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Steve Roth's avatar

This is not on the right track IMO. The theory presented here doesn't help, because no "greed index" or desired profit margins increased. (As a producer/businessperson, I can tell you that desired profit margins are always infinite.) "Greedflation" is not a thing that anybody is claiming. *Achievable* profit margins increased. For whatever reasons.

Easiest understanding of that: firms (at least perceived that) they were facing steep demand curves: Price increases had limited impact on quantity sold, aka low elasticity of Q to P. Their pricing-related comments on earnings calls made that crystal clear. And it seems their perceptions were right

At the extreme: If the demand curve is vertical, increasing prices is printing *pure profit,* straight into owners' pockets. (Vs. boring revenue gains from >er Q. Yawn, so old-school.) Ka-ching. Who's not gonna do that?

Now: *why* the steep (perceived? actual?) demand curve? There's the question. Corporate concentration comes quickly to mind. If there's a limited choice of sellers and they're all raising prices... Where ya gonna go?

Thanks for listening.

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Nominal News's avatar

I think we're agreement - it's more of a naming convention. The main criticisms of some of the 'greedflation' work was the argument that 'greed' (unmeasurable) changed. The issue is that from a purely macroeconomic perspective - the main models explicitly have this but it is captured by a variable commonly referred to as 'desired' markup (note the naming, as you point out, might not be the best either). Regardless, for these macro models, this mark-up is an exogenous object.

Micro-models and the work by Weber and Wasner argue why this targeted mark-up can change (and it could even be a short-lived change). Basically, these economists focused on how to determine this 'desired' markup parameter that can directly inform our other models - such as our inflation model.

As you explain, the 'desired' markup may have gone up due to lack of competition, market structure , maybe changing demand curve shape etc. Popular media call this 'desired' mark-up variable greed, and then spun a narrative around greed, rather than around the other ideas.

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Steve Roth's avatar

Right, naming. But names carry baggage, meaning. If we replace "desired markup" (because we know it's always infinite) with achievable markup (not sure how to measure/model...), we might actually have a behaviorally plausible model.

I'm actually surprised to hear you say that Weber and Wasner participate in discussing the incoherent modeling devolved unto us by the "desired markup" misconception. (I haven't plumbed their (implicit) models carefully.)

I also Q how prevalent the "greed/desired markup increased" arguments were. They always seemed like such improbable/incoherent BS to me (vs my demand-curve story), I couldn't believe that anyone would actually make that argument. So the innumerable takedowns of that claim seemed like just tilting at nonexistent strawmen.

But! Maybe it was widespread and I didn't see it? And! You've helped me realize that econs trapped in the "desired markup" modeling construct would inevitably *have* to make that argument, right? They can't use Achievable Markup (it doesn't exist in the model), which would pretty inevitably invoke my steep demand curve and start questioning the causes for that.

Which might explain why Weber and Wasner got sucked into that strawman argument-trap? They stuck with the canonical model?

Appreciate your much deeper understanding of those models. Thanks, Steve

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