It’s an established phenomena. But, just because it’s established as a concept, doesn’t mean it’s prevalent, or especially not that it could be used to explain simultaneous increases in prices across the entire economy.
Here’s an introductory article on price leadership:
Breaks it down into “barometric”, “collusive” and “dominant” categories. Going through each one -
Barometric being the phenomena where all the firms in a space look to the dominant firm for indication on what to do with their prices. Assumes heavy market concentration in the dominant firm and a marked imbalance to analyze market trends or predict upcoming cost shifts on the part of other companies. Does not make any sense in a space with several near-equally sized entrants in the market exist with similar capabilities for determining prices and macro conditions.
Collusive being where they have actually agreed to fix prices together. This is of course illegal and requires ongoing coordination across basically every major company in the economy. This is mostly what we’ve been talking about in this thread and requires extraordinary proof, because the level of coordination required to make this happen is extreme, especially across not just one industry, but every industry. Or, to be fair, at least the basic industrial/manufacturing industries upon which all other industries depend.
Finally there’s the “dominant” category. That’s where a single dominant firm (or cartel of multiple firms) is setting prices - particularly, setting them downwards - and other smaller firms are forced to lower their prices to survive. This doesn’t make a whole lot of sense with upwards price-fixing, because less dominant firms become more competitive as a result, not less.
Here’s what it looks like from a business perspective: if I am a meat packing company, I need to go to the farmers and buy the pork that is going to be processed by my factory. The pig farmer says I will sell you my pork for four dollars a pound. I asked for him to sell at two dollars a pound, but he simply refuses and sells to somebody who paid is willing to pay a higher price.
Now, I can do two things to lower the price:
I can collude with all of the other meat packing companies and refused to buy pork at four dollars a pound, and we set our willing price at two dollars a pound. If we get enough other companies to collude together as a cartel, then we can force the prices down. This is generally illegal.
The second option is through consolidation: first, I get enough money to buy up all of the other meat packing companies. Then when I go back to the pig farmers, they only have one buyer to sell to, which is my business. So I get to set the prices, which will be at whatever price I stipulate. Walmart is famous for doing this.
It’s an established phenomena. But, just because it’s established as a concept, doesn’t mean it’s prevalent, or especially not that it could be used to explain simultaneous increases in prices across the entire economy.
Here’s an introductory article on price leadership:
https://www.investopedia.com/terms/p/price-leadership.asp
Breaks it down into “barometric”, “collusive” and “dominant” categories. Going through each one -
Barometric being the phenomena where all the firms in a space look to the dominant firm for indication on what to do with their prices. Assumes heavy market concentration in the dominant firm and a marked imbalance to analyze market trends or predict upcoming cost shifts on the part of other companies. Does not make any sense in a space with several near-equally sized entrants in the market exist with similar capabilities for determining prices and macro conditions.
Collusive being where they have actually agreed to fix prices together. This is of course illegal and requires ongoing coordination across basically every major company in the economy. This is mostly what we’ve been talking about in this thread and requires extraordinary proof, because the level of coordination required to make this happen is extreme, especially across not just one industry, but every industry. Or, to be fair, at least the basic industrial/manufacturing industries upon which all other industries depend.
Finally there’s the “dominant” category. That’s where a single dominant firm (or cartel of multiple firms) is setting prices - particularly, setting them downwards - and other smaller firms are forced to lower their prices to survive. This doesn’t make a whole lot of sense with upwards price-fixing, because less dominant firms become more competitive as a result, not less.
That is written like a true economist.
Here’s what it looks like from a business perspective: if I am a meat packing company, I need to go to the farmers and buy the pork that is going to be processed by my factory. The pig farmer says I will sell you my pork for four dollars a pound. I asked for him to sell at two dollars a pound, but he simply refuses and sells to somebody who paid is willing to pay a higher price.
Now, I can do two things to lower the price:
I can collude with all of the other meat packing companies and refused to buy pork at four dollars a pound, and we set our willing price at two dollars a pound. If we get enough other companies to collude together as a cartel, then we can force the prices down. This is generally illegal.
The second option is through consolidation: first, I get enough money to buy up all of the other meat packing companies. Then when I go back to the pig farmers, they only have one buyer to sell to, which is my business. So I get to set the prices, which will be at whatever price I stipulate. Walmart is famous for doing this.