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1. Implicit Coordination in Sellers’ Inflation: How Cost Shocks Facilitate Price Hikes

Author:
Isabella Weber, Evan Wasner, Markus Lang, Benjamin Braun, and Jens van't Klooster
Publication Date:
11-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
Supply shocks are now widely recognized as a driver of the recent inflation bout, but the role of firms’ pricing strategies in propagating input cost shocks remains contested. In this paper, we review the state of the academic debate over sellers’ inflation and assess whether, in line with this theory, economy-wide cost shocks have functioned as an implicit coordination mechanism for firms to hike prices. We use a dataset containing 138,962 corporate earnings call transcripts of 4,823 stock-market listed U.S. corporations from the period 2007-Q1 to 2022-Q2 to conduct sentiment analysis via both dictionary-based natural language processing and a large language model approach. We find that large input price shocks (as well as their co-occurrence with supply constraints) correlate with positive sentiments expressed in executives’ statements about cost increases. Qualitative analysis provides further insights into the reasoning behind executives’ optimism regarding their ability to turn an economy-wide cost shock into an opportunity to raise prices and protect or even increase profits.
Topic:
Economy, Inflation, Profit, and Corporations
Political Geography:
North America and United States of America

2. Sellers’ Inflation, Profits, and Conflict: Why Can Large Firms Hike Prices in an Emergency?

Author:
Isabella Weber and Evan Wasner
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The dominant view of inflation holds that it is macroeconomic in origin and must always be tackled with macroeconomic tightening. In contrast, we argue that the US COVID-19 inflation is predominantly a sellers’ inflation that derives from microeconomic origins, namely the ability of firms with market power to hike prices. Such firms are price makers, but they only engage in price hikes if they expect their competitors to do the same. This requires an implicit agreement which can be coordinated by sector-wide cost shocks and supply bottlenecks. We review the long-standing literature on price-setting in concentrated markets and survey earnings calls and compile firm-level data to derive a three-stage heuristic of the inflationary process: (1) Rising prices in systemically significant upstream sectors due to commodity market dynamics or bottlenecks create windfall profits and provide an impulse for further price hikes. (2) To protect profit margins from rising costs, downstream sectors propagate, or in cases of temporary monopolies due to bottlenecks, amplify price pressures. (3) Labor responds by trying to fend off real wage declines in the conflict stage. We argue that such sellers’ inflation generates a general price rise which may be transitory, but can also lead to self-sustaining inflationary spirals under certain conditions. Policy should aim to contain price hikes at the impulse stage to prevent inflation from the onset.
Topic:
Political Economy, Inflation, Profit, and COVID-19
Political Geography:
Global Focus