Monopolies cause inflation — so cracking down on monopolies will cause inflation to decline. That's the claim of the Biden administration, anyway.
Why it matters: It's very hard to find good-faith arguments on any side of this debate. But one thing is clear: The U.S. government is currently being broadly blamed for rapidly rising prices. If inflation does decline, for any reason, then it will surely claim credit.
Driving the news: The White House said in December that rising meat prices were due to four monopolists in the meat-processing industry abusing their 85% share of the market.
- “Their goal is to control the market so that they can control the price,” NYU professor Marion Nestle told the NYT last week.
The other side: The North American Meat Institute says that the White House doesn't understand agricultural economics.
- They're backed up by a Twitter thread from Harvard economist Larry Summers, claiming that increases in demand won't create higher inflation in monopolistic industries than in competitive ones.
- That said, Summers also believes that "competition helps constrain inflation," something that is well established in the literature.
The big picture: Corporate profits have soared during the pandemic, in part thanks to the fact that in the current inflationary environment, companies don't find themselves punished by consumers for raising prices.
- The more competition there is in an industry, however, the harder it is to raise prices.
Be smart: Monopolies tend to find it easier to raise prices and cause inflation — think of pharmaceutical companies steadily ratcheting up the price of drugs they control. Monopsonies, on the other hand, where there's a single buyer and multiple sellers, tend to keep consumer prices low.
- When demand rises in say the meat industry, where a small number of meatpackers sell to many buyers, supermarkets are forced to compete with each other to buy beef — which means offering to pay more.
- One step up the supply chain, however, it's the other way around: Cattle farmers aren't seeing higher prices for their beef, because the handful of buyers are able to keep wholesale prices low.
Between the lines: The White House's Brian Deese told the NYT last month that a focus on antitrust issues “will deliver lower prices for Americans right away.” That seems unlikely. Supply-chain issues and labor shortages aren't going away any time soon, especially given anemic immigration.
- But so long as inflation comes down before the 2022 election, the Biden administration now has a way of taking credit for that.
The bottom line: Inflation is a microeconomic phenomenon, a macroeconomic phenomenon, and a political attack vector all at once. Republicans will blame Democrats for causing it — and Democrats will blame greedy corporations. Both attacks are stronger on political expedience than they are on explanatory power.
