(lots to say about interest rate moralizing in both directions, but vis a vis this exchange i think it’s less the rates per se but the difficulty managers face in actually taking the hit that compels the borrowing…

obviously the hit is worse when rates are high. but the first order issue is terror of defying growth expectations upon which high valuation multiples are based.)

i think i believe in the effectiveness of the shareholder value revolution a bit more than you! 1/

a corporate’s balance sheet may be in good shape in terms of surviving a profitability rough patch, but share price fluctuations against which managers’ careers are leveraged overweight short-term results, so managers try very hard not to let a long view justify near-term disappointments. 2/

(however good a corporate’s fundamentals may be, recent decade management trends tend to impose continual pressure on management to sustain cash flows. that may or may not show up as overt leverage, debt service being the most straightforward way to demand cash flows.) /fin

we may not be disagreeing so much then. i don’t claim this kind of thing persists indefinitely. firms want to avoid both price shocks to customers and profit shocks to themselves. unfortunately those goals conflict here. 1/

so, for the immediate term, larger firms may smooth the price shock over a period of, as you suggest, two to three years, and manage the potential profit hit by looking to other markets not under unusual stress. 2/

that second part would be hard if firms were price takers, but they are not, and even less so because their main competitors face the same challenge and are interested in the same solution. 3/

over two or three years, yeah, i agree, if the tariffs are still in place firms will largely have passed them through, and tacitly coordinated price increases in other markets will have begun to unravel. 4/

the idea isn’t that firms permanently defy competitive forces. it’s that they have some degree of temporary play, and more temporary play when industries are consolidated and face similar challenges. 5/

economic profit, along with resilience and capability across a variety of dimensions, derives from that play, from how far and wide they can or can’t push their deviations from textbook behavior. /fin

my contention is definitely stronger than Rolex, macroeconomiy significant, but also “it depends”. as Donovan suggests, it’s a market by market thing. 8% on a once every 10 year purchase just gets passed through. 1/

but things more frequent and salient, those proverbial nappies for example, sellers feel constrained in their ability to raise. they really do care about reputation and customer pushback in ways not discernible on a supply/demand graph. 2/

you see this on the other side, when during earnings calls they were very candid and even exuberant about using the 2022 general inflation as cover to raise prices and increase margins. 3/

but now US importers face the opposite, no general inflation to provide cover but rising costs. where they must, they will partially pass through, partially lose margin, incidence determined by relative elasticities like an Econ 101 class. 4/

but real businesses are sprawling and creative and have choice sets that go far beyond price and quantity. they face constraints like “we will be punished in the stock market if the profits we report at a firm level decline”, not discussed with Marshallian scissors. 5/

when the toothpaste of profitability is squeezed in one place, a large firm try to make up for it in another. when members of a consolidated industry are similarly situated and face similar challenges, they will tacitly coordinate to make that work. 6/

(they may be competitors in consumer markets, but they face a common adversary in potential discipline and defenestration via stock markets.) /fin

market power takes different forms. firms like NVIDIA or TSMC or ASML are have a great deal of market power as single firms. Apple as well, but less, the goods it uniquely provides admit more substitutes. 1/

but more commonly market power is an industry rather than firm characteristic. if there are tractably few major firms, market power is exercised by tacit coordination. major firms settle on similar strategies. 2/

if tariffs in the US leave international firms fearful of losing long-term share, they may try as the article suggests to pass incidence of the tariff to third countries. if there are a few dominant international firms, we may find they make similar choices. 3/

they will argue it’s because they face similar market constraints — eg British markets are price sensitive — but if they jointly perceive a greater interest in maintaining US markets access than competing with one another for share, they’ll also quietly converge and copycat. 4/

of course smaller, purely domestic players and upstarts may try to take share from the international oligopolists. but in many industries, multinational incumbents remain difficult to challenge. 5/

how well and how long tacit coordination in mutual benefit of large incumbents can last in any industry will depend on the particulars of the industry and, well, chance. 6/

but it is mistaken to imagine this kind of coordination cannot or will not occur, just as it’s mistaken to imagine it has no limits. 7/

market power is a continuum and its exercise a coordination challenge, but exercising market power and addressing those kinds of challenges is the very heart of real-life commerce. /fin

monopolists may be intertemporal optimizers. they may leave some money on the table short-term, because they believe it confers longer-term advantages. 1/

if you are apple, you want people deep in your ecosystem, and you may be willing to tolerate a bit of redirectable consumer surplus in order to encourage that. 2/

now comes a tax in one country. if you pass it through in just that country, it hits that surplus only there. but maybe it hurts uptake into your ecosystem and brand satisfaction there. you can of course partially eat the tax, but you don’t like the hit to profits. 3/

alternatively you can reoptimize that tradeoff between longer term uptake concerns and immediate pricing concerns globally. 4/

you pull back a little bit on the immediate-term unnecessary surplus you had previously offered globally, take a hit on expected future uptake globally, to reduce the hit in the important country now imposing the tax with minimal impact to profits. 5/

not every monopolist is maximally immediate term ruthless. the point of being a price maker rather than a price taker is you have choices. 6/

if your understanding of market power is it is always exploited like an Econ 101 textbook in which the only relevant dimensions are price and quantity, you will miss the real diversity and unpredictability that comes with having the power to choose. /fin