Investigating Markups: Evidence of Greedflation?

The term “greedflation” has entered the vernacular recently to describe the connection between rising prices and corporate profits, but is corporate greed really keeping prices high? Research by an economist with the University of Virginia’s College and Graduate School of Arts & Sciences finds that the answer may have more to do with changes in consumer behavior and changes in manufacturing costs.

In a study of consumer products, Alex MacKay, the James H. and Elizabeth W. Wright Jefferson Scholars Foundation Distinguished Associate Professor of Economics at UVA, and his co-authors estimated markups for products in more than 100 branded consumer product categories in the United States. They found that from 2006 to 2019 production costs fell while retail prices increased slightly, which resulted in higher markups on consumer products.

“Without changes in demand, economic theory would typically say that if you have falling marginal costs, you should also get falling prices,” MacKay said. 

Instead, those documented savings were not being passed along to consumers.

MacKay and his team explored a variety of reasons why this might be happening, including industry consolidation and changes in consumer income. What they found was that consumers, on the whole, have become less sensitive to price over time. In other words, they aren’t buying less when the prices rise. As a result, retailers were able to raise prices and increase profits, a phenomenon that may still be influencing consumer prices now.

In a second study, covering 2018 to 2023, MacKay and co-authors also found that prices for the consumer products in their study increased rapidly in 2022, but the increase can be attributed to an increase in manufacturing costs. Markups were essentially unchanged over this period. 

Because markups did not increase, the higher prices don’t necessarily mean that corporations have gotten greedier, MacKay said.

“We don’t see evidence for it in our sample. Firms raised prices in response to increasing input costs in 2022, but they did so in a way that is consistent profit-maximizing behavior along the supply chain — before, during, and after the inflationary period,” MacKay explained.

So why are prices still high after many of the economic pressures caused by a global pandemic are well behind us?

“Consumers became less price elastic over the past 15 years or so. That is one factor that allows firms to charge a higher markup.” MacKay said.

MacKay and his co-authors find that consumers are simply spending less time shopping, and when they do shop, they might not be putting in as much effort into getting the best price. In 1992, MacKay said, consumers used 7.7 billion coupons, and by 2019, that number had dropped to 1.3 billion. 

“In 2020, consumers redeemed only one out of every 200 coupons that were issued,” MacKay said.

This could be good news or bad news for consumers, according to MacKay. If we place a higher value on our time and we have a stronger affiliation for particular brands, then this could mean that consumers feel they’re getting more value from the products they buy. On the other hand, if consumers are just feeling squeezed for time, they’re certainly not going to feel that they’re better off.

But that doesn’t mean that retailers aren’t still very attentive to changes in consumer demand, MacKay said.

“Firms will respond to the price sensitivity of consumers,” MacKay said.  “If you care about paying less, you should shop around. You can still find a range of prices for consumer products, even products produced by the same company. There are savings to be had, but only if that time or effort is worth it to you.”

An alumnus of the University of Virginia, MacKay is a recent addition to the Department of Ecomomics faculty, returning to Grounds in the fall of 2024.

“Professor MacKay is a rising star in the field economics,” said Christa Acampora, Buckner W. Clay Professor of Philosophy and Dean of Arts & Sciences. “His efforts to understand the complexities of our global consumer marketplace will certainly play an important role in shaping more enlightened business practices and effective economic policy in the years to come.”