[asdajksah2123]

We saw this throughout the pandemic.

Companies used the very real inflationary pressures to increase the cost of their products well beyond what those inflationary pressures alone would require.

There are 2 reasons IMO that led to this working:

1. If every company does it, the normal competitive market pressures to reduce prices don't operate. Normally, every company will only raise prices due to collusion, which would be illegal. But when there's a broad based increase in cost, every company will also raise prices beyond just the absolute values of those costs independently, because companies are judged by their margins more than they are by absolute numbers. This is not illegal but the effect is the same.

If in your example, Acer sells 1000 laptops, they originally made $1mm in revenues, with $500k in costs, leading to $500k in gross profits and a gross profit margin of 50%.

If their costs increase by 50%, they need to increase their selling price by $100 to maintain those margins. $1.1mm revenue, with $550k costs, leading to $550k gross profits for a gross profit margin of 50%.

If, however, they increase their Selling price only by the cost, their new selling price will be $1050, for revenues of $1.05mm, costs of $550k, gross profits of $500k, but gross profit margins declining to $500/$1050 = ~47.6%.

The decline in gross profits will hurt their stock price and their valuations (if private) significantly.

2. Consumer pressure. The other reason companies do not easily increase prices with higher costs is negative publicity. Pandemic related inflation, and now tariffs, give them an easy way to explain the reason for the price increases to their consumers and avoid facing any backlash directly.

What did surprise me with the pandemic, which will likely be true with the tariff increases, is that once the companies did increase their selling prices after the pandemic, even though their costs then subsequently dropped, they did not drop prices, across the board.

And the result were the record breaking profits companies have been declaring.

[phyzix5761]

> What did surprise me with the pandemic, which will likely be true with the tariff increases, is that once the companies did increase their selling prices after the pandemic, even though their costs then subsequently dropped, they did not drop prices, across the board.

Prices will only decrease when demand decreases. If your competitor offers a higher-value product and attracts more customers, you'll need to decide whether to increase the value of your product or lower your prices to remain competitive.

If the market can support your current prices there's no reason to lower them.

[bombcar]

Businesses are also very conservative - if you go to the Big Boss and say "we should increase our price 20%" you're likely to be shot down unless you can show WHY it must be done or you go bankrupt.

This means that competitive prices will be "lower" than what the market clearing amount should be. So when they are "forced" to raise them, they then find they're still selling, and will be slow to bring them back down.

Which does occur, but first as sales, then perpetual sales, and then a new product size that's coincidentally cheaper.

[9283409232]

Businesses are constantly doing a price sensitivity analysis to see if they can raise prices and by how much. Economic factors like tariffs allow you to raise prices more than your usual price sensitivity would allow because you can blame it on factors out of your control.

[phendrenad2]

It's true. But this isn't that strong an effect, because they still have to worry about competitors undercutting them.

[mrguyorama]

Except they really don't, because each aisle of your grocery store only has two actual companies making 90% of the products, and coke does not compete with pepsi on price

If Pepsi doubles in price but coke does not, you will not see most pepsi drinkers switch to coke, you will see a small amount of pepsi drinkers abstain, a small amount of pepsi drinkers switch to coke, and the majority of pepsi drinkers just grumbling about paying more.

We've had decades of shrinkflation at this point. I can't use a recipe from twenty years ago because it calls for 15.5oz cans when we've already moved to 14.7oz cans of that product. I can't buy a competitor's version because they use the same can and same can sizes.

A great demonstration of this is something I've been bitching about since "inflation" happened. Lays (the same company that owns pepsi) massively increased chip prices. So did their competitors. Our regional store brand DID NOT (because potato prices did not increase for over a year!). Our regional store brand is comparable to basic chips from other brands. Predictably, people just paid the higher price for lays and the competitors who also raised their prices.

The past several decades, companies realized that consumers have WAY MORE stickiness to a "brand" than ever realized. People still buy craftsman tools, including my father the contractor, despite them being cheap garbage for decades now. Companies don't compete on prices because there is only one competitor in each market segment, and they love the sky high profit margins too. It's not worth it to gain an extra 5% of the market by lowering your price significantly, which is what it would take to get the extra market share. Consumers aren't rational, they are tribal. Nobody drinks pepsi or coke, or prefers red vines to twizzlers, because of some rational evaluation of product merits.

What DID switch people from pepsi to coke was not price, but marketing!

[phendrenad2]

RC cola competes with both Coke and Pepsi on price, however. And wouldn't you know it, it's earned a place on store shelves for that reason.