[erkt]

Consider the case of a business operating at excessive margins with huge room to discount but doesn’t. Their fixed costs must then be spread over few transactions and lower their net margins to almost nothing. Instead a business operating at a much more socially optimum price point sells a huge amount of goods at a lower mark up and gets to spread those fixed costs over a lot more transactions. Their Gross markup may be less than the high priced store but their net margin can be higher.

I set a lot of prices during the pandemic. Any average business found that they were granted some degree of monopoly power and could generate higher net margins with less competitive prices. Many of us found the simplest solution was to just pass on all costs to the consumer because they had no choice but to take our price or not get their good.

Times are different and there is competition but many businesses have still forgotten how to increase gross margin by having a sale.

Not to get into politics but tariffs are the same way. The elasticity of demand for a good determines the monopoly power of the supplier/retailer and how much of the tariff gets passed on to the consumer. Highly interchangeable products will not see the full tariff passed on to the consumer because that would mean forgoing all sales. The importer will determine how much gross margin they can give up without loosing money…but the producer in the foreign country also does the same math. Do they completely give up the American market to save inventory for other markets or do they eat some top line profit and still make some sales.

Many goods will indeed be pulled from the market, but if the producer fails to find replacement customers in other markets they will look back at 300M Americans and reconsider whether they can give their importer a better price while still making something. If the good expires, like say a case of white wine, or becomes obsolete in the case of say a lightning charging cable there is additional pressure to make the decision before the surplus simply becomes unseeable.

If a good has no viable alternatives and is relatively shelf stable expect all tariffs to be passed along because the products price is already disconnected from its cost and the business producing it is closer to a monopoly than not.