How large corporations make huge profits from hidden profit margins at the expense of consumers

Inflation, followed by poverty and social inequality are the most pressing issues People around the world are worried right now. Canada has not been immune to, and continues to struggle with, the rising cost of living The inflation rate is above the 2 percent target Preferred by the Bank of Canada.

Canada’s inflation rate It reached 8.1 percent in June – its highest level in more than 40 years. While the rate did drop a bit after that, it was still 6.8 percent in Novembermitigate to 6.3 percent in December.

High prices direct wealth from consumers to large corporations and owners Widening the pay gap between CEOs and workers. my research Shows that consumer prices are higher than they should be. This is even without considering inflation, due to a less studied phenomenon: complex coding.

Less competition than you think

Many economists rely on the philosopher Adam Smith borrow from The invisible hand To understand how the market economy works. According to Smith, the invisible hand is the natural force that drives individuals to make economic decisions that are better for society without their knowledge.

This economic philosophy maintains the view that competition is omnipresent in market economies such as North America and Western Europe. Competition makes producers lower prices of other producers until prices are low enough to compensate producers for their costs and time.

A statue of a man in Victorian clothing and a powdered wig stands on a plinth in front of an ornate building.
Statue of Scottish economist and philosopher Adam Smith on the Royal Mile in Edinburgh, Scotland.

But, As my research showsLow prices are the exception, not the rule. Such news should come as a surprise Those who believe in the power of the invisible hand To reduce prices as low as possible.

While still championing the principles of the free market, including the invisible hand, Adam Smith Was aware that monopoliesWhich may prevent competition and lead to inflation of product prices.

Prices are much higher than production costs

The concept of markup, which is the number of times the price is higher than the production cost, is not new. Government institutions dedicated to monitoring markets They do exist to prevent large corporations from conspiring against consumers by maintaining artificially high prices.

The economic literature considers only one product at a time or a few slightly differentiated products, such as Adidas and Nike, when measuring labels. Existing theories and estimates ignore this Labels multiply as raw materials, ingredients and ingredients move around From one company to another down the production chain.

A company sells an expensive component to a second company, and that second company incorporates it into its 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 inflated several times in a row.

A gloved hand reaches into a bakery display case to pick up a baked cake from a stack
Each additional step in the bread production process adds another layer of profit to the price of the final product—hence, the compound price.
(AP Photo/Michael Probst)

Take the bread market. My research indicates that the price of bread includes large profit margins that go to a handful of large companies. 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.

However, to produce wheat, one needs fertilizers, which are mostly sold Markets are not very competitive by large companies such as Nutrient Ltd.And Heavy machinery Sold by big companies like John DeereAnd Insecticidesand seeds and other inputs from markets dominated by large corporations.

Tractors need computer chips, steel, aluminum and tires, which also come from large companies. batteries Need rare earth elements, which comes from only a few producers in the world. Each additional step in the production chain adds another layer of profit to the price of the final product—and thus, the compound price.

Consumer price margins are abnormally high

To determine the profit margins of different industries compared to the costs of production, I compared the market price of the products to the “normal” cost of production. This normalized cost is neighborhood-specific and takes into account the average cost of rent, earnings, and wages in certain areas.

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

To do this, I measured the rise in prices of complex end products such as electronics and transportation services, taking into account all the expensive components that the final product includes. For data, I’m used to Input and output tables, which gives flows of sales of intermediate goods from one industry to another. The results of this calculation are the composite marks.

A composite sign of three means that the price of the final product is three times greater than the normal cost, taking into account all intermediate stages. In contrast, traditional labels consider only the last stage of production, where the finished good is assembled and sold to the consumer.

The table showing compound profit margins is much greater than the conventional cost of production
Table showing compound margins compared to traditional brands in a few industries. Composite tags are much larger than traditional tags.
(Constantine Colnescu)And Author introduced

These results indicate that prices for many of the goods and services we all need are five times higher than the natural costs of production. Owners of large companies make extraordinarily high profits at the expense of consumers.

Rethinking market competition

The invisible hand does indeed work in the supermarket, but it is one that Adam Smith would not recognize. The true invisible hand is there to benefit the producer, not the consumer, contrary to Smith’s belief. The groups concerned have identified fair trade As a target 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 can use research like this to encourage more competition in markets, advocate for fair trade within a country and rethink income inequality policies.

Large firms tend to monopolize the intermediate markets more than they do the final commodity markets. Because of this, government antitrust agencies Like the Canadian Competition Bureau It should oversee markets for intermediate commodities such as fertilizers, agricultural machinery, and rare earth elements — not just markets for final consumer goods.

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