Thread by @NateHMiller

Why is the Biden administration connecting inflation and antitrust? Here is a thread where I speculate a bit, using a supply/demand framework, and drawing on conversations and material previously circulated here on #EconTwitter.

It starts with a conjecture: the impetus for higher prices is an increase in demand, possible due to the American Rescue Plan and the help that it provides. In support is that the economy is seemingly strong (demand up -> higher price, higher output).

Taking this conjecture as given, upward pressure on prices could be reversed either by reducing demand (e.g., withdrawing support) or by working with supply. I suspect the administration views the first option as going backward—the economic support is a good thing.

So then how to work with supply. There are two approaches. One is to remove bottlenecks, alleviate capacity constraints, and so on. I don’t have much to say about that here. I believe that the administration has engaged on that front.

The second way is to increase competition. In models of oligopoly, market power increases the upward slope of supply. So by focusing on antitrust, it might be possible to rotate supply outward, reducing pricing pressure.

In another thread, I provided this intuition drawing on oligopoly theory a bit more explicitly: the more market power there is, the more economic theory says that firms increase prices in response to increases in demand.

https://twitter.com/NateHMiller/status/1475638923821035524?s=20

Thinking about market power in terms of a supply curve might feel unfamiliar to some economists. But game-theoretical models of oligopoly can be recast as supply/demand systems. See for example my research with @_amackay:

nathanhmiller.org/IdOLS.pdf

Also, @HalSinger points out that cartels – which are more likely to exist in less competitive industries – might use demand shocks as a pretext for collusive price hikes. Presumably because even cartels face some constraints on the prices they set:

https://twitter.com/HalSinger/status/1481615795562205184?s=20

How effective might antitrust be in reducing upward pricing pressure? It depends on how much market power contributes to the slope of supply, and on how effectively and quickly competition can be introduced. These are open questions, though surely some have strong priors.