Advertisement
Advertisement

Large Corporations Make Huge Profits from Hidden Markups at the Expense of Consumers [Op-Ed]

Date:

Share post:

Inflation, followed by poverty and social inequality are the most pressing issues worrying people around the world right now. Canada has not been immune from the rising cost of living and is still fighting an inflation rate above the two per cent target preferred by the Bank of Canada.

Canada’s inflation rate hit 8.1 per cent in June — the highest it had been in over 40 years. While the rate has dropped slightly afterwards, it was still 6.8 per cent in November, easing to 6.3 per cent in December.

High prices funnel wealth from consumers to owners of large companies and widen the wage gap between CEOs and workersMy research shows consumer prices are higher than they should be. This is even without considering inflation, because of a less studied phenomenon: compound markup.

Less competition than you think

Many economists rely on philosopher Adam Smith’s metaphor of the invisible hand to understand how the market economy works. According to Smith, the invisible hand is the natural force that drives individuals to unknowingly make economic decisions that are best for society.

This economic philosophy maintains the view that competition is ubiquitous in market economies such as North America and western Europe. Competition makes producers undercut other producers’ prices until prices become low enough to just compensate producers for their costs and time.

But, as my research shows, low prices are the exception, rather than the rule. Such news should surprise those who believe in the power of the invisible hand to bring prices down to their lowest possible level.

While still advocating for the principles of free market, including for the invisible hand, Adam Smith was aware that monopolies, which would prevent competition and inflate product prices, could emerge.

Prices much higher than production costs

The concept of markup, which is how many times a price is higher than the cost of production, is not new. Government organizations dedicated to watching the markets already exist to prevent large companies from conspiring against consumers by artificially maintaining high prices.

Economic literature considers only one product at a time or a few slightly differentiated products, such as Adidas and Nike, when measuring markups. Existing theories and estimations ignore that markups multiply when raw materials, ingredients and components travel from one company to another down the production chain.

A company sells an overpriced component to a second company, that second company incorporates it into their yet unfinished product, then sells it at a profit to a third company, and so on. By the time the finished product reaches the consumer, its price has been successively inflated several times.

Take the bread market. My research implies that the price of bread includes substantial profit margins that go to a handful of large corporations. To produce bread, one needs wheat, which is also sold in competitive markets because all wheat is the same and there are many wheat producers.

To produce wheat, however, one needs fertilizers, mostly sold in highly non-competitive markets by large corporations such as Nutrien Ltd.heavy machinery sold by large corporations such as John Deerepesticides, seeds and other inputs from markets dominated by large corporations.

Tractors need computer chips, steel, aluminium and tires that also come from large corporations. Batteries need rare earth elements, which come from just a few world producers. Each extra step in the production chain adds another layer of profit to the final product’s price — hence, the compound markup.

Consumer price markups are abnormally high

To determine the markups of different industries compared to the costs of production, I compared the market price of products with the “natural” cost of production. This natural cost is neighbourhood-specific and takes into account the average cost of rent, profits and wages for certain areas.

My notion of compound markup compares market prices to this concept of natural cost, because a fair price would equal this cost in a monopoly-free economy.

To do this, I measured the overpricing of complex final products such as electronics and transportation services, considering all the overpriced components that the final product incorporates. For data, I used input-output tables, which give flows of sales of intermediate goods from one industry to another. The results of this calculation are the compound markups.

A compound markup of three means the price of the final product is three times greater than the natural cost, considering all the intermediate phases. In contrast, the conventional markup only considers the last phase of production, where the finished good is assembled and sold to a consumer.

Table showing compound markups compared to conventional markups in a few industries. The compound markups are substantially greater than the conventional ones. (Constantin Colonescu), Author provided

These results indicate that prices are, for many of the goods and services we all need, up to five times higher than the natural costs of production. The owners of large corporations make abnormally high profits at the expense of consumers.

Re-thinking market competition

An invisible hand is indeed at work in the supermarket, but it is one that Adam Smith would not recognize. The real invisible hand is there to benefit the producer, not the consumer, contrary to Smith’s belief. Concerned groups have identified fair trade as a goal in international markets for years, but not so much in our daily lives and not in the context of compound pricing.

Governments, consumers and consumer organizations could use research like this to promote more competition in markets, advocate fair trade within a country and re-think income inequality policies.

Large corporations tend to monopolize intermediate markets even more than they do in final goods markets. Because of this, antitrust government agencies like Canada’s Competition Bureau should supervise markets for intermediate goods such as fertilizers, agricultural machinery and rare earth elements — not just the markets for final consumer goods.

By Constantin Colonescu, Associate Professor of Economics, MacEwan University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

More From The Author

John Crombie Shares 6 Canadian Retail Trends to Watch for in 2023 [Interview]

Crombie, who's predictions usually come true, spoke at the ICSC Whistler Conference recently and discussed how retail in Canada is shifting as consumer habits change.

Video Interview: What Matters To Today’s Consumer in Canada

An expert talks about how consumers are looking for discounts and value, their concerns about their finances, how they are making fewer impulse buys and how they expect big companies to do good in society.

Major Condo Tower Rezoning Application Threatens a Block’s Worth of Toronto Restaurants

Developers say that they're responding to shifting urban trends, though only two small commercial spaces are proposed where a block of businesses currently operate.

Hudson’s Bay to Shut Londonderry Mall Store in Edmonton

The retailer will close one of its oldest locations in Alberta this summer as the retailer strategizes the future of its physical stores.

Toronto Six Professional Women’s Hockey Team Retail Presence Looks to Multi-channel Growth with On-Ice Success [Interview]

The President of women's professional hockey team the Toronto Six says that fans of teams are helping create a new revenue source.

Best Retailers for Customer Experience in Canada Ranked in Leger Study [Interview]

Thousands of Canadians were polled to determine which retailers came out on top, with some surprising findings.

Deciem Rebrands Many Stores as ‘The Ordinary’ as Company Shifts Focus and Retail Strategy [CEO Interview]

The popular beauty brand is refocusing some of its stores as 'The Ordinary' as Deciem grows its wholesale business with Sephora, and is also looking to launch new brands through its incubator engine.

Retailers Shifting Loyalty Programs to In-House as Businesses Drop Air Miles and Others [Interview]

An industry expert says that companies such as Starbucks have found success in its own loyalty programs, and consumer confusion with third-party programs is leading more retailers to develop their own.

‘Repair and Run’ Bike Maintenance Retail Concept Expanding to more Locations in Canada after Successful 1st Launch [Interview]

The bike repair business, founded by some of the people behind the launch and success of Mobile Klinik, is seeing success after opening its first store in 2021.

Earls to Launch New Restaurant Concept as Chain Expands Locations [Interview]

The Canadian chain is expanding its operations as consumers embrace in-person dining following the pandemic.

Canadians Should be Checking Receipts at the Grocery Store as Errors are Common [Op-Ed]

Sylvain Charlebois says that Canadians may not realize that the prices on the shelves and what's scanned might be different, and that there's sometimes an opportunity for compensation if there's been an error.

Retailer Bankruptcies Not as High as Expected in Canada Since Pandemic, but Uncertainty Persists: Insolvency Insider

The tsunami of business creditor protection filings didn't happen as predicted, but an expert says that a reduction of locations by some retailers as well as headwinds could lead to industry challenges.

Video Interview: How Red Tape Is Strangling Canadian Small Businesses

Laura Jones of CFIB talks about the impact of red tape on businesses across the country and why it's so important to their bottom line.

Italian Grocery-Restaurant Concept Lina’s Prepares to Open 15,000 sq ft Location in Calgary’s Inglewood [Photos/Interview]

The expanding business is based on the concept of an Italian public square or marketplace, making it a popular hub that has strong consumer loyalty.

Zellers to Launch Food Trucks in Effort to Drive Traffic to Bay Stores

The retailer has also all but confirmed the relaunch to the Zeddy teddy bear mascot as it prepares to open 25 locations inside of Hudson’s Bay stores this spring.

Cineplex Launches New ‘Junxion’ Entertainment Concept with Additional Canadian Locations Planned [Interviews]

The concept features movies, gaming, dining and live entertainment under one roof, with plans to roll it out to multiple Canadian markets this year as part of a growth strategy for Cineplex.

Queen Street West Retailers in Toronto Anxious about Metrolinx Ontario Line Construction [Interviews]

Construction has the community worried that they’ll experience a repeat of Eglinton line ‘nightmare’.

Ron White Marks 25th Anniversary of its Charity ‘Shoe Drive’ [Interview]

The Toronto-based brand, which has stores in the area, is taking in gently used footwear that still have life in them to give to those in need.

Supply Chain Issues for Canadian Retailers Expected into 2025: Expert

Various factors are contributing to ongoing challenges to coordinate the optimal availability of goods says Gary Newbury.

DTC Jewellery Brand Mejuri Continues Ongoing Expansion with More Stores in Key Canadian Markets [Interview]

Calgary and Montreal are the latest cities to see openings for the popular jewellery brand which is looking to gain market share with a growing loyal client base.

RECENT RETAIL INSIDER VIDEOS

Advertisment

Subscribe to the Newsletter

RECENT articles

John Crombie Shares 6 Canadian Retail Trends to Watch for in 2023 [Interview]

Crombie, who's predictions usually come true, spoke at the ICSC Whistler Conference recently and discussed how retail in Canada is shifting as consumer habits change.

Video Interview: What Matters To Today’s Consumer in Canada

An expert talks about how consumers are looking for discounts and value, their concerns about their finances, how they are making fewer impulse buys and how they expect big companies to do good in society.

Major Condo Tower Rezoning Application Threatens a Block’s Worth of Toronto Restaurants

Developers say that they're responding to shifting urban trends, though only two small commercial spaces are proposed where a block of businesses currently operate.

Hudson’s Bay to Shut Londonderry Mall Store in Edmonton

The retailer will close one of its oldest locations in Alberta this summer as the retailer strategizes the future of its physical stores.

Toronto Six Professional Women’s Hockey Team Retail Presence Looks to Multi-channel Growth with On-Ice Success [Interview]

The President of women's professional hockey team the Toronto Six says that fans of teams are helping create a new revenue source.

Best Retailers for Customer Experience in Canada Ranked in Leger Study [Interview]

Thousands of Canadians were polled to determine which retailers came out on top, with some surprising findings.

Deciem Rebrands Many Stores as ‘The Ordinary’ as Company Shifts Focus and Retail Strategy [CEO Interview]

The popular beauty brand is refocusing some of its stores as 'The Ordinary' as Deciem grows its wholesale business with Sephora, and is also looking to launch new brands through its incubator engine.

Retailers Shifting Loyalty Programs to In-House as Businesses Drop Air Miles and Others [Interview]

An industry expert says that companies such as Starbucks have found success in its own loyalty programs, and consumer confusion with third-party programs is leading more retailers to develop their own.

‘Repair and Run’ Bike Maintenance Retail Concept Expanding to more Locations in Canada after Successful 1st Launch [Interview]

The bike repair business, founded by some of the people behind the launch and success of Mobile Klinik, is seeing success after opening its first store in 2021.

Earls to Launch New Restaurant Concept as Chain Expands Locations [Interview]

The Canadian chain is expanding its operations as consumers embrace in-person dining following the pandemic.

Canadians Should be Checking Receipts at the Grocery Store as Errors are Common [Op-Ed]

Sylvain Charlebois says that Canadians may not realize that the prices on the shelves and what's scanned might be different, and that there's sometimes an opportunity for compensation if there's been an error.

Retailer Bankruptcies Not as High as Expected in Canada Since Pandemic, but Uncertainty Persists: Insolvency Insider

The tsunami of business creditor protection filings didn't happen as predicted, but an expert says that a reduction of locations by some retailers as well as headwinds could lead to industry challenges.

Video Interview: How Red Tape Is Strangling Canadian Small Businesses

Laura Jones of CFIB talks about the impact of red tape on businesses across the country and why it's so important to their bottom line.

Italian Grocery-Restaurant Concept Lina’s Prepares to Open 15,000 sq ft Location in Calgary’s Inglewood [Photos/Interview]

The expanding business is based on the concept of an Italian public square or marketplace, making it a popular hub that has strong consumer loyalty.

Zellers to Launch Food Trucks in Effort to Drive Traffic to Bay Stores

The retailer has also all but confirmed the relaunch to the Zeddy teddy bear mascot as it prepares to open 25 locations inside of Hudson’s Bay stores this spring.

Cineplex Launches New ‘Junxion’ Entertainment Concept with Additional Canadian Locations Planned [Interviews]

The concept features movies, gaming, dining and live entertainment under one roof, with plans to roll it out to multiple Canadian markets this year as part of a growth strategy for Cineplex.

Queen Street West Retailers in Toronto Anxious about Metrolinx Ontario Line Construction [Interviews]

Construction has the community worried that they’ll experience a repeat of Eglinton line ‘nightmare’.

Ron White Marks 25th Anniversary of its Charity ‘Shoe Drive’ [Interview]

The Toronto-based brand, which has stores in the area, is taking in gently used footwear that still have life in them to give to those in need.

Supply Chain Issues for Canadian Retailers Expected into 2025: Expert

Various factors are contributing to ongoing challenges to coordinate the optimal availability of goods says Gary Newbury.

DTC Jewellery Brand Mejuri Continues Ongoing Expansion with More Stores in Key Canadian Markets [Interview]

Calgary and Montreal are the latest cities to see openings for the popular jewellery brand which is looking to gain market share with a growing loyal client base.