Inflation, Market Power, and Price Controls

a) A significant factor behind today’s higher US inflation is dominant corporations in uncompetitive markets taking advantage of their market power to raise prices in order to increase their profit margins.

b) Antitrust interventions could successfully reduce US inflation over the next 12 months.

c) Price controls as deployed in the 1970s could successfully reduce US inflation over the next 12 months.

Market power and inflation

Of our 43 US experts, 41 participated in this survey. On the first statement about firms with market power pushing up inflation, over three-quarters of the panel disagree. Weighted by each expert’s confidence in their response, 3% of the panel strongly agree, 7% agree, 12% are uncertain, 52% disagree, and 27% strongly disagree.

More details on the experts’ views come in the short comments that they are able to include when they participate in the survey. Among those who say they are uncertain, Daron Acemoglu at MIT notes: ‘The US has a big business problem, with various pernicious effects. But it is not clear whether this has been a major factor in inflation.’ Larry Samuelson at Yale adds: ‘Corporate market power leads to higher prices, but it is not clear this is the dominant force behind the increased inflation rate.’ And Austan Goolsbee at Chicago comments: ‘Margins are up but not by enough to explain inflation.’

Among panelists who disagree, Christopher Udry at Northwestern replies: ‘Market structure obviously interacts with shocks to affect inflation, but unlikely that this is first order now.’ Others point to mechanisms by which market structure, firms’ costs, prices and inflation may interact. For example, Judith Chevalier at Yale says: ‘Pass-through of both cost shocks and demand shocks clearly differ in industries with versus without market power’, adding a link to a study of pass-through as an economic tool. And Eric Maskin at Harvard notes: ‘Theory suggests that monopolists respond less to changes in costs than pure competitors do – so market power doesn’t seem a likely culprit.’

Robert Hall at Stanford declares: ‘The proposition is an elementary confusion of levels and changes – market power causes high prices, not rising prices.’ Richard Schmalensee at MIT concurs: ‘Market power yields high prices, not rapidly rising prices.’ And Markus Brunnermeier at Princeton suggests: ‘Many firms have market power due to supply shortages, which prevents competitors from expanding. Dominant tech firms didn’t push prices up.’

Several experts refer to the different timescales between changes in market power and changes in inflation. Anil Kashyap at Chicago links to recent New York Fed data on inflation expectations, commenting: ‘Inflation has shot up, could market power really have changed much and why would firms be leaving money on the table before?’ David Autor at MIT remarks: ‘I don’t see the logic: US markets have been concentrating for decades but high inflation is less than one year old.’ And linking to St Louis Fed data, Pete Klenow at Stanford observes: ‘Labor’s share of income seems to have risen in 2021, not fallen.’

Antitrust interventions

On the second statement about whether antitrust interventions could reduce inflation, more than four in five panelists disagree. Weighted by each expert’s confidence in their response, 4% of the panel agree, 12% are uncertain, 38% disagree, and 46% strongly disagree.

Among the comments, Larry Samuelson at Yale states: ‘Antitrust intervention is warranted in many markets, but again it is not clear this will reduce the rate of inflation.’ Robert Hall protests: ‘Many interventions are on behalf of high-cost disappointed rivals, so the interventions tend to raise prices.’ And Austan Goolsbee comments: ‘Seems dubious as a national level policy. In some specific industries, it could reduce pricing power.’

Several experts who disagree note that antitrust actions typically operate on a very different timescale to policies to control inflation. Markus Brunnermeier responds: ‘Antitrust works at a different frequency.’ William Nordhaus at Yale says: ‘Couldn’t even get the case filed in 12 months.’ Daron Acemoglu adds: ‘Even if excessive monopoly power was a contributing factor, antitrust couldn’t act that fast.’

Others who disagree suggest various caveats. David Autor remarks: ‘US has a competition problem – but I don’t see it closely connected to current inflation.’ Richard Schmalensee explains: ‘Charging high prices or even increasing prices is not an antitrust violation. Threats might have some slight effect in a few places.’ And Jose Scheinkman at Columbia suggests: ‘However, better antitrust policy could lead to productivity improvements in the long run.’

Price controls

On the third statement about whether 1970s-style price controls could reduce inflation, a smaller majority disagrees than on the first two questions. Weighted by each expert’s confidence in their response, 24% of the panel agree, 11% are uncertain, 49% disagree, and 16% strongly disagree.

While nearly a quarter of the panelists agree that price controls could reduce inflation, several make clear that they don’t necessarily think that reintroducing them should actually happen. Darrell Duffie at Stanford explains: ‘Barring illegal price setting, this seems to be mechanically true. A more interesting question is whether price controls are a good idea!’ Eric Maskin observes: ‘I imagine that price controls could restrain inflation – but that doesn’t mean such controls are a good idea. And David Autor adds: ‘Price controls can of course control prices – but they’re a terrible idea!’

Others who agree provide more detail on why price controls might be unwise. Aaron Edlin at Berkeley comments: ‘Price controls could temporarily reduce inflation at cost of shortages and possibly later inflation.’ Oliver Hart at Yale says: ‘They could reduce inflation but the consequence would be shortages and rationing.’ Kenneth Judd at Stanford remarks: ‘Yes, it could reduce inflation over the short run – but only temporarily – just as the 1971 controls did. Too much money creation.’ And Jose Scheinkman adds: ‘Could lower measured inflation but would generate inefficiencies and cause even higher inflation when controls are lifted (see US 1974).’

Comments by panelists who say they are uncertain reflect similar concerns. James Stock at Harvard argues: ‘There might be some ephemeral success because of the way inflation is measured, but longer-run, price controls would be ineffective.’ Abhijit Banerjee at MIT states: ‘I worry that the implementation will be a huge challenge, as it was in the 1970s.’ And William Nordhaus notes: ‘Perhaps could reduce inflation in short run as 1970s. Would only cause more shortages and a terrible idea.’

Some panelists who disagree with the statement point to experiences with price controls in the 1970s and elsewhere. Joseph Altonji at Yale says: ‘Wage and price controls in the early 70s did little good.’ Barry Eichengreen at Berkeley agrees: ‘As deployed in the 1970s? In the 1970s they were not particularly effective.’ And linking to evidence from Argentina on the impact of targeted price controls for supermarket products, Pete Klenow explains: ‘And they would distort price signals.’

Finally, there are some further thoughts on likely damaging effects of price controls. Robert Shimer at Chicago says: ‘Price controls could affect measured prices, but only by creating shortages, i.e. mismeasurement of true prices (including queues, waiting, etc).’ Maurice Obstfeld at Berkeley adds: ‘Even if there were a negative effect on measured inflation (as in the early 1970s), shortages would raise shadow inflation.’ And Anil Kashyap concludes: ‘They would have to be draconian with fewer exceptions and even then the longer-term effectiveness would be highly doubtful.’

All comments made by the experts are in the full survey results.

Romesh Vaitilingam
@econromesh
February 2022