Does market power explain high inflation?

The Covid-19 contingency caused inflation to resurface after decades of stability. From bottlenecks that disrupted supply networks to changes in the population’s consumption patterns, they have been key factors in the sustained global increase in prices. However, despite the gradual normalization of international trade, the slowdown in household spending (especially in the United States), less expansionary fiscal policies, and the efforts of central banks, inflation has not subsided. In this context of uncertainty, a question arises: could large corporations, through their market power, be playing a role in inflation?

A survey of economists and academics conducted by the IGM Forum in 2022 reveals that the prevailing opinion is a resounding no: 79% of those surveyed do not believe that companies are taking advantage of their market power to increase prices. And it is that economic theory establishes that the corporations that have market power are precisely those that are in a position to absorb possible increases in costs (such as those observed in recent months in materials and energy), and they do so by giving up part of their margins. that are structurally positive. Therefore, it is unlikely that market structure alone can currently explain the significant pace of price growth.

Market power and inflation, however, could go hand in hand when there is collusion between companies. It is uncertain whether the Covid-19 contingency created conditions that motivate companies to adopt anti-competitive behavior, but it is a possibility that cannot be ruled out. There is economic literature that suggests that companies may have more incentives to collude (expressed as a coordinated increase in prices) during phases of economic slowdown, and such behavior continues as long as growth expectations are negative. Under this argument, the current situation would represent a favorable framework for collusion between companies.

Could anticompetitive behavior explain the level and persistence of inflation globally? Most probably not, since it would imply a coordination of economic agents and corporations in all kinds of sectors and regions. However, the truth is that it would be worthwhile to closely review sectors where it could be happening. In the United States, for example, voices have emerged advocating conducting research in specific sectors. In September of last year, the White House announced an investigation into possible collusion in the meat processing industry in that country. In this specific case, the emergence of anticompetitive behavior does not seem improbable, since according to data from the US administration, four companies concentrate an important part of the market.

In Mexico there is currently no research of this type. However, it will be necessary to be attentive to those markets whose offer is concentrated in a few players, or where it is known that some player along the chain has a structurally high bargaining power. Similarly, due to the nature of their demand, special attention should be paid to basic necessities such as food or medicine.

Market power, near-double-digit inflation, and the needs of the population could become propitious ingredients for anti-competitive practices. However, it will be necessary to be equally cautious when designing solutions, and remember that price controls or export quotas have historically not been effective in combating the underlying problem: the sustained increase in prices. Economic theory shows us that high concentration can explain high price levels, not high inflation rates.

*The author is a senior economist at BBVA Mexico.