Thread by @interfluidity

A way to understand it is that, under US antitrust, it’s dangerous for participants in concentrated industries to restrict “ordinary” supply, but nothing prevents them from designing *inflexible* supply. i/

re @glastris washingtonmonthly.com/2022/01/12/pre…

Inflexible supply has two desirable characteristics:

(1) it’s cheaper and narrowly more “efficient” to arrange, reducing costs and increasing profit in ordinary times; and

(2) it offers firms a convenience yield in the form of pricing power during spikes in demand. ii/

When there are spikes in demand, the structure of production forces the very supply restrictions that an antitrust regulator would otherwise attack. You get thrown by circumstance into the briar patch of the old-school profiteering US antitrust still plainly forbids… iii/

but you can claim it’s not your fault, you’re doing the best you can, what are you supposed to provoke a shortage by selling too low a price? iv/

the foul here isn’t the pricing during the demand spike itself, but *choosing and designing a low price elasticity of supply* production system, bc it’s cheap up front and bc you know when it “fails” it’ll do so in a way that will be profitable, not costly, to your firm. v/

antitrust, or industrial policy more broadly, should have as its goal *ensuring production arrangements with a very high elasticity of supply throughout the economy*. vi/

how best to regulate to encourage this is a complicated question, but far from intractable. you might, for example, design a tax that would eliminate or turn negative the convenience yields that firms in concentrated industries earn because of inability to promptly vii/

expand supply.

(in very competitive industries, there is no such convenience yield: a firm’s failure to expand supply translates to loss of market share rather than higher prices.) /fin

p.s. long long ago i wrote an explainer of convenience yields: interfluidity.com/v2/133.html