While President Joe Biden has halfheartedly scolded corporations for using inflation to reap record profits, he has done little but sit and watch as Congress fails to act on rising prices, instead leaving it to the Federal Reserve to deal with the issue — by declaring war on workers.
But the president has another option. His purportedly tough regulators — including Federal Trade Commission (FTC) Chairperson Lina Khan — could use their authority to investigate potential illegal price increases or limits on production.
When executives publicly proclaim plans to raise future prices or limit production, their comments could amount to illegal “invitations to collude” under federal antitrust laws — because announcing these future plans signals to competitors that they can make such moves in lockstep.
“These firms have now recognized that they can use inflation as a pretext to say, ‘Oh my god, our costs are going up, in the next quarter we are going to raise prices by 17 percent,’” said Hal Singer, a Georgetown University economics professor who focuses on antitrust issues and managing director at the litigation consulting firm Econ One. “And all their rivals are listening.”
Singer is referring to a particular case this April, in which the CEO of United Airlines announced that ticket prices would be rising to levels 17 percent higher than they were two years ago. Such an announcement could very well play into how competing airlines set their prices, which have skyrocketed in recent months.
When asked whether Khan was currently investigating any such potential invitations to collude, an FTC spokesperson told The Lever, “The agency doesn’t comment (specifically or generally) on the cases it has under investigation. All investigations are non-public.”
Is Market Power Enabling Price Increases?
While economists across the ideological spectrum dispute the extent to which skyrocketing corporate profits are impacting inflation, data show that profits constituted a much larger portion of price increases last year than at any point in recent history.
Less understood by economists, however, is the extent to which corporate consolidation has enabled these price increases. In other words, when just a few companies dominate an industry, are those companies able to increase their prices more than they would in a more competitive environment?
The White House has blamed market concentration for inflation, as has antitrust hawk Sen. Elizabeth Warren (D-Mass.) — while polling has shown the talking point plays well. While economists dispute how much market power has played a role, many agree that it’s a factor.
One new study suggests it’s a larger factor than many previously suspected. The study, conducted by the progressive think tank the Roosevelt Institute, looked at price markups — essentially, a measure of the gap between prices and input costs.
According to the study, which looked at the financial information of over 10,000 public companies, markups are at their highest recorded levels since the 1950s, and increased more rapidly in 2021 than any other year on record.
Source: “Prices, Profits, and Power: An Analysis of 2021 Firm-Level Markups,” The Roosevelt Institute, June 2022.
“We found that markups in the year 2021 were both the highest level on record and the largest one-year increase — over 2.5 times the increase of the next several largest annual increases,” the study’s authors noted. They added that “in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs.”
These trends suggest that market power is indeed playing a role in record corporate profits.
“It’s pretty compelling that there’s something here, and something that the FTC and other regulators and policymakers should take a serious look at when it comes to an all-of-the-above approach to tackling inflation,” Mike Konczal, a co-author of the study and director of macroeconomic analysis at the Roosevelt Institute, told The Lever.
According to Konczal, one piece of evidence that concentration is driving higher markups is that firms that already had higher markups before the pandemic implemented larger price increases in 2021 than those that didn’t. “Economists take for granted that having high markups before the pandemic is a sign of some kind of market power,” he explained.
Another recent study from the Boston branch of the Federal Reserve found that, as industries have become more consolidated in recent years, the rate at which companies pass on their costs through prices is about 25 percent higher than it was before. “The authors’ findings suggest that the increase in industry concentration over the past two decades could be amplifying the inflationary pressure from current supply-chain disruptions and a tight labor market,” says the study.
“Deep Antitrust Ramifications”
Experts say that, while federal authority to tackle price gouging is limited, the administration could investigate whether corporations are using inflation as a cover to engage in illegal behaviors that are driving up prices.
Khan, the FTC chair, is already on notice in that regard.
At an April conference at the University of Chicago’s business school, Khan said, “CEOs have been boasting on earnings calls that the inflationary environment gives them cover to be exploiting market power, to be increasing prices… So that’s certainly something that can raise a whole set of legal concerns, including potential invitations to collude, instances in which firms might be using these earnings calls as a way to kind of signal to their competitors certain types of strategies.”
Earnings calls over the past year contain multiple examples of companies publicly announcing future price hikes or plans to restrict supply.
In March 2021, Kimberly-Clark, which manufactures toilet paper, issued a press release announcing specific, future price increases: “The increases will be implemented almost entirely through changes in list prices and are necessary to help offset significant commodity cost inflation. The percentage increases are in the mid-to-high single digits. Nearly all of the increases will be effective in late June and impact the company's baby and child care, adult care and Scott bathroom tissue businesses.”
This February, the massive housing developer PulteGroup announced, “Given the price of homes in backlog and the mix of homes we anticipate closing, we expect our average sales price to be between $500,000 and $510,000 in the first quarter. Our average sales price should move higher as we move through the year and we currently expect our full year average sales price to be approximately $515,000."
After Russia invaded Ukraine, Delta Air Lines announced that ticket prices would be going up by about 10 percent in the next quarter.
“Instances in which companies may be signaling to each other that they’re looking to engage in coordinated price hikes, that’s something that has deep antitrust ramifications and is something that’s on our radar,” Khan told Bloomberg earlier this month. “Concentrated markets could be contributing to or exacerbating what we’re seeing in terms of companies’ ability to raise prices. An inflationary environment could give cover for companies to either unilaterally or in coordination be raising prices that consumers are more resigned to accepting.”
The authority to investigate such invitations comes from the FTC’s authorizing statute. When asked where this authority comes from, an FTC spokesperson directed The Lever to a 2015 blog post by Debbie Feinstein, then the FTC’s director for the Bureau of Competition. As Feinstein noted in the post, “Invitation-to-collude cases have special resonance for me because I led the first investigation involving this type of conduct when I first worked at the commission back in the late 1980s.”
Today marks the end of the second quarter of the fiscal year, meaning that public companies will soon hold another round of earnings calls.
“If I were Lina Khan, I would put some resources into monitoring the next round of earnings calls,” said Singer. “I would be on the lookout for the next CEO who discusses her intention to raise prices in the future or reduce capacity. And then I want the FTC, on the next day, to make a very public and loud announcement that they are opening an antitrust investigation into that CEO personally, and to the company, under the FTC’s powers to police invitations to collude.”
Singer added that the announcement alone could be a deterrent to such future behaviors, as right now, companies seem to think they will get away with these invitations.
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