[gruez]

>The author claims, that these companies raise prices more than inflation based cost increases in production would allow for.

That's just supply and demand? People get mad that when there's an oil shortage, that oil companies raise prices above the cost of production, but they're happy to see oil companies' margin collapse when there's an oil glut.

[amluto]

What supply and demand? The supplies of these goods have had occasional disruptions but are largely unchanged. The demand has not changed in any material way. And yet the prices have increased, and those increases have far outstripped the increases in the cost of goods sold.

It’s worth noting that, in classical economic theory, the price in a competitive market is set by matching supply and demand, but the price in a monopolistic market is set higher such that the profit (“producer surplus”) is maximized, which harms the buyers (“consumer surplus”) even more than the amount by which the seller benefits. The net loss is called deadweight loss, and one can argue about whether and how government policy should be arranged to minimize deadweight loss.

[pwg]

> The supplies of these goods have had occasional disruptions but are largely unchanged.

Those "disruptions" you refer to create periods of "lack of supply" (i.e., less of the goods). That is what the "disruption" is, a temporary reduction in the "supply"

> The demand has not changed in any material way.

True, but, during the period of "temporary reduction in the supply" (i.e., the disruption) Econ 101's supply/demand curve will predict that the price will rise to make the "demand" during the period of limited supply equalize with the new supply level due to the disruption.

What often happens (and you see it most clearly with gasoline prices), is that the price reacts extremely quickly to the supply disruption by increasing fast (seemingly within hours). But then, when the "disruption" clears, and the supply amount returns to normal, the price tends to slowly drift downward (if it drifts downward at all).

[arrosenberg]

Forget about oil for a second. Why is a large box of cereal $8 at the supermarket? It costs pennies to produce, maybe a dollar in landed cost. The small box costs almost the same landed and it's $5, which is also absurd. There is no supply shortage of corn and sugar, and no glut of demand for cereal.

I'm not stupid, I understand supply and demand. COVID was 4 years ago. Explain the $8 box of cereal.

[AnthonyMouse]

> Why is a large box of cereal $8 at the supermarket? It costs pennies to produce, maybe a dollar in landed cost. The small box costs almost the same landed and it's $5, which is also absurd. There is no supply shortage of corn and sugar, and no glut of demand for cereal.

Most of the cost of the cereal isn't the cereal. First you're paying for the store. That's real estate costs -- currently excruciating. Property tax and insurance, based on the real estate prices. The store needs heat and light, that's oil and electricity. There are people who work at the store, has your state recently increased its minimum wage? Grocery stores that don't buy advertising have fewer customers and have to amortize these costs over fewer sales, so you either have higher costs per unit because they didn't buy advertising or higher total costs because they did, etc.

The next question you might ask is, why don't they get rid of the store? Ship the cereal to your door. But it's like 8 oz of cereal, you'd get killed on the shipping. To make it work you'd need your whole grocery order to be delivered in one trip.

That could actually be an interesting business model. Instead of "free shipping" encouraging you to buy one item at a time but then the shipping cost is really baked into the item price, have "flat rate shipping" where you pay e.g. $35/order for shipping with no item limit. Then if you're buying what would otherwise be $400 in groceries for $200 by cutting out the retail store, paying the $35 is totally worth it, and you could be adding items to your cart all month for a scheduled monthly delivery.

But is anybody offering that?

[arrosenberg]

> First you're paying for the store. That's real estate costs -- currently excruciating. Property tax and insurance, based on the real estate prices. The store needs heat and light, that's oil and electricity. There are people who work at the store, has your state recently increased its minimum wage?

Same box of cereal costs the same in Southern California and South Carolina. South Carolina is cheaper in every way - electricity, rent, insurance, and labor. Same $8 premium cost for a commodity product that costs a dollar or so to land.

No one is competing for the customers' dollar, they are imposing a price scheme because there is extremely limited competition and distributors are being allowed to abuse their pricing power.

[AnthonyMouse]

Cost of living index is 96.5 in South Carolina, 134.5 in California. It's higher in California but not by an order of magnitude. Somewhat unexpectedly, grocery costs are not just the same but actually higher in South Carolina:

https://worldpopulationreview.com/state-rankings/grocery-pri...

Could be California's higher population density allowing store costs to be spread across more units.

Also unexpected: The highest and lowest grocery prices in the continental US are Vermont and New Hampshire, respectively, and they're geographically right next to each other with nearly identical cost of living index but Vermont is paying 2.7x as much for groceries. But New Hampshire does also have 2.2x Vermont's population density.

In any event, price fixing doesn't seem like a strong explanation, because what are they doing, fixing prices in Vermont but not in New Hampshire?

[dghlsakjg]

What it costs to produce is irrelevant in an equilibrium price for supply and demand. I'm not sure you do understand.

Many people are buying the cereal for $8. Its that simple.

There is enough demand for it at $8 that the company is happy with the market clearing their supply at that price point.

If people were not buying the cereal at that price, they would lower it, or have gone out of business by now.

If someone could produce a substitute for far cheaper, and undercut, they would, and they do, but consumers are partial to name brands.

Cheerios are $5 at Walmart, People are buying them. Those people that think that $5 is too much can and do buy the $2 off-brand alternative.

[ricardobeat]

> If someone could produce a substitute for far cheaper, and undercut, they would

Not when a cartel controls 97% of the market, distribution, placement, and is very keen on maintaining the status quo, as posited by the article.

[creer]

At least in high population places like much of California, nobody controls distribution and placement to this degree. If you are not happy with Safeway - and there is no reason to be - you can buy some product categories at the other chains, at walmart or Costco, unpackaged at specialized grocery stores, at several kinds of ethnic grocery stores, even at eastern european grocery stores. And that's before getting to online, long distance, grocery delivery which is not even always out of the question on price. ALL of these are functional. We do have a lot of choice currently.

[arrosenberg]

Thanks for quoting the textbook at me. Does that seem like a competitive market to you?

It shouldn't, because if it was, the cost would be pushed down near it's landed cost. That's a result of companies (both CPG producers and food market retailers) having concentrated market share in contravention of the law.

[fsckboy]

there is also competition for limited/expensive shelf space in the supermarket and only-so-much advertising media that must be shared with all other products

I'm old enough to remember that there used to be choices for different brands of various types of flakes: people use their dollars to exercise choices in the space of products to choose from, and they aren't any longer looking for a "dirt cheap corn flake shootout"

yes, there are also nonlinearities like minimum viable factory size, which leads to market concentration heading toward monopolization, but those factors are not specific to corn flakes nor driving that market.

did you know that Frosted Flakes are actually just stale corn flakes that are revived by spraying them with sugar? I used to work for a company modelling factory automation, and that was part of the model. So, if you don't sell sugar cereals, you're not as efficient.

[dghlsakjg]

Here's your competition. Literally $1.97 cereal that is a direct substitute for Cheerios: https://www.walmart.com/ip/Great-Value-Honey-Nut-O-s-Oat-Bre...

The competition is clearly Cheerios which sells for $4.93, which is still not $8 (I did find Cheerios priced above $8 at other stores, but only in family and giant size which are 50-75% larger): https://www.walmart.com/ip/Honey-Nut-Cheerios-Heart-Healthy-...

I'm not making up the numbers. Or the substitutes. Every grocery store I go to has name brand cereals, and then in the exact same aisle, off-brand alternatives that sell for far less.

So yeah it seems like a pretty competitive market to me if I can buy an alternative for 40% of the price of the name brand by reaching for a lower shelf. Is $5 a lot for a box of cereal? Maybe, that's up to you as the consumer. But, name brand cereal is also not a necessity, you can live a very happy life, eating healthy breakfasts without ever having touched a box of cereal.

Again, it seems like a pretty competitive market. Cereal is not a necessity, there are tons of other breakfast foods that substitute just fine, there are a variety of companies selling more or less substitable products through a variety of outlets, and there are no real regulatory barriers to entry. If I don't like one retailer, I can choose from dozens of others owned by different companies. If you think that there is a ton of margin being made, this is your opportunity to get rich selling cereal, or even just investing in General Mills (which has a profit margin of 12% on their goods, and has under-performed the stock market as a whole).

If you don't like the price of an $8 box of cereal, go buy the $5 one, or the $2 one, or don't buy any cereal at all and eat yogurt, or order from Amazon.com where you can get the best of all worlds by having name brand Cheerios brought to your door for $1.99: https://www.amazon.com/Honey-Cheerios-Gluten-Free-Cereal/dp/...

[afro88]

But why is all that cereal $8? Where's the competition driving prices back down?

[creer]

This is a misunderstanding. There is no reason for SOME cereal to not be $8. Competition will not make ALL substitutable products go to the lowest price. The question is whether all cereal is there, or at least all plausibly substitutable cereal is there. And it's not. Someone else did the research, even if you want brand name Cheerios, there is still a lot of range in prices. Unfortunately many people are not THAT price driven, clearly.

Now, all these grocery store do have something in common. They are all in California (if we pick that state), so they all share the high cost of real estate, the high cost of custom formula gas, the high taxes, etc, etc, etc.

And the fire truck example, it correct, is much more of a problem. It's not hard to manufacture breakfast cereals (and clearly not THAT hard to distribute them) or to bring potatoes to restaurants! It's much harder to build reliable fire trucks.

[dghlsakjg]

I will emphasize: because people are paying that much for it. Willingly.

The competition is at Amazon, where I can buy a box of Cheerios, delivered, for $1.99. Or at Walmart where I can buy name brand cereal for $5, and Walmart equivalents for $1.97.

[daedrdev]

The company that makes the cereal is a low margin business. In fact most food that isnt high end is low margin. Somewhere they have a lot of costs to cover.

[arrosenberg]

None of that answers the question of why a box of cereal that costs a dollar or so to deliver landed to a store costs me $8 to buy. Middle men are taking a huge chunk of the pie!

[latency-guy2]

> costs a dollar or so to deliver landed to a store costs me $8 to buy.

Delivery optimization, logistics, and last mile operations are an unfathomably difficult problem(s) to solve, so much so that the entire world participates and there are still enormous gaps in efficiency, many that likely will never be solved due to physics.

I know you're plain wrong about it costing "a dollar" to deliver. Even if it did, you do not pay for just the operational cost, you pay for the convenience, expertise, reliability, or many other factors that comes with procuring a contract/agreement.

[bschne]

Their point is simply that your cost estimate is likely wrong.

> It costs pennies to produce, maybe a dollar in landed cost

Kellanova last had gross, operating, and net margins of ~35%, ~13%, and ~8%, respectively [1]. Likewise, Walmart achieved ~25%, ~4%, ~3% [2]. This isn't really compatible with "someone makes 700% of net profits on this box of cereal", unless you assume cereal is single-handedly subsidizing huge loss leaders for both its producer and retailers.

1. https://www.macrotrends.net/stocks/charts/K/kellanova/profit...

2. https://www.macrotrends.net/stocks/charts/WMT/walmart/profit...

[DasCorCor]

They’re colluding to fix prices. That is a cartel. It is facilitated by a middleman app. Still unethical, and should be illegal.

[gruez]

Right, but "companies raise prices more than inflation based cost increases in production would allow for" non-sequitur. There's plenty of ways that prices can raise faster than input costs, that doesn't imply price fixing.

[MetaWhirledPeas]

> that doesn't imply price fixing

But Potatorac and Agri Stats do. They are price-fixing right out in the open.

[naijaboiler]

same thing realpage was doing for renting.

It is 21st century version of a cartel.

Cartel via an app. It should be illegal. I was hoping feds going after RealPage would be a deterrent to that trend. But with the new admin, yeah thats over.

[ddtaylor]

The author is doing some extra work to connect dots that might otherwise be better left connected by the readers.

[danny_codes]

The author’s entire thesis is that there isn’t a market for lots of goods because of oligopolies colluding. Supply and demand don’t work like the textbook says they will if there’s no market. He’s saying that almost all potatoes are sold by a couple firms, and those firms collude on price, effectively meaning (from a pricing perspective) that there is only one potato company. They therefore can charge whatever they want, up to the point of driving their customers out of business.

This is in contrast to a healthy market, in which producers compete by lowering prices to the point where the producer would go out of business.

[Pooge]

> People get mad that when there's an oil shortage, that oil companies raise prices above the cost of production

It's a bit different when they all (i.e. cartel) agree to keep the same price even after the shock has passed, isn't it?

[amazingamazing]

if there's clear evidence to this, it's illegal

[Pooge]

According to the author, there is - through an app - and they even admit to it.

[bdangubic]

under what statute would this be illegal?

[amazingamazing]

sherman act in usa

[bdangubic]

how many companies - lifetime - have actually been charged, convicted and significantly impacted by the sherman act?

[VertanaNinjai]

Here is a page DOJ publishes on that (at least for fines). https://www.justice.gov/atr/sherman-act-violations-yielding-...

I also found this for criminal prosecutions under section 2 which is the section covering illegal monopolies. Pages 12 and 14 have some quick summary charts and tables.

https://www.americanbar.org/content/dam/aba/publications/ant...

[dghlsakjg]

Google, Facebook, Microsoft, Amazon are the ones in FANMAG off the top of my head.

Also keep in mind that the existence of the law guides decisions around compliance. There is ample evidence that all of the big decisions at FANMAG are viewed through compliance with anti-trust as a concern. Basically, a lot of big companies haven't been prosecuted because they have armies of lawyers working on where exactly that law kicks in, and how much they can step over the line without putting themselves at serious risk.

The existence of the law itself is a deterrence mechanism. It just seems like the justice department is hampered with a century old law in dealing with a modern world.

I personally think that we should be more zealous in enforcing, or better yet, pass better laws. Move the line way back, essentially.

[BowBun]

You can get this information from google. If you're trying to make a point, just make it!

[margalabargala]

The same one that makes price fixing illegal.

Go look up price fixing, and tell me why that statute wouldn't apply here, if you remain unconvinced.

[scott_w]

The article is very clear in the mechanism: he posits companies are “blindly” colluding by using third party price information to inform their decisions on their own pricing. This isn’t “collusion” because they’re not the picking up the phone to each other to discuss price fixing. They’re allowing a third party to tell them what others are charging and “coincidentally” decide that they’d like to charge that, too.

If this fits the legal definition of a cartel and price fixing, I can’t say. I’m not a lawyer nor do I know what US law says on this matter. However, it’s fair to say there’s a bad smell to the whole affair.

[mrunkel]

No, the article says that the suppliers send data to a central service, which then tells them the optimal price, this service bases this price based on data sent by all other suppliers, and presumably gives all suppliers the same price.

[itsoktocry]

True market clearing prices depend on easy entrance and exit of participants in the market. Apparently that isn't the case with potatoes, per the article.