Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Price elasticity of demand

“Despite the fastest inflation in decades, consumer spending has held up relatively well so far. But this may not last, and that’s where elasticity comes in. The price elasticity of demand, to use its full name, measures how sensitive buyers are to price changes.” (NYT, 19 August 2022)

Why has consumer spending held up so long?

I think, feel and believe that the reasons are (at least) twofold: (i) our relief over the end of pandemic restrictions in our freedom, (ii) the sudden shock of supply-side inflation due to the Russian invasion of Ukraine. Moreover, both happened almost simultaneously around early 2022.

In due time, our pain over consumer spending restrictions has outgrown our relief over ending freedom restrictions. To some extent, the restrictions in our freedom have moved from physical (eg, indoors) to financial (eg, wallet). Our anger will follow a similar path: from physical to financial protests.

Hence, the NYT article: Why Are C.E.O.s Suddenly Obsessed With ‘Elasticity’? Those CEOs fear that angry consumer reactions will cause a drop in demand, like a substitution towards low(er)-cost goods and/or suppliers. That drop in demand would hurt their profits and thus their jobs.

Recently, the operational director at Colruyt supermarkets (Belgium) warned that: “Brand manufacturers are overstepping the limits of price elasticity” (source). To some extent, they can because a lack of suppliers will cause a low elasticity in demand. Investopedia: “Oil has a low elasticity of demand []”.

I think, feel and believe that we have come at a point where mergers or acquisitions should be viewed as a threat to competition because a lack of suppliers will easily create market manipulation and thus higher consumer prices. Hence, there is much more to greedflation than meets the eye.

The above may explain why M&A appears to be focussing on markets with many small suppliers (eg, WSJ, 27 June 2023). Their business is turning threats into opportunities. National competition supervisory authorities (eg, Wiki-1, Wiki-2) will – once again – be (too) slow to follow.

” …… [name] and other brand suppliers raise their prices so fast that they step over the limit of price elasticity. That is not good for anyone, it causes downtrading: since December, we have seen customers buying significantly more private brands. In the discount country that is Belgium, the price gap between A-brands and private label is widening.” “

A 15 June 2023 quote from the operational director at Colruyt supermarkets

Stand And Deliver (1981) by Adam & The Ants
band, lyrics, video, Wiki-band, Wiki-song

Stand and deliver
Your money or your life
Try to use a mirror
Not a bullet or a knife

Note: all markings (bolditalicunderlining) by LO unless in quotes or stated otherwise.


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