Be advised: this thread is not for serious in-depth discussion of weighty topics (we have a link for that), this thread is not for anything Culture War related. This thread is for Fun. You got jokes? Share 'em. You got silly questions? Ask 'em.
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Large companies have zero incentive to reduce prices when they know that their competitor will do the same. McDonald’s has actually sued 12 of the major national meat suppliers for price-fixing simply based on the fact that each supplier knew the others’ pricing due to a shared analytic tool. All it takes is one reasonably intelligent analyst at the meat supplier board room to ask “so what happens if we lower our prices” for all to realize it’s an unprofitable move.
https://www.fooddive.com/news/mcdonalds-sues-meat-companies-pork-price-fixing/637572/
https://www.atg.wa.gov/news/news-releases/ag-ferguson-s-price-fixing-lawsuit-nets-105-million-washingtonians-tyson-foods
https://www.agriculturedive.com/news/agri-stats-sued-by-DOJ-for-role-in-meatpacking-antitrust-scheme/695196/
If you are McDonald’s and there’s a Wendy’s across the street, you have two options. You can both keep your prices high and split the pool of consumers 50/50, knowing that stressed American consumers will continue to buy your slop because it is time-efficient and they have formed a habit to your addictive slop. Or you can lower your prices, which the competitor will do next week, which leaves you back to the first option only with less profit. Of course they don’t do this. But if a brand new competitor moves in who doesn’t play ball, perhaps they will do this to squeeze him out — no new competitor can compete with the supply chain and the institutional knowledge of McDonald’s.
It’s an entrenched mythology of capitalism that companies lower prices based on competition. This hardly ever works in the real world. There’s no reason, for instance, for OnlyFans to rake in billions of dollars when anyone can create a similar site. But OnlyFans isn’t profitable because their service is better, but because the pornographer who operated it made the site a meme among the public (a kind of psychological rentseeking), because he had the previous institutional knowledge and capital to do this. And you see with car dealerships, there’s no reason for any used car dealership owner to make tens of millions. But in an intensive competition what they do is compete over psychologically manipulating the vulnerable, so the car dealerships compete over misleading pricing plans, overpriced itemization that the customer doesn’t have the knowledge to dispute, etc. It is horrifically inefficient and immoral as a system and it is only maintained due to various mythologies in the public imagination.
I'm pretty sure demand for fast food is much more elastic than you're suggesting. You can't use misanthropy as an excuse for ignoring the fact that consumers do respond to higher prices and firms respond by lowering them.
Why are you quoting me McDonald’s PR as if it means something? Are you going to quote me Wendy’s selling $1 burgers next, after their PR disaster of announcing a plan to do surge pricing?
They may as well continue doing this cycle, raising then lowering when publicity gets bad / people notice.
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Huh? Then why have the prices of wood, steel, food, electricity, computing power, plastic, televisions, phones, and literally every material good ever declined by orders of magnitude over the past four centuries? When we observe any specific one, what we see is that new, more efficient or productive techniques enter the market at lower prices and drive out higher priced competitors, over and over. What am I missing?
I think you could get there from a normal supply/demand relation, since efficiency raises supply?
There’s probably a labor theory of value explanation, too. It’d be funny if coffee was taking the Marxist tack.
Monopolists don't set prices to where supply = demand, they set prices to maximize their own profit, and there's deadweight loss because of the mismatch. But, yeah, prices would still decrease as efficiency increased. I think it gets weird when there are very large price differences involved and it'd depend on what the demand curve looks like exactly. My argument is more that we can observe competition driving the price decreases of all those specific goods historically.
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I agree there are some inefficient markets with deceptive pricing schemes, network effects that create effective monopolies etc. but the idea that this applies to food of all things is absurd. Yes, Wendy’s/McDonald’s are both highly priced now, so as a consumer I simply eat them less. I quite like fast food and if a quarter pounder with fries and a drink was $6 I would probably go to McDonald’s frequently when I didn’t feel like cooking, but it’s $12.29 (just checked) so I’ll get pizza for $2/slice instead
They frequently have coupons built into the app you can use. Also, often the drink prices are very inflated- you can save a couple bucks easily by using a reusable water, even if you just fill it with soda you bought at the grocery store.
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Restaurants are if anything, a great example of competition keeping prices low. Most restaurants have terrible profit margins and many of them fail.
Other good examples of industries with high competition and crummy profit margins - airlines, supermarkets.
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You're overselling it.
In many industries, competition is fierce to the point where no one is making any money.
For example, during the shale boom that started around 2010, U.S. oil producers plowed all of their profits back into expansion. U.S. oil production rose from 5 million barrels per day then to over 13 million today. But overproduction caused oil prices to collapse and many producers went bankrupt. Even the best-run firms have substantially underperformed the market. Today oil trades well below what it did in 2010, despite the prices of everything else going up a lot.
As a result you can buy the stocks of most oil and gas producers for a PE of less than 10 (compared to a PE of 50 for Costco). Even though they are profitable today, people expect that they will repeat the same mistakes a second time.
Some corporations stick it to the consumer and make big profits. Some don't care about money and just like to drill, baby, drill.
I am sure that there are lots of other industries like this too.
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So I take it you're a socialist or communist of some sort?
What do you think it is that stops McDonald's from charging $10 for a bottle of water?
They can’t charge an amount that is so noticeably higher that you remember it and buy a pack of water for 1/20th of the price at a store. But they can (and do) overcharge on water, understanding that they can get away with it because it’s an inconvenience for you to get it elsewhere. That’s extremely economically inefficient, because McDonald’s surplus profit goes disproportionately to already-wealthy individuals. (It’s better for a nation to have more people with more money, versus some with extraneous wealth that doesn’t provide any benefit in terms of happiness or entrepreneurship or invention or culture.)
It would be more efficient if, for super-sized corporations, an agency stepped in and “auctioned” off the corporate positions and ownership according to who will do the job for the least amount of money, then pass the saved money to consumers. If that’s too much government interference, then allow the employees to form powerful unions, because the employees are more likely to identify with the interests of the consumer and stand to gain less as individuals from purposeful economic inefficiency.
There are a lot of problems with communism. People should be paid up to 10x more than median wages for performance, because humans have an instinct to be rewarded according to performance, that’s deeply evolutionary. Humans also have an instinct to care for things they own, and you see this in small businesses and entrepreneurship. The answer is a balance that accepts the importance of human instinct while also realizing that primitive capitalism can get harmful, antisocial and inefficient. For large corporations, no one should feel like they “own” it, and these trend toward pseudo-monopolies due to institutional knowledge accumulation and established supply chains. For a problem like used car dealerships, we should have some kind of Honesty Regulation akin to Cicero’s grain merchant at Rhodes thought experiments. The policy should make it so that even a very dumb person can immediately tell that something isn’t in his economic best interest.
It's an inconvenience to get it elsewhere because billions of dollars have been invested in buying land, constructing physical buildings, paying for utilities, creating distribution networks, investing in facilities to produce the products you're buying, all for water and a thousand other products. One does need to pay for that investment.
I will be the CEO of every major company at the same time for $1. More generally, it's hard to pick a good board and CEO, and many companies that could've succeeded fail due to bad leadership. I think an agency choosing it would be even worse than the current system.
There’s a concept called “profit” and we look at profit when determining whether things are overpriced, not just gross expenditures
This has always happened. Even very highly paid corporate CEOs screw up companies.
(warning: citing graphs without understanding deeply where the numbers come from, but all that matters for this argument is the order of magnitude)
McDonalds's profit margin, averaged over the past decade, is like 24%. They'd, you know, rather it be 100%, but competition doesn't let them do that.
Mcdonalds is actually a high outlier in that regard because of the value of the brand, other fast food companies are lower etc. Again, this is competition manifesting, people are willing to pay more for a mcdonalds burger than a generic burger.
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Most fast food restaurants will give you a cup for water for free.
This is just wishful thinking. Look no further than dockworkers fighting tooth and nail against automation that would increase port throughput because there'd be less demand for their labor.
Dockworkers rightfully fight automation because they know that there are not other jobs for them with high pay as many other jobs lack unions; the “efficiency” goes to just a few at top. This is different from a scenario where unions are the norm across industries — suddenly the benefit of being a dockworker would not so large as to prevent them going through with automation. But even if for some reason dockworkers maintain a disproportionately high salary, we can imagine a system where the union of one industry negotiates (and can be overruled) by a broader “related-industry” or “affected industry” greater union body. There are many ways to incentivize efficient economic decisions which involve unions and cross-union negotiation.
This just evades the point, try again but for soda
No, when there's competition, it'll tend towards the efficiency going entirely to the consumer (insofar as we can treat efficiency as a thing, the units are probably not quite right), in the long run.
In the meantime, sure, it'll make a profit, but that'll trend to zero unless there's a reason for it not to, in an environment of competition.
Your point here was that "that's extremely economically inefficient, because McDonald’s surplus profit goes disproportionately to already-wealthy individuals."
First, we don't know that this would go to surplus profit. One benefit of higher priced sodas is that with that extra money, they are able to afford to lower prices for other things, meaning that it's not obvious that they're making much of a profit. Now, it was elsewhere pointed out that they are making a profit, (presumably due to a mix of people valuing the brand, and that the relevant measure is not nominal profit, but profit compared to the return of the next-best alternative for the investment used to set up the franchises, like the stock market). But profit going to wealthy individuals does not mean that it's economically inefficient! The measure of economic efficiency is not whether it leads to equality, but whether it leads to value production. And this system of allocation does lead to production of value, because there's now a bunch of McDonald's that we wouldn't have otherwise, providing food cheaply, that evidently, people appreciate, since they shop there.
And even if there isn't competition (which is not the case), well, it's still better than there not being any soda available for you to buy.
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He "evades" the point by offering directly contradicting evidence to your assertion? And then you literally move the goalposts by shifting the object from water to the substance that is single most responsible for the American pre-diabetic and diabetes epidemic.
This isn't just poor argumentation, it's a lack of understanding of the nature of consumer demand and vendor supply.
McDonald's continues to exist and generate profit because American (and foreign!) consumers really enjoy, and therefore demand, their product. Every time I hear someone go on about "the corporate overlords" I get a strong suspicion they've never worked in one of these large corporations. They're bureaucratic, slow, with pockets of poor management everywhere. Often, they're coasting on brand recognition and incumbent advantage. Sure, they may still have top line growth, but they're not innovating outside of buying potential challengers (see: McDonalds and Chipotle). The idea that there are these Gordon Gekko greed machines with incredible ability to manipulate the public is laughable. The lizard people don't exist.
The sad fact of the matter is that McDonald's CEO is a former soap salesman who did the handshakeful path of Harvard Biz School to Big Consulting. This is the kind of dude who looks forward to "networking with the family" for 45 minutes of Christmas Eve before diving back in to the sweet sweet womb of quarterly reports. He is a business nerd.
But you know who aren't business nerds? Construction workers getting their morning coffee, single moms too tired to cook, stoned teenagers, and (years ago) my drunk ass at 2 a.m. And we all like the convenience, predictability, and location density of McDonalds. And so we spend, together, billions of dollars on their product.
An auction. Yes. Like, perhaps, at a market. Like where people would buy and sell assets they own - their "stock" you could say. A kind of "stock market" if you will.
So we solve government interference by creating organizations that are intrinsically tied to the government.
What does this even mean?
Tell some undefined "truth" or you're committing a crime? George Orwell would like to see you in the hall.
This is just outlandish and I'm beginning to think I'm being trolled.
Eh, that's the main point that I have some sympathy to. I certainly expect some industries to be unethical and taking advantage of people, especially if they have poor self control or are less intelligent or senile.
Also, he wasn't the one that brought up high bottled water prices. I'm with you overall, though.
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How is it possible that you don’t understand that it evades the point? That’s shocking, because it’s a very clear case of arguing against the substance — which should never be done because it wastes time (hence my terse reply, and now I have to waste time clarifying something so simple). It’s not just bad argumentation, it’s damaging to the whole discussion because of that.
We are talking about the overcharging of goods with water as an example. The one example is not the substance of the argument.
If someone wants a bottle of water they should be purchasing it at a reasonable price. Tap water has nothing to do with the claim. It’s not always possible to drive with an open cup of water in your car, depending on cupholders and road conditions
If some locations allow free cups of water, what does this have to do with the locations which do not? Even if points 1 and 2 don’t apply, the simple fact that there are locations which do not give free water makes this whole argument a wasteful tangent. See here, here, here
it’s crucial to understand the difference between substance and trivial details
Are you trolling?
I will read the rest of your post if you can confirm that you’ve understood why you are incorrect per the above
I'm far too dumb to do that.
Is this why my pants are wet?
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Sure there are, they can learn to code. Or install air conditioners. Or...
The "efficiency" is reflected in higher prices for all imported goods. Poor people consume more of their income than rich people.
The dockworkers raise prices for every American. They simply do not care about this, contrary to your claim about the employees having the interests of the consumer at heart. It's classic diffuse costs and concentrated benefits.
The goalposts have moved very far indeed from "employees are more likely to identify with the interests of the consumer and stand to gain less as individuals from purposeful economic inefficiency". Now we need a union of unions to put down the unions who unionize too hard.
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How would private investment into companies work in your system?
Why wouldn't the store just raise their price to $5, colluding with McDonald's in a similar manner to how the Wendy's does?
Edit: P.S I think for the most part free markets are very effective and there are only a few areas where the government needs to intervene, such as carbon emissions. I am asking questions because I think you're very wrong, but I'm not yet entirely sure what the root causes of your mistaken beliefs are.
New businesses typically lower prices so that consumers try out their business, as consumer behavior is based around habits and attachment to routine — lower prices break this cycle. If you’ve noticed this is why newly opened stores have sales / deals. McDonald’s also may be over-pricing an item and at the same time a new competitor can’t compete due to economy of scale
Thy will have to invest based upon the idea that the business they invest in is actually valuable to society. If it is valuable then it will grow and profit for a period, and if the profits are too extravagant than the Government steps in — and this is a good threat because it makes investors vote for boards that lower prices themselves, lest the government step in.
Then this is better than if they didn't exist, and there were no economies of scale. They can't go below the threshold of what other competitors can compete at, so they have to be at least as good. Any better than that, and that's just free additional value to the consumer.
I'm guessing that investing in expanding the business, research and development, etc. etc. counts in the costs, and lowers profits? Because then many enormous companies operate without profit. If that doesn't count, then you're harming the companies, leading to less economic prosperity. Most companies don't pay out dividends. I imagine it would mostly be small businesses where they just take it as profit, but people seem not to like going after small businesses. Did you realize that it's them that you are targeting mostly?
Edit: That last bit is unfair; I haven't actually checked frequency of dividends.
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Okay, but how's that relevant to why McDonald's wouldn't set their price to $10, get the Wendy's to set the price to $10, and also get every other competitor in a large radius to set their price to $10?
Also, how does that square with how most of the McDonald's I've been to having the exact same prices, even if they're geographically in very different areas? I don't think I've ever once seen one lower its prices in response to a new restaurant opening up across the street.
Even if the private company earns so much profit by simply making an amazing product everyone wants to buy and can't produce enough supply to meet demand even when they try, e.g Ozempic or Nvidia?
Edit: Reading your responses and your replies to other commenters, I strongly recommend you go through the Khan Academy economics courses or another standard economics class. I think you'd learn a lot.
I appreciate your advice to look at Khan Academy. I will look for a cost-efficient reading comprehension program to suggest you.
That wasn’t in the reply I replied to. You are asking me why my explanation for X does not reply to the non-existent question Y. In fact, you asked Y three posts up, and to that I replied
Now clearly this answers your question as to why all fast food locations can’t arbitrarily raise their prices to infinity. They compete with grocery stores, which have more competition over prices due to the variety of bulk retail outlets, online grocery orders, and so on, and which the consumer plans trips to in advance. This is different from having a limited number of expedient food options near your work.
I have no idea, you could have googled it
https://www.huffpost.com/entry/why-mcdonalds-prices-are-wildly-different-from-one-location-to-another_l_65665af4e4b03ac1cd17b7d9
From the article:
Back to you:
We have to ask, (1) should the developer of Ozempic make as much money as possible, or (2) should the developer of Ozempic make approximately the amount of money that a reasonable developer would consider justifies his research. My position is the second one. (If this is too many words of commas let me know and I can rephrase). Imagine how evil it would be if the scientist who discovered penicillin tried to maximize profit.
You and @non_radical_centrist: stop this schoolyard nonsense.
It wasn't supposed to be a slight at him. Khan Academy is a great learning resource, and I'm pretty sure he's never learnt any economics beyond articles and blogs(If he has and just chose to reject it, then I should stop wasting my time here). I think he'd learn from just going through the lessons there than any amount of arguing with me or reading more articles and blogs, because there are actual graphs and formulas involved that Khan Academy is better set up to teach.
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You never properly answered it so I asked again.
This is a proper answer. However, it contradicts with what you said earlier,
I don't see why McDonald's needs to lower prices to compete with grocery stores and bulk retail outlets, but not to compete with Wendy's.
I'll grant you that apparently I'm wrong and haven't travelled enough, or at least haven't documented enough McDonald's prices. But there's still nothing showing McDonald's locations lower their prices to shut down competitors then raise them again.
I think cases where IP is involved is complex. I agree that stumbling onto the right formula shouldn't be a license to print massive amounts of money for all eternity. I think people should get a few years to be very wealthy, then it should be simple for anyone else to use the same formula to join the open market. Probably shorter than what we currently have and definitely it should be simpler to get permission from the FDA to compete. But in the meantime before IP expires, the developers should get to make as much money as they want. That's how you properly incentivize people to search for amazing drugs instead of just good drugs, since if either way they'd just get enough money to incentivize looking, no one would look for harder but better drugs.
I'd like you to address nvidia too, since while they have a lot of IP I'm sure, a big part of why they make so much money is that no other company can make chips as good as them, even if they didn't have IP. If you limit their profit, they'd have no incentive to open another factory or research team, since they'd already have maxed out on money they can make.
Replying to a comment you make further down:
They aren't simply "psychologically manipulating" the public. The public can think for themselves. The public likes being expensive things to show off how hip(and wealthy) they are, they do it all the time. Diamond rings, luxury cars and watches and clothes, meals at pricey restaurants, art, wine. All those things might be better in some small ways than their budget competitors, but the vast majority of the price differential comes from people wanting to show off their wealth and taste. And if they want to show off their wealth and taste, someone will inevitably sell them the opportunity to do so.
I answered it but I understand you need clarification and don’t mind.
Grocery stores will always need to have lower prices than an expedient restaurant like McDonald’s, otherwise few would eat at home. Consumers are more likely venture far away for groceries, because it can be cost-saving to do so. This is different from having only a few fast food places to go to on your lunch break. There may be dozens of grocers, some of which will not know their competitors’ pricings. And because the food is already purchased in bulk and perishable, grocers need to sell some food at a discount otherwise they lose more money in the whole. This is all very different than a fast food place with very efficient supply chains.
But if you’re wondering, “according to your argument, we should still see grocery stores pricefix with other grocers!” Indeed, we do:
https://en.wikipedia.org/wiki/Bread_price-fixing_in_Canada
the scheme inflated the price of bread by at least $1.50
I promise you, if grocers can negotiate price increases amongst themselves over a period of 15 years in secrecy, they can surely decide not to lower prices unless their competitor does so (guaranteeing rarely-lowering prices). So you need a place like CostCo whose entire shtick is an ugly experience for lower prices. Even then, CostCo makes 30 billion in profit.
https://archive.is/eZbUv
I’ll edit and reply to other points in a bit
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This is just where we arrive at a differential in positions on economic theories. My wager is that if there had been a substantial profit motive, industrial manufacturing would have started up more quickly. I don't think there is a plausible case for patenting the relevant molecule, since it can be isolated from naturally occurring molds, just the industrial processes used to manufacture it in large quantities. Here's the summary of that development where manufacturing at scale wasn't feasible until Pfizer developed the process for doing so.
To the extent that IP laws could have allowed monopolization of penicillin or regulators could have prevented competition by not allowing different companies to manufacture penicillin, these are complaints about government regulation rather than profit motive. While there are market failures, what we mostly find in competitive markets is that prices come down and goods become broadly available. Despite the object-level complaints on the price of McDonald's in this thread, pretty much everyone can afford a Big Mac and almost no one thinks that the situation would improve if governments were responsible for the manufacture and distribution of burgers.
To the Ozempic example, the ability to profit-max outside the bounds of what most would consider ethical is a product of regulatory capture, not a unique process for creating semaglutide that no one else can match.
I agree with you that repealing IP laws would increase competition and lower prices significantly — look no further than Stanley Cups, why should one company make so much profit on cups just because they have the funds to psychologically manipulate the public’s desires — but economies of scale come in and demand centralization. One or a few factories producing Ozempic will always be more efficient than a dozen or two dozen, no? It could be this way with fast food giants, as well. McDonald’s and a couple other giants simply due to economies of scale and accumulated institutional knowledge can uniquely lower food prices, but it’s unlikely this will ever happen because nothing enforces the competition past a certain point (“lower than grocery stores and not painfully higher than competitors” is all their profit needs to be, but they will never willingly race to the bottom for prices because they can anticipate lower total profit as a result)
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