not prevent this corporate profiteering. Weber and Wasner’s research dissects what triggered these coordinated price hikes and what can be done to dissuade further corporate “greed-flation.”

The dominant economic consensus argued that pandemic-era inflation came from “too much money chasing too few goods.” In other words, the basic forces of supply and demand drove up prices as pandemic stimulus checks supported shopping and supply chain disruptions created shortages. But Weber and Wasner’s review of corporate financials and investor calls finds that much of the inflation in late 2020 and the first half of 2021 went to pay for higher corporate profits. In the second quarter of 2021, profit margins for U.S. non-financial corporations jumped 13.5 percent, the largest increase in nearly 75 years.

In a less consolidated market, we’d expect competitors to eat into these profits and take sales away from one another by offering lower prices. But Weber and Wasner find that food corporations abused their market power and raised prices in concert to preserve and even grow their pre-pandemic profit margins, passing all their higher input costs onto consumers and then some. Tyson Foods, for instance, “more than doubled its margins and profits in the second half of 2021.” This profit-seeking and parallel price hikes made inflation worse than it may have been in a more competitive market.

Critics of this market power theory contend that the past three decades were marked by record consolidation and low prices. If corporations have market power to raise prices, why haven’t they used it until now?

Weber theorizes that corporations leverage their pricing power in different ways under different conditions. In the decades before the pandemic, the paper argues that companies increased their profits not by raising prices, but by lowering costs in an age of stagnant wages and globalized production without also lowering their prices. In this case, companies abused their market power by tacitly coordinating to avoid a low-pricing war. “We argue that firms with market power typically refrain from lowering prices and raise prices only if they expect other firms to do the same,” Weber and Wasner write.

Dominant corporations felt secure raising prices recently because they could point to genuine, sector-wide input cost shocks as justification for charging more. Wall-to-wall media coverage of mangled supply chains and out-of-control inflation helped condition consumers to expect higher prices. “The earnings calls reflect that firms find customers are more willing to pay higher prices when price hikes are perceived as legitimate,” the research says.

Contrary to corporate narratives, businesses do not have to increase prices when their input costs go up. They might rather choose to eat higher costs and accept lower profit margins to maintain or grow sales. In fact, some corporations tried this strategy during the pandemic, but they were disciplined by Wall Street. The study finds that in 2021, Target and Walmart chose to absorb some of their increased costs and maintain stable prices to retain shoppers and expand market share. Even though this strategy was profitable and brought in strong earnings, investors started selling Target and Walmart stock and instead backed companies that put price hikes and short-term profits over long-term market shares.

In this way, investors played a part in pushing firms to keep raising prices. “Firms that refuse to exercise pricing power to enhance or protect short-run profitability risk being sanctioned by financial markets,” the authors concluded.

Weber and Wasner do not think that raising interest rates will address this “seller-driven” inflation. Tamping down consumer spending harms small businesses that do not have the market power to raise prices and protect profit margins, they argue. Instead, the authors promote price-gouging laws and taxes on windfall profits that would discourage profit-seeking price hikes in times of emergencies. As a last resort, they also recommend strategic government price controls for “systemically significant sectors,” like energy, where legitimate price shocks can trigger profit protecting inflation.

Weber and Wasner focus on policies that could avert seller-driven inflation in the near term. In the long term, the White House, Senator Elizabeth Warren and some economists have called for antitrust investigations and greater antitrust enforcement to tame corporate market power and discourage tacit collusion.