[mitthrowaway2]

Competition should drive down prices even if consumers have deep pockets.

This suggests that the US market has gotten less competitive. I wonder how much it has to do with ownership of competing firms by a few large index funds with concentrated voting power.

[rossriley]

Don't forget supply and demand works on the capital side of the equation too, higher inflation means shareholders push for higher profits in the same way that high inflation causes workers to push for higher wages.

There's increasing supply of investments at higher rate of return, bond yields are close to 4% which means riskier investments need to pay more to compete.

[mitthrowaway2]

Absolutely. But for competitors to raise margins bilaterally requires cooperation, because each side can take market share by keeping prices low.

I just wonder if the cooperation might come in the form of, say, one powerful shareholder of both competitors making calls to the boards of directors of both competing companies.

Unexpected consequence of passive investing?

[rossriley]

Is this really the case though? All shareholders are pushing for higher returns because of inflation, it's not an indication of collusion, it's an indication that the market conditions have changed.

As I said on the flip side the fact that all workers are pushing for higher salaries isn't a reflection of collusion between different sets of workers, it's just a reflection of the new economic conditions on the ground.

[mitthrowaway2]

Shareholders are always pushing for higher returns, inflation or not. The thing is that normally Pepsi and Coke would be preventing each other from raising margins. In a hypothetical state of perfect competition, where Pepsi and Coke are perfect substitutes and customers have no loyalty, and with constant or declining marginal costs at scale, Coke increasing their profit margin by 1% without Pepsi doing the same would result in Pepsi eventually taking the entire market from them. And if they both raise margins, that should result in a third party taking the entire market. Obviously this isn't as good for soda shareholders as if all soda companies raised margins at the same time, but game theory is supposed to prevent that kind of cooperation, and keep every company at their competitors' throats.

However, if both companies had enough shareholders in common -- or just one big shareholder in the Soda Index -- then they sort of stop being competitors, and just become brands.

[doublespanner]

Only if the competition thinks the increase in share is worth more than the increase in per unit profit.

And depending on the industry, there might not be much more to be gained by scaling up. Going from 45% to 60% of the market might not be more profitable than an extra few percent per unit.

[lores]

That's hitting the nail squarely. If your margin is 5%, going to 10% is far better and far easier than doubling your market share.

[mitthrowaway2]

Perhaps, but that's sort of like pointing to the prisoner's dilemma and saying "clearly, the best and easiest option for both prisoners is to both cooperate, thus achieving the best outcomes for both".

We usually expect that competitors would try to compete, and going from 5% to 10% market share would result in getting undercut so badly that you lose far more customers than the higher margins are worth. It's not so easy to hand-wave the reasons why that hasn't happened here.

[doublespanner]

Well no, there is no real dilemma, because unlike the prisoners you can change your choice at any time. You can do research and make a decent guess at the units sold at a price point of you only make a small increase, and then your competition does the same, and as long as you can all keep pushing the price each small increase is absorbed. This is essentially a mechanism for discovering inflation, it continues step by step until people stop buying.