this post was submitted on 04 Nov 2023
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Sellers can set prices, but for many things there are alternatives and hence more than one seller. Apple sets the iPhone prices, but you can substitute an Android pretty effectively, and there are multiple manufacturers of Android phones at lots of price points. If Apple decided to set the base price of an iPhone to 100k, people would not get mortgages, they'd buy a 500 dollar Android.
This holds true for lots of things, but housing is distorted by lots of factors. But housing doesn't disprove supply and demand.
I am aware of the extremely simple story that you will learn in econ 101 - and sadly in more advanced courses as well.
It's just that it's only a theory. You should perhaps pay attention to the information you gave, and how you didn't say, "observation of market behaviour bears out the supply & demand theory", you just waved vaguely in the direction of a mechanism, with no reference to data.
If you look at the many studies into the matter where economists accidentally - and sometimes intentionally - did science on this, they found no actual data to support supply and demand as a model of pricing. It simply doesn't hold true, and yet it's taught constantly, and if you try to google this, you'll just find publication after publication talking about the "law" of supply & demand. But it's not a law, it is simply an assumption.
When looking at market behaviour and when talking to price setters, there is no data to support the theory, and nobody in the business pays attention to supply & demand. All the models that seem to work share the feature that they are set by the supply chain.
This article gathers the relevant information and has sources linked: https://strangematters.coop/supply-chain-theory-of-inflation/
I don't mean supply and demand in the extremely vague sense of that essay though. I mean individual people purchases and company sales. Something is happening when a person decides or not to buy something.
If in the aggregate people buy one product instead of another, that affects the business and they need to either appeal on other grounds or drop prices to compete.
I know there are different demand elasticity for different people for different things. That doesn't mean that price is completely arbitrary and buyers have no leverage at all. I think most of that essay is just saying to ignore macroeconomics, which as far as I ever learned (as taking the required class and a very minor interest in terms of expertise - so not much) was a major simplification to express large groups of people's actions. So of course it comes down to individual transactions. But I think the idea makes even more intuitive sense there.
Lets say I'm at a craft fair as a buyer. Someone wants to price their ceramic mug at 50 dollars. They can do that, but I am going to pass and look at other sellers. If the seller 30 feet down also has artsy ceramic mugs, but for 30 dollars - then that might make people there question the 50 dollar mug. Prices tend to affect demand and hence volume at least in my personal experience.
It's not the end all of things. I would take more flights if the price was 1/2 of what it is, but I don't know if I would take even more as it went cheaper. There's only so much travel I want to do in a year.
All that said - I agree that business just set prices but outside of maybe hospital bills, they're not arbitrary. If a business is constantly selling out they will raise prices I would argue that it seems pretty obvious to me that a lot of "covid" pricing was businesses just charging more and seeing if people would pay.
On the flip side, businesses regularly set lower prices on stuff that isn't moving. This ranges from simple "manager markdowns" all the way to the liquidation of merchandise to sellers like Ollie's. For small businesses they'll often see if you bite on something at the arbitrary price, but if not and the item has sat there too long they might haggle with you to get something vs an unending storage cost.
Even if you argue that we don't have an auction for many of the things we buy so the price is arbitrary and set by the seller - we still are almost always buying something that there are other potential buyers for. If I don't want it at price X+10%, the impact of that depends on how many other potential buyers will step in to buy it. When I talk about demand, I am simplifying a paragraph to a word.
Whats more, scalpers and ebay resellers will do the whole restricted supply driving prices up for the company even if they don't want to. We see that all the time. At that point it seems worse for the economy as the scalpers are just skimming money from buyers with no actual value provided. At least the original manufacturer could get a bonus or invest in more capacity if they grabbed that money.
So I pointed out that the supply & demand theory is just a bunch of storytelling with no data to back it up and you responded by telling me a bunch of stories with no reference to any sort of data.
Do you see a problem here? Who taught you to think that this was an acceptable way to understand anything? It was orthodox economic theory, wasn't it? There's nothing special about the economy that exempts it from science, except how much incentive there is to tell stories that justify the hoarding of wealth rather than doing research to understand reality.
Also, I don't know how you're differentiating what you're talking about from what the article was talking about. You're describing how price setting and inflation happens, and so are they. It's just they've actually done the work to understand it. If you dig into their references I think you'll find that there isn't really some other context where supply & demand does apply. They are talking about how the economy in general is shaped by these microeconomic principles.
They covered all the stuff you're talking about, for instance how companies will set negative margins on some products for various reasons. Cost-plus-markup pricing doesn't necessarily mean the markup part is actually positive. It can be negative and this is captured by the studies. I don't know why you felt the need to go into that level of detail about all these ideas, except perhaps to intimidate me with your level of "knowledge" and bury me in the weeds.
Except again, you're telling a bunch of stories and expecting me to believe not only the stories but the conclusions you say come from them. The research tells a different story. You can pay attention to that research, or you can act like most economists and ignore it in favour of the doctrines you've read about in textbooks.
The problem with the data referenced is that as far as I can tell it's a bunch of surveys. And I really don't understand how you expect to discuss microeconomics at the level of one seller like the essay references without it being talking about anecdotes.
In general, (not specifically economics) I find ignoring the consensus of experts in a field leads you to conspiracy theories. So yes, in terms of sources reliability and my rating system for who to trust, I will take the standard college classes and consensus of experts.
It feels like each thing I address just has you pulling either a non-sequitor or just lambasting standard economics.
I also don't really see what you are arguing with me about except for a pedantic definition of supply vs demand or if those are even concepts.
The main argument in the essay is that the money printer doesn't lead to inflation. I never claimed it does, and all but one standard theory referenced in that essay agrees with you and the essay writer that it's not a straight "hydrolic" relationship.
The anecdotes you're both ignoring is that unless you're rather well off, if you get a raise or a stimulus package - almost everyone spends that money (or pays off debt, which is less direct but does free up spending power down the road). And we have seen shortages that pretty much were driven by hoarding in the pandemic. One vital part of that is having the money to spend - there were few reports of stealing actually leading to shortages.
And you completely skip the scalpers - did we imagine the PS5s being only available on ebay for 3x or more the MSRP? Did not having more money enable people to pay more to bid up the going price for the few available? What is that if not microeconomic supply and demand curves meeting at ebay sold prices?
I suppose the link you're disputing is getting from individual sales to the economy at large, but that's the problem this theory has, the reverse of the issue the essay claims traditional economics has.
So like... does traditional economics have any data to back up supply & demand? Because you're still just telling stories and dismissing the research as not good enough for you.
I would like to see this much better research that is good enough for you.
I'm not going to get distracted with your stories and forget that you haven't supplied any data of your own.
This isn't a "non-sequitir", it is the core of what I'm saying.
But if you absolutely must hear a response on one of your stories: scalping is a very localised and minor part of the economy. Most of the economy doesn't behave that way. This is hardly creating the dominant law that traditional economics tells us about.
Edit: And you still haven't given any data to prove the anecdote about scalpers, only told a story.
https://research.stlouisfed.org/publications/page1-econ/2021/03/01/the-science-of-supply-and-demand for instance used the COVID economic data to show how lack of supply, or lack of demand depending on the industry bore out what one might expect.
On Scalping - I don't know that anyone has done a study proving the existence of it, but it's a major part of news stories over the last 10 years, and there's papers about how scalpers often set ticket prices in the secondary market, and how it also more effectively allocates the tickets: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4324594
https://www.tomshardware.com/news/how-scalpers-justify-their-actions points to numerous news articles, and denying that this happens when there's high demand for items in low supply is like denying there's a war in Ukraine right now because there's no study proving it.
Finally, maybe you just aren't understanding me - are you saying you've never been to Ollies or Tuesday Mornings or seen liquidation or end of model year sales? You need a study to prove to you this happens pretty much all the time? You are arguing that if you've got a bunch of IDK 2022 Camrys on your lot when the 2023s start coming in, you're going to have less demand and less ability to sell those 2022s if you price them the same as the 2023s (i.e. demand dropping causing prices to need to drop to sell)?
Look - maybe you think "supply and demand" is too simplistic, and I agree. But if you're saying NO WHERE in the economy does supply vs demand affect pricing then I don't know what to tell you - just watching the News or living life buying stuff proves you wrong.
First of all, I'm not saying there is never a correlation between supply & demand, what I am saying, and what that article I linked you was saying, is that the causal mechanism between macroeconomics and actual price fluctuations is not given by supply & demand theory. I am saying that correlation is not causation, and if you want a functioning, usable theory of economics that makes predictions that can be trusted, you need a mechanism. Supply & demand doesn't have one. It finds some correlation and then says it's following a law, without ever doing the work to explain how.
The COVID studies are showing people debating about what the shock was, assuming supply & demand is in operation, but ultimately the only conclusion you can draw is that whatever correlation exists must be co-causal. Both supply & demand shocks were caused by COVID. That's like... obvious. If you wanted to establish more than that you'd need to dig into the causal relationship, but they don't. Unless they do in which case... can you please show me where?
That first article is exactly the problem that I'm talking about. It spends the entire time trying to convince the reader that a correlation exists, and telling stories to explain why it doesn't always fit. It's pure post-hoc justification.
But I want you to look at this graph:
https://files.stlouisfed.org/files/htdocs/publications/images/uploads/2021/POE2103Fig5_20210219101335.jpg
Like JUST LOOK AT IT. Nobody makes that graph if they have the data available to make a real graph. That is a doodle. It is two perfectly straight, perpendicular lines forming a cross, on a graph with no scale. That is there to illustrate the concept of correlation as if it weren't perfectly obvious. That is what I would show a small child if I wanted them to grow up to fundamentally misunderstand statistics. I have seen that diagram, but I didn't mention it earlier because I didn't want to strawman you. Apparently you actually think that's worth showing me.
If you had spent any time in hard sciences you would know two things:
Correlation does not imply causation
People with data will show you the data. They did hard work for it, they are proud of their graphs, and they want you to see the details and insights they are able to wring from it.
Any scientist would be absolutely horrified to present something like that. They would be too afraid of insulting their audience, either by implying this pair of lines they clearly just made up means anything, or by implying the audience were actual children.
And they don't do this:
What the hell is this? What is it? What are they talking about? This is someone trying to coopt the aesthetics of science without doing any.
I can't access the scalping paper, but honestly if supply & demand dictated pricing, why don't ticket prices rise and scalpers get squeezed out? That is what the law of supply & demand would dictate, wouldn't it?
What the scalping situation shows us is companies working hard to fight scalping WITHOUT raising prices, in direct contravention of the law of supply & demand.
I don't actually think economics is a science like physics is a science. I work with world class experimenters in high energy and x-ray physics daily. They have experiments that can be isolated and reproduced, and generate pretty objective data (until you get into the weirder quantum stuff). I don't pretend to understand all of it as Im not a physics PhD but I do get how their lab experiments are obviously different from any attempted economics experiment.
So I kind of doubt you can realistically do a random controlled study on any economics. The best we have is observational studies, which, I'd say are comparably weak. So you're kind of asking for experimental data that doesn't and I'd kind of argue can't exist. We can't have 3 versions of the US economy at the same time and vary one variable and see what happens.
And I think you finally agreed with me, or at least I communicated well enough for you to understand - supply and demand as a concept - an idea - is one part of what's happening in price setting. It's not the only thing, and I don't buy any of the "hydraulic" ideas.
My point of the scalping example was that companies can ignore supply and demand and try and contravene it, but others will step in and make money on the arbitrage. Do you remember what I said in the previous comment about why I think that's worse than the companies capturing that revenue? I was agreeing with you that it's not a "Law" in that companies have to do things that way, it's more that they'll just create secondary markets that bid up the price a la scalpers. The average person doesn't then get access to choose the "company price" or "scalper" supply/demand price - the people making it a business have bought all the tickets / PS5s whatever at the "company price" that's ignoring supply/demand and so the person can either go without or pay the scalper price that did take into account supply/demand.
Right, so you've admitted the data doesn't exist in the way you would want it, so what does that leave? Surveys, perhaps? The thing you denigrated as "anecdote". But like, you know surveys are done all the time in science, right? Have you ever heard the saying "the plural of anecdote is data"? That's why those researchers not only did surveys, but the paper writers looked at many surveys across many parts of the economy. They are doing science to determine the causal mechanisms at the microeconomic level, because those mechanisms add up to macroeconomic phenomena. You can talk about rates of exchange or whatever all day, but in the end it is many exchanges happening at the micro level.
Another place where this happened was the stock market. You'd think if you wanted loads of fluctuating prices responding to supply & demand that would be the place to find it, right? Supply & demand would suggest the market would stabilise and level itself, but doesn't explain the volatility we see. Well, the theory of how the market worked used to be of rational actors working to maximise their self interest, but that model doesn't predict the behaviour of the stock market when you simulate it on a computer. You know what does? Simulating irrational actors making decisions based on entirely randomised and arbitrary internal rulesets. That gives you the boom & bust cycles that we actually see in reality.
And my point about the scalpers is that the behaviour is aberrant. Companies don't do it, even though supply & demand says they could, because they know that it would destroy their good will with customers. That should tell you something about how prices are set elsewhere in the economy, and wouldn't you know it, when people talk to the price setters, they find that they avoid raising prices until their supply chain forces them to. The markets favour stability over price changing, because they don't want to piss off customers.
Companies raising prices wouldn't be better, it would just make ticket prices high across the board. Your scenario of scalpers buying up the entire supply doesn't actually happen. That's probably due to them needing to hedge their bets. They can't sell every ticket every time, they have to guess at how many they can sell, which requires high margins and thus very high prices. Oh look, it's a supply chain explanation for scalping. I don't know if it's true because I have no data, but it's an explanation. Apparently that's all you need. I expect my fake nobel prize any day now.
Also, saying you "work with" people in hard science is pretty telling. So you don't actually do hard science then? You never got any training in it? Because again, if you had been trained in any actual sciences you might have noticed that the data people show you for instructional purposes tends to be real. It tends to be messy. It is not a bunch of doodles.
Anyway, that's besides the point because you've already admitted what I've been saying this whole time: the data isn't there. Supply & demand is an article of faith until someone does the work to look and see if it's there. Well, people have looked, and they haven't found it.