Inflation was one of the big issues of the past year. And it will keep us busy in 2023 as well. According to the Federal Statistical Office, the prices for energy and food in particular have risen noticeably, and these are also significant drivers of price increases. The war and crisis situation is causing delivery bottlenecks and price developments at upstream economic levels and making other goods and services more expensive.
This is not always and everywhere accepted as the (sole) justification. Some companies were just trying to increase their profit margins in the wake of inflation. This usually has negative connotations – sometimes the word rip-off is used. Ultimately, what is behind this is the assumption that there is a “fair price” or that price increases are only justified if other price increases are passed on. If you play through it consistently, it becomes clear that this idea is quite short-sighted.
Because price increases consist solely of passing on costs, they could only occur as a result of increases in public fees or rising wages. The reason is that rising costs are always caused by price increases by companies. If, for example, the price of natural gas rises, it is because a supplier has increased the price. However, if no company can raise prices, prices cannot (with the exceptions mentioned above) rise either.
The question of why prices rise and why not is a perennial issue in economics. The function of price in a market economy is clear. It indicates relative scarcity and ensures that goods and services flow to the most efficient use. Relative scarcity describes the relationship between supply and demand. Starting from a situation of equilibrium between supply and demand, if demand increases (or supply decreases) at a certain price, then a new equilibrium only occurs if the price increases. If the price remains constant in this situation, a permanent market imbalance arises. Rationing must then inevitably occur because companies can no longer meet demand. This manifests itself in the delivery of small quantities, the rejection of orders or in queues. The imbalances then spread to the national economy via the supplier markets.
So much for the economic theory of a functioning market. In practice, however, this applies to markets to a greater or lesser extent. When it comes to “unjustified” price increases, the first question is when price increases are justified. But this also raises the question of the concept of justice, a concept that often plays a central role in Germany, but in an amorphous form. Basically, one must first separate justice and equality. An equal distribution is a well-defined form of income distribution. In contrast, “justice” allows for a variety of distributions.
The question now is how justice is measured. A large number of indicators are possible, for the ongoing distribution of income performance or need have emerged. How does this apply to business and price increases? The implicit thesis that price increases are only justified in the event of cost increases starts with demand. On the other hand, price increases are performance-related if the company’s service is in greater demand and is therefore valued higher – i.e. a company has gained a competitive advantage that is an incentive for innovation.
Intervention in pricing can only ever be an ultima ratio
One cause of the price increase is therefore cost-related, the other performance-related. In practice, there is a third possibility, namely when a market position – perhaps originally based on performance – becomes a position of power and a company can push through price increases in order to optimize its earnings. These markets then moved towards monopoly, in which quantity and price depend on the needs of the monopolist. What lies behind the thesis of “unjustified” price increases is a market inefficiency that manifests itself in the fact that companies can influence the market allocation in their favour. This dominance is a chronic problem of every market in practice because it allows the more powerful side of the market to exploit the other. It is therefore sought after by companies – it is even the basis of the platform economy, but economically inefficient.
However, many of the discussions that can be read recently neither clearly name this cause nor do they ask about the consequences. Rather, the impression is given that an (amorphous) gap in justice needs to be filled. The call for government intervention, such as price controls, is obvious. In fact, however, it is a competition problem that must be combated by regulatory policy, insofar as this makes sense.
The intervention in pricing can only ever be an ultima ratio, because it does not strengthen the positive effect of competition – competition depresses prices – but rather hinders it or even eliminates it. In practice, competition policy can only intervene when powers are clearly evident. Otherwise it would amount to fine-tuning economic policy and would endanger the functioning of the markets through excessive regulation and unpredictability. Exactly where the point is at which competition policy must intervene cannot be precisely defined. But it has become defensive against industrial policy and the newfound propensity to pursue social policy through direct market intervention – though perhaps it needs it more than ever.