Inflation? We live in the golden age of gotcha capitalism — bobsullivan.net

Inflation. That might be the most important word for the future of America right now, so it's worth taking a few minutes to understand it a little better. I think I can help by talking today about how prices are set. Well… the reality is that technology has changed business so radically that prices are never really “set” anymore. And that has forever changed the way we should think about prices and inflation.

Fifteen years ago, I wrote a best-selling book called Gotcha Capitalism. Even then, consumers were angry about hidden fees and extra costs that seemed to make even the simplest transaction more complicated and expensive. In that book, I predicted the death of the price tag (there's even a short film about it!).

We've reached that point now and I think that's one of the reasons why everyone is so confused about inflation and prices.

In Gotcha Capitalism, I joked that asterisks were now the 27th letter of the alphabet, and made the serious charge that fine print was messing up the free market and destroying the American way of life. Even then, it was hard to know your cell phone bill every month, the selling price of a new car, or even next year's mortgage bill.

Today, the situation is much worse. Prices are increasingly dynamic. That means that the same thing you are buying online right now can cost more or less in five minutes or five seconds. This is not science fiction: Grocery stores are experimenting with digital shelf labels that change thousands of times a day based on AI-powered inferences about who is shopping.

I can't stress enough how dramatically this changes the old supply-and-demand construct for pricing. Free markets and fair pricing require perfect information on all sides of a transaction. The information advantage companies have in pricing is overwhelming. It's like pricing robots know your kid is screaming, and that's why they know you'll pay 20 cents more for that box of cereal just to avoid waiting in line at the checkout. Every trip to the store is now like a math competition between PhDs and first graders. People who think cereal prices have exploded because of stimulus checks during the pandemic are ignoring some pretty obvious drivers of “inflation.”

Gotcha Capitalism, the AI ​​version, represents just one of the fundamental changes in the way markets work. “Greedflation,” forged in the fire of the pandemic, is another.

Greed has always been the driving force behind free markets. As long as there is a fair fight and the greedy people on all sides of a transaction have roughly equal bargaining power, markets work great. When demand increases because consumers have more money, prices rise and inflation ensues. But when corporate profits soar despite rising prices—when price increases far exceed increases in production costs—then something else is going on. But trust me, corporations hope consumers don't notice for a very, very long time.

For decades, American corporations have been gobbling each other up in a race to the bottom, meaning there are few to no competitors for most of the products you buy. As an airline, you're fighting for routes where travelers have only one choice. In fact, this is what they teach in business schools today. Find a market, eliminate or acquire all competitors, and then drive up prices. As Matt Stoller reports in his newsletter Big, evidence of consolidation and coordinated price fixing is everywhere in our economy if you know where to look. In a truly twisted form of gotcha capitalism, apartment rental companies use third-party software to collude on rents, but hide behind algorithms in tactics that feel a lot like what airlines do.

Still, raising prices always involves risk. But what if the risk is eliminated? What if suddenly “everyone is doing it”? The pandemic presented a great opportunity for those looking to exploit their enormous information advantage and lack of competitors. It was an incredible natural experiment on a phenomenon that has become known as “rockets and feathers.” Prices rise much faster than they fall, a fact that almost completely contradicts the old supply and demand concept of pricing.

Years ago, “classical” economists snickered at people like me who wrote variations on the same story: There's a major but temporary disruption to U.S. oil supplies, perhaps because of a hurricane in the Gulf or saber-rattling in the Middle East… and within a few hours, prices at the pump rise 20, 30, or 40 cents a gallon. Like a rocket, some say. But when the crisis is over, it will take days, weeks, or even months for prices to fall back to pre-crisis levels. They would fall like a feather. “Greed,” cried one side of the argument; “supply and demand,” cried the economists.

The “less filling but tastes great” argument eventually became so tiresome that a conservative economist named Sam Pelzman set out to study the phenomenon to silence the complainers. Well, Pelzman found that for once, “the man in the street is right and we are wrong.” Rockets and feathers really do exist, he discovered this through his research.

With the pandemic, the entire economy experienced a rocket-like boom. Prices for everything rose practically overnight. There were several factors for this. Yes, raw material costs rose. Yes, labor costs rose. Yes, there were supply chain disruptions. All of these things tell part of the pandemic-induced inflation story. But rising corporate profits are telling a clear story right now: We are living in spring season. Companies are milking high prices for the most part. More than half of last year's inflation can be attributed to springs rather than supply and demand, according to one study.

To make matters worse, corporations have supercomputers, algorithms, and AI to help them squeeze every last penny out of this moment. We now live in the golden age of gotcha capitalism.

What should we do? The solution is there, and fixing it will not be easy. But one thing I can say for sure: fixing it is not Communism. Dynamic pricing and junk fees actually threaten our way of life. If you hate buying airline tickets, wait until everything you buy feels like an airline ticket. Individual consumers can't change this landscape. Government regulations must restore the kind of transparency needed for a free market to function. Price tags that mean what they promise must be revived. Antitrust regulators must be empowered to ensure there is competition in every industry so bad actors can be punished by market forces. Companies that use algorithms must be forced to make them public so they can't discriminate behind a digital curtain. The Federal Trade Commission and other corporate police must be empowered to censure and punish misbehaving companies based on fake reviews, false claims, or hidden fees.

Don't be put off by those who say that trying to fix broken markets and hold corporations accountable will lead to shortages. That's already happening to us. Remember when Hurricane Maria hit Puerto Rico and U.S. hospitals were hit by a saline shortage?

Yes, price fixing is bad. But price fixing is good; the work must begin immediately. If you are worried about inflation, if you are angry about the price of cereal, fight against gotcha capitalism and empower those who are taking up that fight.