[Senate Hearing 118-646]
[From the U.S. Government Publishing Office]
S. Hrg. 118-646
HIGHER PRICES: HOW SHRINKFLATION AND TECHNOLOGY IMPACT CONSUMERS'
FINANCES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING HOW SHRINKFLATION AND TECHNOLOGY IMPACT
CONSUMERS' FINANCES
__________
MAY 2, 2024
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https://www.govinfo.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
60-379 PDF WASHINGTON : 2026
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chair
JACK REED, Rhode Island TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey MIKE CRAPO, Idaho
JON TESTER, Montana MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA M. LUMMIS, Wyoming
TINA SMITH, Minnesota J.D. VANCE, Ohio
RAPHAEL G. WARNOCK, Georgia KATIE BOYD BRITT, Alabama
JOHN FETTERMAN, Pennsylvania KEVIN CRAMER, North Dakota
LAPHONZA R. BUTLER, California STEVE DAINES, Montana
Laura Swanson, Staff Director
Elisha Tuku, Chief Counsel
Catherine Fuchs, Republican Policy Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Assistant Clerk
(ii)
C O N T E N T S
----------
THURSDAY, MAY 2, 2024
Page
Opening statement of Chair Brown................................. 1
Prepared statement....................................... 26
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 3
Prepared statement....................................... 27
WITNESSES
Bilal Baydoun, Director of Policy and Research, Groundwork
Collaborative.................................................. 6
Prepared statement........................................... 28
Responses to written questions of:
Chair Brown.............................................. 35
Allison Schrager, Senior Fellow, Manhattan Institute............. 7
Prepared statement........................................... 30
Ali R. Bustamante, Professor of Practice, University of New
Orleans Department of Economics and Finance, and Director,
Worker Power and Economic Security Program, Roosevelt Institute 9
Prepared statement........................................... 33
Responses to written questions of:
Chair Brown.............................................. 35
Senator Cortez Masto..................................... 36
Additional Material Supplied for the Record
FRBB document.................................................... 37
FRBKC document................................................... 46
(iii)
HIGHER PRICES: HOW SHRINKFLATION AND TECHNOLOGY IMPACT CONSUMERS'
FINANCES
----------
THURSDAY, MAY 2, 2024
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chair of
the Committee, presiding.
OPENING STATEMENT OF CHAIR SHERROD BROWN
Chair Brown. The Banking, Housing, and Urban Affairs
Committee will come to order.
Every time Ohioans go to the grocery store, they're paying
for corporate stock buybacks and executive bonuses. Prices
today are far too high. Families are having a hard time finding
a fair price, seeing more of their paycheck vanish into thin
air. I hear all the time from Ohioans justifiably angry that,
when they buy groceries and other basic essentials, they're
paying more than they did a few years ago.
All of this happens, while corporate profits hit record
highs. Let's be clear, the fact that prices and corporate
profits are going up at the same time is no coincidence. A
study for the Kansas City Fed found that corporate profits
drove half the price increases in 2021, and profits are still
high today.
Of course, I want businesses to make money. I want American
companies to be the most competitive and most profitable in the
world. What I am against is corporate profiteering that funnels
money from working people to executives in the form of massive
bonuses and stock buybacks. I'm against markets that don't
foster competition and low prices. I'm against market
manipulation. A family walking into a restaurant or a store
should not have to guess what they'll be charged. Someone
shopping online should not be paying more for the exact same
product because of their online search history.
Businesses should create new goods and services that
Americans want to buy at prices justified by the cost. And
workers, critical for the success of businesses, of course,
should be paid fairly for helping the businesses succeed.
Instead, the same Wall Street business model that has kept
wages low and executive compensations sky high for decades is
now pushing prices up, too. Corporations use supply shocks from
the pandemic and the war in Ukraine as an excuse to raise
prices, and they keep raising them. Be clear, they're not
charging more because they're paying workers more. Wages are
not causing price hikes. Corporations are raising prices far
beyond their input costs and funnelling those profits to
executives, not workers, just like they always do. They've
realized when the market isn't free or fair, they can push
prices up higher and higher.
And they're using tried-and-true technologies, new
technology, to refine old ones, to charge those higher and
higher prices, and get away with it. When they're talking to
the Wall Street investors, they admit what they're doing. On an
investor earnings call, one CEO of a major American company
said, consumers are tolerating frequent price increases well.
You hear that? Consumers are tolerating price increases.
I'm here to tell CEOs that working families cannot tolerate
unfair price increases. Price gouging isn't new, but it's
getting easier and easier to conceal.
By now, we've heard what the media dubs shrinkflation,
where corporations shrink their products, but keep the prices
the same, or even raise them. The rolls of toilet paper have
fewer sheets, but they didn't lower the price. The package of
Oreos has fewer cookies in it, but the price stays the same.
The trick isn't new, but it's getting worse. What's next?
Will they shrink the amount of cream in the Oreo cookies? Will
Double Stuff become half-stuffed?
Companies use advances in technology to find new methods of
price gouging. They're now using new pricing strategies and
data collection to charge more. They call these tactics dynamic
pricing and personalized pricing algorithms. Dynamic pricing
and personalized pricing, you know some corporate PR firm is
really proud of those terms.
Customers don't want their pricing personalized. They want
it to be fair. They want it to be transparent. They want it to
be as low as possible. Gone are the days when Americans simply
could walk into a store having a clear idea of what they are
about to pay. It's not just the act of walking into a brick-
and-mortar store that's nostalgic, it's the notion of
predictable, transparent prices.
With online retailers, the price can change every day or
even within the hour, sometimes dramatically. They spread the
technique to brick-and-mortar stores, adding electronic menu
boards to restaurants and digital price labels to shelves, so
that corporations can raise the price at a moment's notice.
It's frustrating and it makes it impossible for people to
compare prices and shop around, key ingredients in any fair,
open market. Families with fixed budgets can't afford to walk
into the grocery store, into a pharmacy, not knowing how far
their paycheck will get them.
Big Tech has exported their data-mining business model to
retailers, and that has made all of this even easier for
companies. As more people shop online, retailers learn more
about browsing and shopping habits all of us have by collecting
every bit of our online data. They can charge you more based on
your search history.
You start shopping around to try to find the lowest price
on a new washing machine. Online retailers realize you're in
the market for appliances and start showing you higher and
higher prices.
Spying on people and charging them more for the products
they need, it's not innovation, it's price gouging. Charging
more for food during mealtime isn't the free market, it's
exploitation.
The story is always the same, whether you use old tricks or
new technologies, corporations win; the rest of us, typically,
lose. That's not how free markets are supposed to work. It's
why standing up to corporate interests matters.
And people hate Washington, people hate Washington because
too many politicians in this town over and over and over do
corporations' bidding.
It took us more than a decade of fighting the drug
companies and their lobbyists and their allies in Congress to
finally lower drug prices and to cap the cost of insulin at $35
a month for seniors. Almost nothing we've done elicits the kind
of reception that I get when I talk about lowering the price,
capping the price of a prescription of insulin at $35. Yet,
look at how hard it was in this country because so many of my
colleagues were doing the bidding of corporate interests, doing
the bidding of Big Pharma, day after day, week after week,
month after month, year after year. But consumers had a victory
when we capped the price of insulin at $35.
We need Members of Congress to grow spines and stand up to
more of these corporate lobbyists. Senator Casey and I have a
bill to crack down on companies shrinking their products and
raising their prices by directing the FTC to label this what it
really is, and that is a deceptive practice.
We need our colleagues to join us in efforts like this to
lower prices and stop these tactics that distort the market,
and stifle competition, and make it harder for Americans to
afford the cost of living.
Thank you. Member Scott.
OPENING STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you, Mr. Chairman.
And thank you all for being here with us this morning.
Listening to our Chairman, Democrats would have Americans
believe that the economic pain they're feeling is caused by
greedy corporations putting a few less chips in your chip bag.
It couldn't be more clear where the obvious pain is coming
from. The obvious pain is coming from a guy who lives at 1600
Pennsylvania Avenue.
The bottom line is that President Biden and Bidenomics has
devastated our economy and devastated people working paycheck
to paycheck. The highest percentage of Americans with the
fewest dollars in their savings account for an emergency is now
because of President Biden and Democrats' reckless spending.
They like to name their bills in attractive ways, but the
bottom line is a very simple thing: they all add to inflation,
whether it's the American Rescue Plan, the Bipartisan
Infrastructure Act, or the worst-named bill perhaps in American
history, the Inflation Reduction Act.
Anyone who believes that inflation has gone down because of
the Inflation Reduction Act, all you have to do is look at the
latest information coming out of the Federal Reserve itself.
Inflation continues to increase.
These bills used to be hailed positively as a part of
Bidenomics, but now they're just economics, because no one can
afford President Biden's approach to solving the problems that
we see in our Nation.
And I know this to be true because it doesn't matter
whether I'm at home in South Carolina or any other State around
the country, I keep hearing the same things from consumers:
Rent is too high. I'll never be able to afford a mortgage.
I'm living paycheck to paycheck. My grocery bills are
staggering, and I can barely afford them.
Or I spent my entire life working and building up enough
savings just to retire, but now I'm worried that those savings
won't go far enough and I'll have to go back to work.
Or I'm really worried about my finances and our economy.
And they always end with a simple question: What can you do
to help me?
The number one concern, besides the devastation that
Americans are experiencing because of the unsafe, insecure,
wide-open southern border, the number one concern outside of
the border is the economy.
And Americans across the country point their fingers at the
devastation of inflation. Inflation today is costing the
average American family an additional $8,508 just to buy the
same things they were able to buy before President Biden took
office.
It is truly unfortunate that the Biden administration
continues to play a game of deflection; not taking
responsibility, not solving the problem, but looking for
someone else to blame other than the man in the mirror.
First, the Biden administration told us that the challenges
that we were seeing with inflation were transitory. I cannot
tell you the number of hearings I sat through, whether it was
Secretary Yellen or others, who said that this is transitory
because of COVID.
Well, then they changed the story that it was a Putin's
price hike because of the Russian invasion of Ukraine. And
then, it was greedflation or shrinkflation, when the fact of
the matter is simply Biden's inflation.
Here's the truth; the Biden administration's spending
policies have caused the inflation that we're seeing and the
economic devastation it is producing. They are the key
contributors to the price hikes we are all experiencing today.
Let's take a step back to understand what inflation really
feels like to the average American.
Prices across the board have certainly increased nearly 20
percent since Biden took office. Yes, a 20 percent increase in
just over 3 years. For example, butter is up 27 percent;
chicken, 26 percent; white bread, 30 percent.
When you go to the pump, you don't have to believe what
President Biden says about the challenges. All you have to do
is see the price at the pump, a 40 percent increase; energy
costs, a 25 percent increase.
I could spend the rest of my time this morning discussing
other examples of how much prices have increased, but the
American people know all too well that the challenges that they
face and where it comes. That's why they trust him so little on
the economy.
It is crystal clear. They know what they see with their own
eyes. Yet, instead of looking at ways we can bring inflation
down, this Administration continues to look for scapegoats,
such as corporate America.
But here's what the Federal Reserve recently studied. The
Federal Reserve studied the Administration's claims that
corporations are driving up inflation and came to the
conclusion, and I'll just read it, unprecedented large and
direct Government intervention and accommodative monetary
policy. Profits were back to their prepandemic levels by the
end of 2022.
With respect to shrinkflation, the Biden administration's
own BLS, Bureau of Labor Statistics, reported that its effects
have resulted in a 0.01 percent average annual increase to
prices and has a very small impact on the overall inflation
picture.
I know this is really uncomfortable for some of you to
listen to it. That's just called the facts.
What we should be talking about today is the direct harm
this Administration's policies are causing as they continue to
lead to more inflation.
We should be talking about the inflation spike we are
likely to see after billions and billions of dollars in student
loans are illegally forgiven by this Administration.
We should be talking about a Federal debt that is growing
by trillions of dollars every single year.
The American people are smart. They see through this
blatant attempt by this Administration to blame others for the
inevitable results of their policies.
It's time for the Biden administration and their friends on
the other side of the aisle to wake up and smell the coffee
that now costs 30 percent more.
Out-of-control, reckless spending led to runaway inflation
that has remained elevated for years now. We must all accept
the fact and return to sound economic policies that make
affording the basics just a bit easier for the American family.
With that, I yield back and look forward to asking some
questions.
Chair Brown. Thank you, Senator Scott.
We welcome the three witnesses to the Committee.
Mr. Bilal Baydoun is the Director of Policy and Research at
Groundwork Collaborative. Mr. Baydoun has served as a senior
advisor in several Government organizations, including the city
of Dearborn, Michigan. He holds a master's in public policy
from the University of Michigan.
Dr. Allison Schrager is a Senior Fellow at the Manhattan
Institute. She's an economist and contributing editor at City
Journal; cofounder of LifeCycle Finance Partners. Dr. Schrager
earned her graduate degree from the University of Edinburgh and
a Ph.D. in economics from Columbia University.
Dr. Schrager, welcome.
Dr. Ali Bustamante is the Director of the Worker Power and
Economic Security Program with the Roosevelt Institute. Dr.
Bustamante is an expert in labor, economics, and public policy.
Prior to joining Roosevelt, he served as Chief Economist at the
Louisiana Workforce Commission. He received his BA and Ph.D.
from the University of Miami.
Dr. Bustamante, welcome.
Mr. Baydoun, please begin.
STATEMENT OF BILAL BAYDOUN, DIRECTOR OF POLICY AND RESEARCH,
GROUNDWORK COLLABORATIVE
Mr. Baydoun. Thank you, Senator. Chairman Brown, Ranking
Member Scott, Members of the Committee, thank you for the
opportunity to testify today.
My name is Bilal Baydoun. I'm the Director of Policy and
Research at the Groundwork Collaborative, an economic think
tank based here in Washington.
The modern price tag was invented by John Wanamaker of
Philadelphia, a devout Presbyterian who believed that, if we
were equal before God, we ought to be equal before price. And
so, from the very beginning, the price tag was infused with a
sense of fairness and equality.
Yet, in America today, a fair price, let alone a sweet
deal, is harder and harder to come by. In the age of corporate
concentration and high-powered algorithms, pricing is in the
midst of a troubling transformation, and the price tag as we
know it may become a relic of the past.
Ride-share apps like Uber have reportedly charged users
higher prices if their phone battery was lower. Insurance
companies fly drones above our property in search of signs of
clutter, and car companies install software that reports our
driving behavior to insurance companies, who use the data to
hike our rates.
Amazon, reportedly, changes prices millions of times per
day, while running secret price-hiking experiments like Project
Nessie that reaped $1 billion in revenue.
Frustratingly, food delivery apps like Uber Eats show us
one menu price upfront, only to tack on mysterious junk fees
right at checkout.
In a practice known as shrinkflation, companies discretely
reduce the size or volume of common household items, everything
from jars of peanut butter to bars of soap, to charge consumers
more for less.
All of these tactics converge on a single goal: find out
the maximum price that individual consumers are willing to pay.
In competitive markets, companies often have to innovate,
outwork the competition, and improve products and services in
order to keep customers happy. But a perfect storm in our
economy made it much easier for companies to simply price their
way to record profits.
First, companies have gotten bigger. About three-quarters
of domestic industries have become more concentrated and are
dominated by fewer players than they were 20 years ago. This
grants the remaining large firms the freedom to hike prices
without fear of being undercut by the competition.
Second, pricing has gone high-tech. Technological advances,
such as cloud computing, AI, and surveillance targeting have
enabled companies to collect reams of personal information on
consumers and change prices in under a nanosecond.
These technologies help companies build profiles of
individual customers that include things like our age, marital
status, estimated salary, ethnicity, the magazines we read, and
even the type of topics we discuss online.
Finally, market power and technological advances came
together in the shadow of inflation, giving companies the cover
to roll out pricing strategies once thought to be too risky,
precisely because consumers dislike them.
But with prices rising everywhere, customers couldn't
distinguish which hikes were due to rising costs and which were
truly excessive. As a Barclay's executive told Bloomberg in
2022, quote, the longer inflation lasts and the more widespread
it is, the more air cover it gives companies to raise prices.
Unquote.
The complex algorithms entrusted with setting prices to
maximize revenues have neither a conscience nor legal training,
which is why algorithmic pricing can be both discriminatory and
collusive. But we don't have to accept the end of a fair price
as inevitable. We must continue to enforce current laws that
outlaw collusion and unfair and deceptive practices, while also
recognizing that algorithms can fix prices just as well as
human agents can.
But new laws are also necessary. The Price Gouging
Prevention Act, introduced in this chamber, would enable the
Federal Trade Commission to enforce a Federal anti-price-
gouging statute. Likewise, the Shrinkflation Prevention Act
would classify shrinkflation as a deceptive practice and
empower the FTC to take civil action on behalf of consumers.
We must also continue to eliminate junk fees and regulate
complex pricing structures that push hidden fees on consumers.
The Consumer Financial Protection Bureau's late fees rule
demonstrates that policymakers can and must protect consumers
from predatory fees. By capping late fees at $8, the CFPB will
save American families more than $10 billion annually.
Finally, we can't allow companies to harvest our data and
use it to price discriminate against us. Protecting data
privacy, including transactions data, is essential to
confronting this new pricing regime and ensuring companies
cannot surveil consumers, while pushing arbitrary price hikes.
There's no doubt we have the tools to restore a fair price
in America. We just have to use them.
Thank you, and I look forward to your questions.
Chair Brown. Thank you, Mr. Baydoun. Dr. Schrager.
STATEMENT OF ALLISON SCHRAGER, SENIOR FELLOW, MANHATTAN
INSTITUTE
Ms. Schrager. Chairman Brown, Ranking Member Scott, Members
of the Committee, thank you for the invitation today.
I'm a Senior Fellow at the Manhattan Institute, where I
research fiscal and monetary policy and financial markets. I am
also a columnist at Bloomberg Opinion.
And the high-inflation environment we're in is a terrible
economic burden for American households, especially those
living paycheck to paycheck or struggling to afford groceries,
let alone enjoy the occasional meal out with their family.
And it's tempting to blame whoever raised the price we see,
the firms we buy goods and services from, who appear to be
getting rich off of our bills. But they are not at fault; they
are merely reacting to the realities of the high uncertain
inflation environment we are all facing.
In order to bring inflation down, we need to understand it,
how it started, and why it persists. History has shown that
misdiagnosing the problem, and then, implementing misguided
policies will only create more harm for American households.
And my testimony explains how we got here and why inflation
remains high. The main reason it's remaining high is we're
still in an elevated, high-demand environment, and that is made
worse by a stimulative fiscal policy. Inflation, though, cannot
be blamed on greedy corporations.
First, there's no reason to think that corporations have
just suddenly become greedy. It is natural to increase prices
when you're facing a period of high demand.
Take the example of an umbrella salesman in the rain. It
does feel really unfair that he raises his price when it rains,
but if he didn't increase prices when it starts to sprinkle,
there would be no umbrellas left when there was a downpour. Or
if he can't make more money in the rain, why would he bother
sitting in the rain himself and sell umbrellas?
We see a similar story playing out in markets today. Prices
are increasing because demand is still high. We see consumer
spending is still up. We see a rather very tight and vigorous
labor market, and GDP, particularly around demand focusing, is
still growing. And prices do rise when demand is high, and this
price adjustment is how markets ration goods.
It is true that there was an increase in profits in 2021,
when inflation first spiked, but profits peaked in 2021 and
have since fallen and leveled off.
One way to understand what happened is that, initially,
firms raised prices in response to increased demands and the
limited supply coming out of the pandemic. But just like that
umbrella salesman, they increased prices and reduced that
higher demand.
Now, at first, the cost of their inputs did not go up as
much, in part, because firms had existing contracts. But as
time went on, they had to renegotiate those contracts and gave
many of their employees raises, and then, profit margins
declined.
So, in addition to just re-increasing prices, firms might,
instead, just shrink the volume of the product they sell, but
keep prices the same. Shrinkflation is like fewer potato chips
in a bag. But this is just another way for firms to increase
prices.
And again, I see why this is extremely frustrating to
customers. They are getting less and paying more. But it is
really just another way to pass along the high price increase
of the sort of overall high-demand environment we have and
rising input costs.
You know, whether or not increasing prices or increasing
the volume of the goods is better, it really is sort of hard to
say. But it's important to understand that sometimes just
charging more reduces sort of more people from buying the good
altogether.
Now, dynamic pricing is another way that you can increase
prices. And this is just increasing prices for some consumers
and not others, and particularly, consumers who are more
willing and able to pay more. Wendy's recently attempted this
when they floated the idea of charging more during peak times.
But an example of dynamic pricing that predates Wendy's is
airlines. We've been living with their dynamic pricing for
years. They charge more during peak times or they are now
charging more for goods that used to be included in the price,
like a checked bag or picking your seat.
Now, this is, again, consumers hate this because it feels
unfair. But it's important to understand this actually is how
airlines also deal with the pricing pressure from technology
that enables consumers to look at goods, to use the internet to
sort of price-comparison shop, which puts pricing pressure on
airlines. And the result is that the cost of flying has gone
down.
In the 1980s, only 30 percent of Americans had flown in the
last year. Now, it is more like 50 percent, in large part
because lower-income Americans do have a cheaper option, even
if it means worse service.
And the same is true for Wendy's. If they would just
increase prices across the board, then fewer people would be
able to go to Wendy's. And we can expect more of this. And in
fact, research shows that a lot of the same technology that
enables price discrimination has also created a more inclusive
market and had some deflationary pressure on prices before the
pandemic.
So, I understand why this high-pricing environment is
causing frustration for consumers. It causes frustration for
me, too. But this is, again, the result of the high-demand
environment we're in, and that is largely made worse by sort of
stimulative fiscal policies that are still piling on, adding
fuel to the fire to this high-demand environment.
Past attempts from companies raising prices--if we choose
the wrong solutions, such as price controls, those have proven
counterproductive in the past. They create shortages. They
reduce incentives to sell and produce, and they can worsen
inflation.
The best way to fix this is not to undermine the Fed's
attempts to control inflation; pull back on spending; stop
handouts, especially to high-earners who don't need them, and
try to reduce the debt.
Chair Brown. Thank you, Dr. Schrager. Dr. Bustamante,
welcome.
STATEMENT OF ALI R. BUSTAMANTE PROFESSOR OF PRACTICE,
UNIVERSITY OF NEW ORLEANS DEPARTMENT OF ECONOMICS AND FINANCE,
AND DIRECTOR, WORKER POWER AND ECONOMIC SECURITY PROGRAM,
ROOSEVELT INSTITUTE
Mr. Bustamante. Chairman Brown, Ranking Member Scott, and
honourable Members of the Committee, thank you for inviting me
to speak on the pressing issues surrounding how corporate
pricing strategies are impacting prices and their implications
for consumer finances.
In my testimony I will make three points.
One, inflation is being driven, in part, by corporate
profiteering related to firms' price-setting power.
Second, corporate profiteering is harming consumers,
workers, and small businesses.
And three, Government has tools that can restrict corporate
profiteering and protect consumers and small businesses.
First, there is evidence that large corporations are
engaging in pricing strategies that are contributing to
elevated prices. Research conducted by my colleagues and I at
the Roosevelt Institute has found that a recent sharp rise in
markups by large corporations is contributing to inflation.
Markups are the difference between the prices consumers pay for
goods or services and how much it costs to make or provide
them. Markups are low in competitive markets. But, as
corporations have accumulated significant market power over the
years, they have been able to increase prices without
sacrificing profit. Our research finds average markups grew
from 48 percent above cost in 2014 to 69 percent above cost in
2023, and that is growth that is being driven by a few large
corporations.
For consumers, markups can take several forms through
various pricing strategies employed by corporations.
Standard retail markup. This is the most straightforward
markup where sellers add a percentage to the cost of goods and
services to generate profit.
Shrinkflation. Reducing the quantity or size of a product
while maintaining or increasing its price.
Dynamic pricing. A method of price discrimination whereby
prices adjust in real time using pricing algorithms and
sophisticated consumer data, often with new artificial
intelligence methods.
Decoy pricing. Pricing structures where firms introduce a
third, less attractive option to lead consumers to choose a
more expensive option than they originally might have.
Bundling. Bundling products together to sell them at a
price that seems to offer a savings compared to buying each
item individually, but that often includes a markup.
Markups, and the sophisticated pricing strategies that are
driving them, are on the rise because of large corporations'
outsized market power. Research finds that smaller firms in
less consolidated industries have not driven explicit markup
growth.
Take the fast-food industry, for example. My recent
research of markups finds that the average markup in the fast-
food industry grew by 14.7 percent during the past decade. When
analyzing markups at the 10 largest fast-food firms in 2023, we
found that they were the highest at Wendy's, McDonald's, and
Restaurant Brands International, the parent company of Burger
King and Popeyes. At these firms, prices were between 80 and 91
percent above companies' marginal costs. These large companies
are charging consumers above and beyond what is necessary for
typical profit margins.
Second, there is ample evidence that markups and corporate
profiteering in general by large corporations are harming
consumers, workers, and small businesses.
Consumer surplus, how economists measure the social/
economic benefits of consumption, would have been 14 percent
higher in 2019 if markups had remained stable at 2006 levels
and 50 percent higher if firms passed along the reductions in
their costs over that period to consumers. This hits low-income
consumers the hardest, as their disposable income is stretched
even thinner, forcing them to make difficult decisions about
the basic necessities and bills they need to cover.
Workers are also being squeezed. Research shows that
increases in markups lead to a decline in wages of
approximately 12 percent, because markups lead to a reduction
in the aggregate demand for labor. The harmful effect of
markups on workers is also visible in the declining share of
income going to workers. Rather than rewarding workers who
drive productivity in the first place, these large corporations
driving growth in markups are the same ones returning higher
profits from markups to wealthy shareholders via stock buybacks
and dividends.
Furthermore, markups reflect a winner-take-most economic
environment where large corporations with price-setting power
also have the capability to reduce competition by creating
barriers to new firms to enter the market, crowd out smaller
firms, and squeeze supplier margins in order to protect and
expand their market share.
Lastly, I'd like to discuss the myriad of available
Government tools that can restrict corporate profiteering and
protect consumers, workers, and small businesses.
We need to enforce and strengthen antitrust laws to prevent
monopolistic practices and ensure competitive markets,
particularly in industries where a few companies control
significant market share, leading to higher markups.
Policymakers can move to create guidelines and restrictions
around the use of dynamic and personalized pricing to prevent
unfair or deceptive practices by requiring businesses to fully
disclose the pricing structure of their products and services.
This would disincentivize corporations from enjoying these
predatory pricing practices.
To improve fairness and transparency in pricing,
administrative agencies like the Consumer Financial Protection
Bureau can mandate clearer disclosure of pricing components and
service fees and enforce rules against deceptive pricing
practices or hidden fees. This is particularly impactful in
sectors prone to higher markups, such as financial services and
health care.
There are great economic benefits to be gained by reining
in markups and unfair corporate pricing strategies, including
lower prices in the short term and more competitive economic
environment for business and workers in the medium and long
term. Yet, inaction from both regulators and legislators will
enable corporate profiteering that continues to elevate prices,
harm consumers, and squeeze small businesses.
Thank you.
Chair Brown. Thank you, Dr. Bustamante. And the question
will go to Senator Tester of Montana.
Senator Tester. Thank you, Mr. Chairman, for the courtesy.
And I want to thank you and the Ranking Member for holding
this very important hearing.
And I appreciate the folks who gave their testimony.
I want to start with you, Dr. Bustamante.
I believe in capitalism. I think you've got to have
competition in the marketplace. It keeps everybody honest--
everybody honest.
I think what we've seen in many, many different sectors of
our economy is way too much consolidation. I want to bring
agriculture up as one. You know the statistics. Three-quarters
of the global grain market is controlled by four traders.
Eighty-two percent of the U.S. beef market is controlled by
four packers.
I'm going to tell you, and I'm a farmer in my real life--
that concentration prevents folks that are in production
agriculture, family farmers, from being able to survive. And by
the way, the statistics on the other end point that out.
Eighty-five percent of farm income is going to 7 percent of the
farms. Ninety-three percent of the farms in Montana, for
example, share just 15 percent of the farm income. That's a
system that, quite frankly, needs some attention. We're talking
about consumers getting taken advantage of. We talk about
producers of the food in this case getting taken advantage of.
Can you tell me if, and excuse me if I'm stepping out, but
can you tell me if things like the Packers and Stockyards Act
that was passed over 100 years ago, because the industry of
meat packing was so consolidated, and today's it's even more
consolidated than it was 100 years ago, is something that we
should really focus on? Or is it a different issue than just
making sure that people are following the antitrust laws that
are out there?
Mr. Bustamante. Consolidation has been a huge issue driving
markups and higher market concentration in so many industries.
As you mentioned, when we think of meat and meat processing,
the fact that cattle ranchers used to get about 67 percent of
every dollar that consumers were paying, was actually going to
them, now it's closer to 33 percent. And this is a huge red
flag that meat packers are, basically, driving consumer prices,
but actually not passing on those gains to cattle ranchers or
to workers to begin with.
Senator Tester. Yes.
Mr. Bustamante. And so, it's really being able to push back
against consolidation, being able to push back against these
large corporations that, ultimately, have so much market share
that they're able to squeezer suppliers, consumers, and workers
at the same time.
Senator Tester. Well, thank you for that. Because you're
spot on.
And I will tell you food security is really, really
important in this country. And because there's just not
enforcement of laws that have been on the books for 100 years,
we're forcing more consolidation at the ground level. And I've
said this and I mean this, if we lose family farm agriculture
in this country, this country becomes far, far, far less
secure. And so, I think Congress needs to pay attention to
that.
And in that vein, I would tell you that Chairwoman Stabenow
put out her farm bill yesterday, and in that she included a
bill that I've been pushing for and that I've sponsored; the
Meat and Poultry Special Investigator Act.
This is for you, Mr. Baydoun. You mentioned the negative
impacts of consolidation, of reduced competition, however you
want to put it, in your testimony. Could you flesh out a little
more what increased competition and accountability, how that
could help farmers, ranchers, consumers, and what Congress
needs to do from your perspective to try to make this happen?
Mr. Baydoun. Absolutely, Senator. Thanks for the question.
In competitive markets, we know that prices come down, in
part, because firms have to compete against one another to win
over consumer loyalty. And the consolidation that we've seen
over the last 20 years especially has created such a situation
where pricing has been divorced from competition.
And so, whereas, once pricing was a fairly straightforward
process that took into account factors such as the cost of
materials, labor, the lack of competition, and also, the advent
of algorithms, in which, you know, all sorts of industries,
including beef processing, for example, use algorithms; all
share the same algorithm, and that, effectively, allows these
companies to collude in higher prices. Now, those higher prices
are all across the supply chain and, ultimately, consumers feel
that at the checkout line.
Senator Tester. Well, I just appreciate this hearing
because I firmly believe, if you're worried about how many
ounces are in a potato chip bag, or Fritos, or an Oreo cookie
bag, competition can fix that problem, but Congress has to do
their job.
Thank you guys very much.
Chair Brown. Senator Scott of South Carolina is recognized.
Senator Scott. Thank you, Mr. Chairman.
Thank you all for being here this morning.
Since taking office, the Biden administration has been on a
regulatory blitz. And what I mean by that is, if you compare it
to the Obama administration, where you saw about $300 billion
of increased cost resulting from more regulations, under the
Biden administration, we've seen about a $1.3, almost a $1.4,
trillion increase in the regulatory burden put on businesses.
Having been in business, started a few businesses myself, that
could only increase the cost of being in business.
Now, you compare that with the total cost of the Trump
administration, that was a little bit over $30 billion. So, $30
billion with the Trump administration; $300 billion with the
Obama administration, and over $1.3, nearly $1.4, trillion of
added regulatory cost.
Dr. Schrager, do you agree that the breakneck speed of new
regulations finalized by this Administration has contributed to
inflation?
Ms. Schrager. Yes, it certainly has contributed. So,
there's a lot of factors going on. But, certainly, when you
make it more expensive for businesses to produce, spend more
time on paperwork, especially a huge part of inflation that
consumers are having problems with is the cost of housing. And
certainly, a lot of regulation and especially a lot of
environmental regulations that make it more expensive to build
housing is making that more expensive. And I think we're seeing
in a lot of surveys that, as I said, the cost of housing is
really number one for a lot of consumers. So, I think
deregulation would certainly--it wouldn't solve all of the
inflation problems, but it would certainly help.
Senator Scott. Let me just stay on that subject because I
hadn't thought about what you just said as it relates to
housing. I've certainly seen the housing costs go up without
question.
I served some time on the local government, where we
improved and increased the building requirements in Charleston
County. If you think about the regulatory burden that comes
from a municipality or a county, and then, you add that on top
of the State, and on top of that is the Federal Government, you
see this regulatory burden that is in many ways for small
businesses, frankly, oppressive.
I also think that an oppressive regulatory environment
actually reduces competition and only benefits the players who
are already in that space, and is more likely to create a
monopoly in that space. That is not good for consumers.
Thoughts?
Ms. Schrager. Yes. That's absolutely true. And, in fact, we
see this a lot in Europe, who have a lot more regulatory
burden, particularly around technology, which we're talking
about here, and how firms use data.
And this was intended, as I said, to increase competition,
but it actually had the opposite effect, because complying with
all these regulations has actually made technological
entrepreneurship much harder there.
Senator Scott. There's no doubt when you see our largest
technological firms saying, ``Please regulate me. Please
regulate me,'' because it closes the door of competition. It
kind of answers the question itself.
A different question for you: I won't say this very well,
but I'll do my best. From my perspective watching the
legislation leave Washington and impact the country, whether
it's the first bill signed into law, the $1.9 trillion
legislation, that artificial stimulation where you're pouring
new resources or cash into our economy--actually, artificial
stimulation called money from the Government--increases the
demand without increasing the supply. And so, if you increase
the demand without increasing the supply, and you add on top of
that the snarl from a transportation perspective that we saw in
2021 and 2022, it's harder to get your supplies. So, it only
increases the demand because you have fewer supplies, and you
have more money in the market, which also increases the supply.
The ultimate outcome of that is less supply, larger demand,
and no real ability to see when your products are going to get
there. That is very hard for businesses to manage, and it only
leads to a more challenging environment.
Ms. Schrager. Yes, exactly. I think even economists who
associate themselves as Democrats have been saying that at
least 3 to 4 percentage points of the initial inflation was due
to stimulative fiscal policy, which has definitely sort of
added to demand. And, you know, it's important to argue we
still have very stimulative fiscal policy, despite the fact
we're in a high inflation environment, which makes the Fed's
job a lot harder.
Senator Scott. Right. I only have about 20 seconds left.
You said, I think, during your opening comments that the
corporate profits peaked in 2021?
Ms. Schrager. 2022.
Senator Scott. 2022. I think that's actually relevant as
well. As we think about the greed of our corporations--and
frankly, I'm not going to sit here and defend any of them; they
have the ability and responsibility of defending themselves--
but, as a kid who grew up in poverty, the one thing that I can
tell you is that the price that we're seeing at the pump, and
the lack of the ability for a single mother to navigate gas
prices, energy prices, and food prices, when we see a glut of
resources coming into the marketplace, and for 52 consecutive
paychecks, inflation outpaces her wage increases, that's a
devastation. That's not a problem, but a crisis.
Chair Brown. Thank you, Senator Scott.
This question is to both of you, to Mr. Baydoun and to Dr.
Bustamante. Ohioans are angry, as we all know, as they are all
over the country, about the rising cost of everything. Every
time they go to the grocery store, families pay for corporate
stock buybacks, pay for executive bonuses. As prices increase,
so do profits. Corporate profits climbed to record highs at the
end of 2023, are projected to keep climbing through 2024.
Dr. Bustamante, how much are corporate profits, in their
quest to drive them higher and higher, how much does that
contribute to rising prices today?
Mr. Bustamante. Thank you for that question, Senator.
When we look at data from the San Francisco Federal
Reserve, we actually find that more than two-thirds of
inflation is actually being driven by supply factors and other
factors that are not demand-related. And, in fact, when we look
at corporate profiteering and we're looking at markups, that's
largely accounting for about 16 percent of inflation that we're
actually seeing over the past 6 months.
Chair Brown. Mr. Baydoun, what do you think about that?
Mr. Baydoun. Our own analysis, Senator, at Groundwork has
found that, in the second and third quarters of 2023, corporate
profits drove over half of inflation, about 53 percent of
inflation.
Just a point of comparison, over the last 40 years before
the pandemic, profits drove just 11 percent of inflation. And I
think what's interesting over this year is that, although
consumer prices have risen, the price of inputs has gone down,
and also, the labor share of income has gone down. And so,
there's still plenty more of savings to pass on to consumers,
but there's also plenty more to share with workers.
Chair Brown. And what you said tracks with a report that I
cited earlier on the Kansas City Fed.
Mr. Baydoun, you spoke about higher profits are
contributing to higher prices. We've seen companies now raise
prices, as you know, and shrink their products, while charging
people the same price or even raising the price. This means
people are either buying less of the things they need or paying
more, or both.
A study found that so-called ``shrinkflation'' accounts for
about 10 percent of the price increases consumers experienced.
Consumers really don't know how much their money is getting
them.
Could you provide other examples of how corporations use
so-called ``shrinkflation'' to make it harder for consumers to
find the lowest price?
Mr. Baydoun. Absolutely, Senator.
I think Americans would really be stunned to see the
breadth of how many different strategies there are. It really
runs the gamut from lowering the number of paper towels that
come in a roll, the number of Kleenex that are in a box. It
could be increasing the indentation of a drink, so that, you
know, less liquid could go inside. It could be discretely
reducing the amount of dish soap in the bottle. And so, really,
there's all sorts of creative ways.
I would also add that, in addition to shrinkflation,
there's also a practice known as ``skimpflation,'' which
involves degrading the quality of those products, while keeping
the price the same.
And so, we're now seeing a new frontier of ways to deceive
consumers into paying higher prices.
Chair Brown. So, talk about, if you would, talk about
technology, what kind of ways it's easier for corporations to
charge higher prices and keep consumers in the dark. And can we
have free market competition of customers who cannot compare
prices and can't really shop around for lower prices?
Mr. Baydoun. Absolutely, Senator.
You know, pricing, as I said, was a fairly simple formula.
It took into account the cost of materials, the cost of labor,
and some rudimentary analysis about what your competition was
up to. And companies would simply stick that final price of
that calculation on a price tag and they would let it be.
But today, we are in a totally different era. Technology
really enables companies to, number one, surveil consumers and
collect data about consumers that, frankly, only our families
and God should know about--things like marital status,
ethnicity. And so, all of those things are really fed into
algorithms that are able to test each one of our sensitivities
to price hikes. And the goal is always the same. It's, let's
find out the maximum price that each individual consumer is
willing to pay.
Chair Brown. Dr. Bustamante, your thoughts on that?
Mr. Bustamante. Yes, thank you, Senator.
What we ultimately know is that, when we look at these
pricing strategies, they're very much black boxes that
corporations are ultimately employing. And that really opens
the door for potential discriminatory practices, for practices
that ultimately harm families who are already on the brink of
having so much financial stress in their lives.
Chair Brown. Thank you.
I wanted to mention, next week, in the next hearing, we're
going to talk about junk fees. And we know that the
complexities of technology, and the comments you each made
about the employment of these technologies by companies that
produce these products, make fees even harder to ascertain and
understand. CFPB just released a report that found that
consumers pay more with complex pricing structures. The
Committee next week will hold a hearing examining how junk fees
hurt consumers and how we can ensure consumers can keep more of
their own money. Senator Tillis of North Carolina.
Senator Tillis. Thank you, Mr. Chairman.
Mr. Baydoun, so if someone making a business decision to
charge a price that they believe is over a general market
value, that reduces the number of people that can purchase it,
do you think that's a bad practice?
Mr. Baydoun. Senator, I think if companies engage in
practices that are unfair, deceptive--
Senator Tillis. Well, no, I'm back to that specific use
case.
Mr. Baydoun. Mm-hmm.
Senator Tillis. I have a business person knowingly making a
decision to price above, to reduce the number of people that
could afford a product that I've decided to sell. Do you think
that that's fundamentally a bad decision?
Mr. Baydoun. Not necessarily, Senator, but we do have--the
concept of price gouging still applies. And if companies are
raising prices to protect their profit margins from rising
costs, that's one consideration. But if they're hiking their
prices to reap super-normal profits, that's a problem.
Senator Tillis. In your opening statement, I think you may
have mentioned that you believe corporate profit margins are
abnormally high. Do you agree with that, that they are
abnormally high? Because that seems to be in conflict with the
Fed report of September 2023, where they said, when you adjust
for COVID, some of the COVID policies implemented, that they
were, more or less, back to prepandemic levels. So, do you
disagree with the Fed's assessment?
Mr. Baydoun. Senator, over the last 3 years, corporate
profit margins have hovered around 70-year highs.
Senator Tillis. So, you disagree with the Fed's assessment
in their September 2023 report?
Mr. Baydoun. I'm not familiar with that specific--
Senator Tillis. I'm asking for the record, in that context,
if you disagree because it seems to be in conflict. I'm just
curious.
Mr. Baydoun. Mm-hmm.
Senator Tillis. And thank you, Mr. Baydoun, for the
skimpflation. That's a new one I can add to my lexicon.
Let's use Frito-Lay as an example. Look, they're making--I
was using that example. You answered the question differently.
But a homeowner who decides to price a house above the
market is making that decision at an atomic level. I'm glad you
actually did not say that that was a bad thing. Because we
can't separate, we can't create a free market sort of concept
for small businesses and not a free market concept for big
businesses, because those big businesses were once small.
And I think it's very dangerous when we decide that perhaps
we should have some oversight to determine what an adequate
profit margin is for, let's say, a Frito-Lay. I don't know,
you're probably too young to remember it, but Frito-Lay had a
catastrophic failure with fat-free potato chips. Do you
remember those, Mr. Chair, olestra, that ended up not doing
very well?
Businesses don't always succeed. Sometimes businesses lose
money. And so, we only seem to talk about this when businesses
are succeeding, when businesses aren't going into bankruptcy.
I, for one, think that the internet is doing a pretty good job
of identifying when potato chip bags are getting smaller.
I, for one, am very cheap. So, I'll go find a brand that I
like that hasn't skimped on me or hasn't shrunk on me. I don't
know why the free market is not going to take care of this.
But you did bring up something that's critically important
that I happen to agree with. It's actually the only thing I
agree with, to be honest with you, based on your opening
testimony. And that is the use of consumer data. This is where
we're failing.
We just had a hearing, Mr. Chair, in Finance yesterday. A
couple of years ago, when Europe implemented GDPR, Congress was
hot to say, ``We've got to get controls over data. People
should have to explicitly opt into having their data shared,
knowingly marketing it,'' et cetera. Everybody was hot on it,
and then, all of a sudden, we found out there were two or three
committees involved. We wasted 2 or 3 years, and we haven't
done a damn thing.
As a matter of fact, we've implemented a patchwork, States
have, that are actually making it more costly. So now, to some
people here, bad corporations are actually incurring more costs
because they're having to adhere to a patchwork of data privacy
rules at the State level, because Congress has failed to act.
I actually believe, if we want to reduce prices, then we
have to go back to what Ranking Member Scott referred to. We
can't just say it's just corporate greed. We have to look at
the last 3 or 4 years of added regulatory burdens, of a lack of
really trying to work on trade agreements--all these things
that actually affect global competition and, ultimately, price
points.
But, on that issue, because it was brought up in Finance,
on data privacy, data ownership, data breach, boy, I hope we
can get that under control, because if we do, it will fix some
of this stuff that you're talking about.
Thank you, Mr. Chair.
Chair Brown. Thank you, Senator Tillis. Senator Warren of
Massachusetts is recognized.
Senator Warren. Thank you very much, Mr. Chairman.
If we're going to talk about markets, and how perfect
markets are, maybe the one thing we should talk about is how
concentrated markets have become. And when we have concentrated
markets, we have a whole lot less competition.
So, just a handful of companies have taken over the food
industry, thanks to literally hundreds of mergers over the last
50 years. Just four grocery chains control an average of 72
percent of sales in American cities. And in most grocery
categories, like bread, pasta, beef, cereal, just four
companies control more than 60 percent of the market.
Now, less competition means food brands don't have to
compete on either price or product quality. For families'
pocketbooks, that means higher prices. Grocery prices have
climbed faster than inflation over the past few years. Now,
families are paying 25 percent more than they did before the
pandemic.
So, I want to talk today about the tricks and traps that
families face when they head to the grocery store. Dr.
Bustamante, you have researched corporate pricing practices. I
understand that when inflation increases, food producers and
grocery stores may need to pass on some of those higher costs
to customers. But the question is: have groceries gotten more
expensive just because of inflation--that is, passing along
higher prices--or is there more going on here?
Mr. Bustamante. Thank you, Senator.
What we actually see is that, if you look at the long-term
price, the actual marginal cost of production for many
groceries has actually gone down. And part of the big reason
for this is actually with just the nature of the supply chains
that have actually been developed over time.
That being said, those lower marginal costs were not passed
on to consumers. Instead, what we see is that, for the past 40
years, this just growing and fastening trajectory of markups,
basically, again, firms pricing their products and services at
a much higher rate than the actual increase in cost. And what
we see, during the past few years, that's just been accelerated
due to the pandemic.
Senator Warren. Right. And something they can do because
there's a lot of concentration in the industry, so there's not
much competition.
In fact, corporate profits rose five times faster than
inflation between 2020 and 2022. Kraft Heinz, which sells
everything from Oreos to pasta sauce to coffee, increased
profits by 448 percent over 2022. Cal-Maine, the largest egg
producer in the U.S., increased profits by 718 percent. In
fact, for most of 2023, corporate profits drove over half of
inflation.
Now, that hasn't stopped Big Food from pulling out another
trick. Jacking up prices was not enough. So, food companies
have decided to quietly shrink the size of products--lobbing
off a few inches here, a few chips there, or a few cookies
somewhere else.
This shrinkflation is all about deceiving customers, so
that corporations can have their profits. The CEO of the snack
company Utz admitted calling shrinkflation ``the path to higher
margins.'' So, it seems like we lost the basic principle of
knowing how much something costs before we pay for it.
Mr. Baydoun, you have been studying corporate behavior for
years. Have you seen, in your research, have you seen a shift
in behavior here?
Mr. Baydoun. I have, Senator. Companies deploy a vast array
of tactics that really threaten to make the price tag as we
know it totally obsolete. I'll just name a few.
In addition to shrinkflation, there's also skimpflation.
This is the idea of degrading the quality of a product by using
inferior ingredients, while keeping the price the same or
higher.
There's also dynamic pricing. This involves changing the
price of a product hundreds, thousands, even millions of times
in a day or week--making it difficult to predict costs.
And finally, there's a practice known as drip pricing. This
involves adding on mysterious, confusing fees, as consumers are
making a purchase, as opposed to building all of those fees
into the upfront cost.
Senator Warren. OK. So, you've got a lot of tricks and
traps you identify. I understand it not only happens when you
pull something off the shelf, it also happens when families get
to the cash register, when they get ready to check out.
Mr. Baydoun, let's say you've picked out all of your
groceries. The cashier rings them up or you ring them up
yourself. And you use your credit card to pay. And you talk to
us a little bit about the opportunities that big credit card
companies have to squeeze consumers on their groceries?
Mr. Baydoun. Absolutely, Senator.
In many ways, customers get gouged once at the checkout
line, and in many ways they get gouged again if they carry that
balance on a credit card--not only through exorbitant APRs, but
also through junk fees, like late fees. You know, up until
recently, credit card issuers could charge as high as $41 for
missing a payment, but, thankfully, the Consumer Financial
Protection Bureau actually capped those fees at eight dollars,
and that's something that will save 45 million Americans an
average of $220 a year, $15 billion annually in total. And so,
those are the sorts of interventions we need.
Senator Warren. And special thanks to the Biden
administration that has really started attacking these junk
fees.
Congress also needs to step up. We need to pass Senator
Casey's Shrinkflation Prevention Act to end shrinkflation and
my Price Gouging Prevention Act to give the FTC the tools it
needs.
Thank you, Mr. Chairman.
Chair Brown. Thanks.
Senator Hagerty of Tennessee is recognized.
Senator Hagerty. Mr. Chairman, I'm wondering why we're
having this meeting today. I have been, you know, very
surprised by the fact that we're going through some type of
blame-shifting exercise, where we know what the real cause of
inflation is here in America. And the cause of inflation in
America right now over the past 3\1/2\ years has to do with
policies that have been implemented by the Biden administration
and by Democrat legislation that was passed without a single
Republican vote--the American Rescue Plan, as it was called;
the Inflation Reduction Act, as it was called--dumping
trillions of dollars into the economy, stimulating demand way
beyond what the economy could encounter.
You jack up demand and at the same time imposing massive
regulatory constraints that suppress supply. It's obvious
what's going to happen: prices go up.
The American family, the American consumer can't withstand
this. Prices are up 19 percent since Joe Biden took office.
Young families can't afford a new home right now. The American
public is suffering dramatically. Yet, here we are in a blame-
shifting exercise trying to argue about how many potato chips
are in a bag of potato chips.
Look, the American public can see right through this.
Whether we pay the same price for fewer potato chips or pay
more for the equivalent number of potato chips, inflation is
real. And inflation is the product of policies that have been
implemented that are damaging the American economy.
You think about the blatant vote-buying that the Biden
administration has undertaken with student loan forgiveness.
Again, billions of dollars more into the economy--putting it on
the backs of hardworking Americans to pay off doctors and
lawyers and people with graduate degrees.
The American can see through this. The American public is
suffering. We've got bank failures. We've got serious issues
that this Committee should be addressing. Yet, here we are
today talking about some sloganeering exercise called
``shrinkflation.'' This is not what we should be considering,
Mr. Chairman.
Chair Brown. Thank you, Senator Hagerty. I guess you
weren't here when we talked about that same bill when we
limited the cost of insulin to $35 a month.
Senator Smith of Minnesota is recognized.
Senator Smith. Thank you, Mr. Chair.
I have a question I'm going to bring to you, Mr.
Bustamante, in a minute, but I want to just follow up on what
Senator Hagerty was asking about. He seems to be suggesting
that Government spending is what is contributing to rising
prices that consumers are experiencing at the grocery store or
when they buy auto insurance.
So, do you think the Child Tax Credit was contributing to
inflation?
Mr. Bustamante. Thank you for your question, Senator.
When we actually look at, whether it's at 2022, whether
it's looking at 2023, or even during the past 6 months, about
two-thirds of inflation is actually due to supply factors, as
well as other factors unrelated to demand.
Senator Smith. Right, right. So, our investment in the
Child Tax Credit and housing assistance, and student loan
forgiveness, is not what's causing prices to go up for
consumers.
And I actually think what I hear from my constituents in
Minnesota is they're trying to figure out, like, why is it that
I'm paying so much more at the same time that corporate profits
are going up so much? I just had this question today, Mr.
Chair, when I had my coffee with Tina, with Minnesota
constituents. And one of my constituents was trying to
understand why his insurance, his home insurance rates are
going up so much.
Now, let me ask you about this: I want to actually hone in
on auto insurance, which has been emerging as a huge driver in
rising prices. In Minnesota, car insurance rates have gone up
35 percent, more than 35 percent, between 2022 and 2023. Now,
some of that, of course, can be attributed to rising costs of
car parts and other market forces, but there's also been a real
reduction in coverage options and fewer choices for consumers.
And consumers are getting squeezed here.
So, can you talk about this a little bit? What are you
seeing when it comes to rising car insurance rates? And to what
do you attribute these increased costs? And let's be honest,
another sector where there's a fair amount of concentration, as
Senator Warren was discussing.
Mr. Bustamante. Thank you, Senator.
You're actually pointing at two main factors that are
driving inflation and higher prices in the insurance industry,
which is a key driver to inflation today.
One is consolidation. There are just fewer insurance
providers out there, and that has enabled them to collude and,
ultimately, pass price hikes much greater than the actual cost
to replace parts or replace cars.
And then, the second factor, which has been this black box
of pricing strategies that insurance companies ultimately
employ, which enabled them to both engage in economic
discrimination, where they're able to offer very similar
customers vastly different prices just based on their personal
characteristics--oftentimes, in ways that are not transparent,
in ways that are ultimately driving prices much higher than
they ought to be.
Senator Smith. Competition and the free market works when
there is good balance, when there is a shared power. So that
consumers have power; businesses have power, and it allows
consumers choice. And therefore, they are able to make the best
choice and not be sort of constrained by only having one or two
places where they can purchase something.
And speaking of black boxes, Mr. Baydoun, I want to come to
you next. We're seeing this huge affordability crisis in
housing and in rents. I see this in my home State of Minnesota.
And one of the things that I'm particularly concerned about
is how algorithmic pricing is being used to allow ways for
landlords to be able to use their market power to raise rents
in ways that are just patently unfair. Could you talk about
this? I'm particularly concerned about RealPage, a company that
has reportedly used confidential data and algorithms to help
landlords indirectly collude to set prices and even withhold
supply in the market.
Mr. Baydoun. That's right, Senator. And, you know, if a
group of landlords controls most of the units in a
neighborhood, and they all use the same algorithm to suggest
prices, that algorithm can, effectively, drive up prices and
facilitate collusion in the same way that a human could. And
so, if these landlords were getting together at a barbeque and
deciding to raise prices, they could come to the same sort of
level of price hikes; the algorithm could come to the same
level of price hikes that humans can.
Senator Smith. That's right. And, I mean, that kind of
collusion to raise prices across an industry sector, I mean, we
don't allow that, right?
Mr. Baydoun. No, it's illegal.
Senator Smith. Right.
Mr. Baydoun. And that's why I certainly applaud the Federal
Trade Commission for applying antitrust law to these more
modern scenarios and very effectively making the point that
algorithms can facilitate collusion.
Senator Smith. Yes, I agree with that. RealPage is now the
subject of multiple investigations and lawsuits. And I wonder
how long it will take before the next iteration of this
strategy comes about and where we go from here.
Do you have any advice for us? I appreciate you calling out
the FTC, which I think has been doing an excellent job. But
other advice for us, as we look at ways to put some guardrails
around how this technology can lead to collusion?
Mr. Baydoun. Absolutely.
I would also call out junk fees in rental. I think that's
something that's a new frontier and, increasingly, the cost of
rent, the upfront cost that renters are seeing, is not the
final cost they pay. And I think this body and other regulatory
agencies really need to protect the basic guarantee that the
price we see is the price we'll pay.
Senator Smith. Thank you very much. Thank you, Mr. Chair.
Chair Brown. Thanks, Senator Smith. Senator Britt from
Alabama is recognized.
Senator Britt. Thank you, Mr. Chairman.
I appreciate all of you being here with us today. I would
be the first one to say that I think we can all agree that any
practices of deceptive price gouging or intentionally
misleading of consumers, or elsewhere, are completely and
totally unacceptable. But we already have laws in place to
prevent and enforce against that.
What we're here to discuss today is a separate matter. The
fact is that businesses, just like families in Alabama and in
Ohio, Mr. Chairman, all across our country, are having to
rethink and adjust their spending patterns to adapt to the
current economic circumstances--circumstances that are driven
by persistent high inflation that we've experienced over the
last 3 years. Those circumstances have wreaked havoc on
businesses, especially the local Main Street establishments
that make up the economic heartbeat of their communities and
our Nation.
Core material costs have risen since 2021 and overhead
costs in things like utilities and, as you just mentioned, rent
and interest have also gone up significantly. Plus, packaging
costs for products are up 40 percent and domestic shipping
costs are up over 20 percent since 2021. Businesses of all
sizes are having to make changes in response to those increased
costs just to stay afloat and serve their customers.
However, rather than focusing on the root of the problem, I
am, again, discouraged by the apparent lack of responsibility
taken by the White House for the consequences of their own
actions. Instead of changing policies, this Administration has
chosen to change its messaging. It's engaged in an absurd
attempt to blame-shift rather than to reverse course or to
admit any fault.
Across the board, Americans' finances are being decimated
from this Administration's policies. Seventy-eight percent of
Americans reported having to live paycheck to paycheck in
2023--up 6 percent from the previous year. We've seen
Americans' credit card debt surpass $1 trillion--the highest
amount in history.
We've seen families that have witnessed mortgage rates
double--putting American dream of home ownership, which we know
is something that so many people strive for, out of reach.
Let me just read you a few data points upon the recent
March 2024 Consumer Price Index Report that came out. Compared
to January 2021, the average Alabama household is paying $918
more per month to purchase the same basket of food and
services. Spending is up $133 more per month when it comes to
actually going to get something to eat. Spending is up $162
more on shelter, and spending is up $249 more a month on
transportation.
I want to emphasize this: cumulatively, the average Alabama
household has spent $20,297 more due to inflation since January
of 2021. The biggest issue impacting consumers today is not
that they have less Fritos in the bag; it's that they have less
money in their pocket.
You mentioned, Mrs. Schrager, in your testimony, you said,
quote, ``History has shown that misguided diagnosis of a
problem and then implementing this misguided policy will
actually create more harm for American households.'' I fully
agree with you.
During the pandemic, we saw the Federal Reserve purchase
trillions of dollars in Treasury securities, which initially
contributed to inflation. But by the pandemic, you know, while
it's long over, as you mentioned, monetary policy has become
more restrictive.
White House officials, then, routinely mischaracterized the
high inflationary environment as ``transitory''--spurring the
Administration to pass unprecedented levels of spending, when
the economy simply wasn't ready.
Ms. Schrager, in your testimony you also refer to a, quote,
``loose fiscal policy,'' and with continued spending and
Government subsidies toward things like clean energy programs
and so-called ``loan forgiveness.'' Can you please discuss how
this type of ``loose policy'' only worsens inflation?
Ms. Schrager. Yes. So, it does in a couple of different
ways.
First of all, you know, we're just adding to demand. I
mean, as you can see as well, we also have a very tight labor
market, and a lot of these policies are supposed to be job-
creating. So, we're just adding more, even more competition to
the labor market, which raises wages, which is also going to
raise prices. And as I said, it's just putting more money in
the economy, more money in people's pockets.
But I think, also, there's more economic research and sort
of a burgeoning consensus that just increasing the debt also
increases inflation. Because people anticipate that, you know,
eventually, this debt will have to be paid off, higher interest
rates, and that also will increase inflation.
Senator Britt. Absolutely. We have about 72 percent of our
spending is mandatory spending and that continues to grow, and
the debt at $34.5 trillion is just simply unacceptable.
Ms. Schrager. Mm-hmm.
Senator Britt. It's not only fiscally irresponsible; in my
opinion, it is morally irresponsible.
So, thank you so much.
Chair Brown. Thank you, Senator Britt.
Apparently, there's a couple of people who were going to
come back, but I'm not sure they are.
So, prior to closing, I thank you all, first of all. I
always learn something at these hearings.
In addition to the substance that each of you offered in
the questions, the way you answered questions, I learned
another thing, and that is, the different kinds of Fed studies
there can be. Senator Scott mentioned what's called a FEDS
Note. It's not a report like the report I mentioned from the
Kansas City Fed. It's one economist putting something out as a
FEDS Note, but really written by one economist. So, you don't
have to plumb very deeply to find a lot of different
conflicting voices and almost a cacophony--I have trouble
saying that word--cacophony of voices and ideas.
So, it's pretty clear that what the Fed said or the Boston
Fed said about market consolidation, what the Kansas City Fed
said about the contribution to inflation from corporate profits
stands or are important. And I will just ask unanimous consent
to put the Kansas City Fed study in the record.
Thanks to the witnesses today for your testimony. Senators
who wish to submit questions for the hearing record, those
questions are due 1 week from today, my colleagues, May 9th.
To the witnesses, each of the three of you, please submit
your responses to questions for the record no more than 45 days
from the day you receive them.
Thanks for being here.
The Committee is adjourned.
[Whereupon, at 11:16 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIR SHERROD BROWN
Every time Ohioans go to the grocery store, they're paying for
corporate stock buybacks and executive bonuses.
Prices today are far too high, and families are having a harder
time finding a fair price, seeing more of their paycheck vanish into
thin air.
I hear all the time from Ohioans who are justifiably angry that
when they buy groceries and other basic essentials, they are paying
more than they did a few years ago.
All of this is happening while corporate profits hit record highs.
Let's be clear: the fact that prices and corporate profits are
going up at the same time is no coincidence.
A study by the Kansas City Fed found that corporate profits drove
half of the price increases in 2021. And profits are still high today.
Now, of course I want businesses making money. I want American
companies to be the most competitive and most profitable in the world.
What I am against is corporate profiteering that funnels money from
working people to executives in the form of massive bonuses and stock
buybacks.
I am against markets that don't foster competition and low prices.
I am against market manipulation.
A family walking into a restaurant or a store should not have to
guess what they will be charged. Someone shopping online should not be
paying more for the exact same product because of their online search
history.
Businesses should create new goods and services that Americans want
to buy, at prices justified by the cost.
And workers--who are critical for the success of any businesses--
should be paid fairly for helping the business succeed.
Instead, the same Wall Street business model that has kept wages
low and executive compensation high for decades is now pushing prices
up too.
Corporations used supply shocks from the pandemic and war in
Ukraine as an excuse to raise prices, and they keep raising them.
And let's be clear: they are not charging more because they're
paying workers more. Wages are not causing prices hikes. Corporations
are raising prices far beyond their input costs, and funneling the
profits to executives, not workers--just like they always do.
They've realized that when the market isn't free or fair, they can
keep pushing prices up and up.
And they are using tried and true techniques--and new technology to
refine old ones--to charge these higher and higher prices and get away
with it.
When they're talking to their Wall Street investors, they admit
what they're doing.
On an investor earnings call, one CEO said, ``Consumers are
tolerating [frequent price increases] well.''
You hear that? Consumers are ``tolerating'' price increases.
I'm here to tell CEOs that working families cannot tolerate unfair
price increases.
Price gouging isn't new, but it is getting easier to conceal.
By now, we've all heard about what the media dubbed
``shrinkflation,'' where corporations shrink their products but keep
prices the same, or even raise them.
The rolls of paper towels have fewer sheets, but they don't lower
the price. The package of Oreos has fewer cookies in it, but the price
stays the same.
That trick isn't new--but it's getting worse. What's next--will
they shrink the amount of cream in the cookies? Will double-stuffed
become half-stuffed?
Companies are also using advances in technology to find new methods
of price gouging.
They're now using new pricing strategies and data collection to
charge people more.
They call these tactics ``dynamic pricing'' and ``personalized
pricing algorithms.''
``Dynamic pricing'' and ``personalized pricing.'' You know some
corporate PR firm is really proud of those.
Customers don't want their pricing personalized. They want it to be
fair, transparent, and as low as possible.
Gone are the days when Americans could simply expect to walk into a
store having a clear idea of what they'd pay.
It's not just the act of walking into a brick-and-mortar store
that's nostalgic--it's the notion of predictable, transparent prices.
With online retailers, the price can change every day or even
within the hour, sometimes dramatically.
And they're spreading the technique to brick-and-mortar stores,
adding electronic menu boards to restaurants and digital price labels
to shelves so that corporations can raise the price at a moment's
notice.
It's frustrating, and it makes impossible for people to compare
prices and shop around--key ingredients in any fair, open market.
Families with fixed budgets cannot afford to walk into the grocery
store or pharmacy not knowing how far their paycheck will get them.
Big Tech has exported their data-mining business model to
retailers, and that has made all of this even easier for companies.
As more people shop online, retailers learn more about our browsing
and shopping habits by collecting every bit of our online data. They
can charge you more based on your search history.
You start shopping around to try to find the lowest price on a new
washing machine. Now online retailers realize that you're in the market
for appliances, and start showing you higher and higher prices.
Spying on people and charging them more for the products they need
isn't innovation--it's price gouging.
Charging more for food during mealtime isn't the free market--it's
exploitation.
The story is always the same: Whether using old tricks or new
technologies, corporations win, the rest of us lose.
That's not how free markets are supposed to work.
It's why standing up to corporate interests matters.
And people hate Washington because too many politicians do
corporations' bidding.
It took us more than a decade of fighting the drug companies and
their lobbyists and their allies in Congress to finally lower drug
prices and to cap the cost of insulin at $35 a month for seniors.
We need Members of Congress to grow spines and stand up to more of
these corporate lobbyists. Senator Casey and I have a bill to crack
down on companies shrinking their products and raising their prices, by
directing the FTC to label this what it is--a deceptive practice.
We need our colleagues to join us in efforts like this, to lower
prices and stop these tactics that distort the market, stifle
competition and make it harder for Americans to afford the cost of
living.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
Thank you, Mr. Chairman, and thank you all for being here with us
this morning.
Listening to our Chairman, Democrats would have Americans believe
that the economic pain they're feeling is caused by greedy corporations
putting a few less chips in your chip bag.
It couldn't be more clear where the obvious pain is coming from.
The obvious pain is coming from a guy who lives at 1600
Pennsylvania Avenue.
The bottom line is that President Biden and Bidenomics has
devastated our economy and devastated people working paycheck to
paycheck. The highest percentage of Americans with the fewest dollars
in their savings account for an emergency is now because of President
Biden and Democrats' reckless spending.
They like to name their bills in attractive ways but the bottom
line is a really simple thing: they all add to inflation.
Whether it's the ``American Rescue Plan'', the ``Bipartisan
Infrastructure Act'', or the worst-named bill perhaps in American
history, the ``Inflation Reduction Act''.
Anyone who believes that inflation has gone down because of the
Inflation Reduction Act--all you have to do is look at the latest
information coming out of the Federal Reserve itself. Inflation
continues to increase.
These bills used to be hailed positively as a part of
``Bidenomics,'' but now they're just economics because no one can
afford President Biden's approach to solving the problems that we see
in our Nation.
And I know this to be true, because it doesn't matter whether I'm
at home in South Carolina or any other State around the country, I keep
hearing the same things from consumers:
``Rent is too high. I'll never be able to afford a mortgage.''
``I'm living paycheck to paycheck. My grocery bills are staggering,
and I can barely afford them.''
Or ``I spent my entire life working and building up enough savings
to retire, but now I'm worried those savings won't go far enough and
I'll have to go back to work.''
Or ``I'm really worried about my finances and our economy.''
And they always end with a simple question, ``What can you do to
help me?''
The number one concern besides the devastation that Americans are
experiencing because of the unsafe, insecure, wide-open southern
border, the number one concern outside of the border is the economy.
Americans across the country point their fingers at the devastation
of inflation.
Inflation today is costing the average American family an
additional $8,508, just to buy the same things they were able to buy
before President Biden took office.
It is truly unfortunate that the Biden administration continues to
play a game of deflection--not taking responsibility, not solving the
problem--but looking for someone else to blame other than the man in
the mirror.
First, the Biden administration told us that the challenges that we
were seeing with inflation were ``transitory.'' I cannot tell you the
number of hearings I sat through--whether it was Secretary Yellen or
others--who said that this is transitory because of COVID.
Well, then they changed the story that it was ``Putin's price
hike'' because of the Russian invasion of Ukraine.
And then it was ``greedflation'' or ``shrinkflation'' when the fact
of the matter is simply, Biden's inflation.
Here's the truth: the Biden administration's spending policies has
caused the inflation that we're seeing and the economic devastation it
is producing. They are the key contributors to the price hikes we are
all experiencing today.
Let's take a step back to understand what inflation really feels
like to the average American.
Prices across the board have certainly increased nearly 20 percent
since Biden took office. Yes, 20 percent increase in just over 3 years.
For example, butter is up 27 percent, chicken 26 percent, white
bread 30 percent.
When you go to the pump, you don't have to believe what President
Biden says about the challenges, all you have to do is see the price at
the pump--40 percent increase. Energy costs, 25 percent increase.
I could spend the rest of my time this morning discussing other
examples of how much prices have increased, but the American people
know all to well the challenges that they face and where it comes.
That's why they trust him so little on the economy.
It is crystal clear, they know what they see with their own eyes,
yet instead of looking at ways we can bring inflation down, this
Administration continues to look for scapegoats such as corporate
America.
Here's what The Federal Reserve recently studied that the
Administration's--and that's the Federal Reserve--studied the
Administration's claims that corporations are driving up inflation and
came to the conclusion, and I'll just read it, ``unprecedented large
and direct Government intervention,'' and ``accommodative monetary
policy,'' profits were back to their prepandemic levels by the end of
2022.
With respect to ``shrinkflation,'' the Biden administration's own
Bureau of Labor Statistics (BLS) reported that its effects have
resulted in a 0.01 percent average annual increase to prices, and ``has
a very small impact on the overall inflation picture.''
I know this is really uncomfortable for some of you to listen to
it, that's just called the facts.
What we should be talking about today is the direct harm this
Administration's policies are causing as they continue to lead to more
inflation.
We should be talking about the inflation spike we are likely to see
after billions and billions of dollars in student loans are illegally
forgiven by this Administration.
We should be talking about a Federal debt that is growing by
trillions of dollars every single year.
The American people are smart. They see through this blatant
attempt by the Administration to blame others for the inevitable
results of their policies.
It's time for the Biden administration and their friends on the
other side of the aisle to wake up and smell the coffee that now costs
30 percent more.
Out-of-control, reckless spending led to runaway inflation that has
remained elevated for years now. We must all accept that fact and
return to sound economic policies that make affording the basics just a
bit easier for the American family.
______
PREPARED STATEMENT OF BILAL BAYDOUN
Director of Policy and Research, Groundwork Collaborative
May 2, 2024
Chairman Brown, Ranking Member Scott, Members of the Committee,
thank you for the opportunity to testify today. My name is Bilal
Baydoun, and I'm the Director of Policy and Research at the Groundwork
Collaborative, an economic think tank based here in Washington.
The price tag is a simple communications device we all take for
granted. It's also an American innovation. John Wanamaker of
Philadelphia, who invented the modern price tag, was a devout
Presbyterian who believed that price discrimination--the idea that
different people could pay different prices for the same product--was
immoral. If everyone was equal before God, he believed, everyone ought
to be equal before price. From the very beginning, the price tag was
infused with a sense of fairness and equality.
Yet in America today, a fair price, let alone a sweet deal, is
harder and harder to come by. In the age of corporate concentration and
high-powered algorithms, pricing is in the midst of a troubling
transformation, and the price tag as we know it may become a relic of
the past.
Rideshare apps like Uber reportedly charge users higher prices if
their phone battery is lower. Insurance companies fly drones above our
property in search of signs of clutter, and car companies install
software that reports our driving behavior to insurance companies, who
use the data to hike our rates. Amazon reportedly changes prices
millions of times per day, running secret pricing experiments like
``Project Nessie'' that reaped $1 billion in revenue. Frustratingly,
food delivery apps like UberEats show us one menu price up front, only
to tack on a series of mysterious junk fees right as we're about to
pay, and these last-second markups can be as high as 95 percent. Even a
family outing to the bowling alley means encountering ``surge
pricing,'' in which we're charged more for the sin of seeking out
family fun on a Saturday night, the only available time for such
outings for many families.
At every turn, companies are cutting corners on the path to record
profits, and American consumers are paying the price. In a practice
known as ``shrinkflation,'' companies discreetly reduce the size or
volume of common household items--everything from jars of peanut butter
to bars of soaps--to charge consumers more for less. For some essential
goods like household paper towels, shrinkflation accounted for roughly
10 percent of the price increase consumers experienced over the last 4
years. Indeed, big profits increasingly come in smaller packages.
While price hikes aren't new, today's companies have reinvented
them, relying on surveillance, deception, and even high-tech forms of
collusion to wring as much as possible out of American consumers. All
of these tactics converge on a single goal: find out the maximum price
each individual consumer can be charged at any given time.
It might seem counterintuitive that companies are reaping record
profits by simply hiking prices. After all, in competitive markets,
firms have to innovate, improve their products and services, and take
calculated risks to win over consumers. But a perfect storm in our
economy made it much easier for companies to simply price their way to
profitability.
First, companies got bigger, and competition in many industries has
dwindled. Over the last few decades, we've seen runaway corporate
consolidation across our economy. About three-quarters of domestic
industries have become more concentrated and are dominated by fewer
players than they were 20 years ago. This grants the remaining
corporate giants the freedom to hike prices without fear of being
undercut by the competition. In many markets, there simply is none.
Second, pricing went high tech. Technological advances such as
cloud computing, artificial intelligence, and surveillance targeting
have enabled companies to collect reams of personal information on
consumers and change prices in under a nanosecond. These technologies
help companies build profiles of individual consumers that include
things like our age, marital status, estimated salary, ethnicity, the
magazines we read, and even the kinds of topics we talk about online.
All of these private aspects of our lives can be used to determine how
much price hiking each of us can tolerate.
Finally, market power and technological advances came together in
the shadow of inflation, giving companies the cover they needed to
begin rolling out pricing strategies they'd previously thought of as
risky precisely because consumers dislike them. But with prices rising
everywhere, consumers couldn't discern which hikes were justified by
companies' own rising costs, and which were truly excessive. As the
head of research for Barclay's bank told Bloomberg in 2022, ``The
longer inflation lasts and the more widespread it is, the more air
cover it gives companies to raise prices.'' Visa's CEO was still more
direct, saying, ``historically, inflation has been positive for us.''
The complex algorithms often entrusted with maximizing profits
through rapid changes in pricing have neither a conscience nor legal
training. That is why algorithmic pricing can be both discriminatory
and collusive. If you are charged a higher price for shopping at a
chain store in your zip code, for example, that can function as a proxy
for racial price discrimination. And when different firms in the same
industry rely on a shared algorithm to set prices, that algorithm can
fix prices just as a human agent can. We saw this play out in the
rental market. In one neighborhood in Seattle, 70 percent of apartments
were overseen by just 10 property managers, and all of them relied on
the same pricing software sold by RealPage.
But we don't have to accept the end of a fair price as inevitable.
To start, we must continue to enforce existing laws outlawing
collusion, price fixing, and unfair and deceptive practices. The
Federal Trade Commission and State attorneys general have doubled down
on the idea that algorithmic collusion is no more acceptable than
collusion conducted by human agents in a smoke-filled back room.
But new laws are also necessary to ensure regulations keep pace
with these rapidly changing tactics. The Price Gouging Prevention Act
introduced in this chamber would enable the FTC to implement and
enforce a Federal anti-price gouging statute, saving consumers money in
the 13 States that don't have price-gouging protections on the books.
Likewise, the Shrinkflation Prevention Act would classify shrinkflation
as a deceptive practice and empower the FTC and attorneys general to
take civil action to protect consumers' pocketbooks.
We must also continue to make progress on eliminating junk fees and
regulating complex pricing structures that push hidden fees on
consumers. The CFPB's late fees rule demonstrates that policymakers
can--and must--take on predatory, deceptive behavior and act as a
strong check on corporate power. By capping late fees at $8, the CFPB
will save American families more than $10 billion annually. The
interagency approach taken by the President's Strike Force on Unfair
and Illegal Pricing with the Department of Justice and FTC represents a
key step in tackling predatory pricing by deploying every available
tool.
Finally, we can't allow companies to harvest our data and use it to
price discriminate against us. CFPB Director Chopra noted recently that
payments data (e.g., Venmo) is the ``holy grail'' of personal pricing.
Allowing companies access to transaction data will open up a new
frontier for exerting power over consumers. Protecting data privacy,
including transactions data, is essential to confronting this new
pricing regime and ensuring companies cannot surveil consumers as a
means of pushing arbitrary price hikes based on unfair calculations of
consumers' ``willingness to pay.''
Through these actions and others, we have the tools to restore a
fair price in America--we just have to use them. Thank you, and I look
forward to your questions.
______
PREPARED STATEMENT OF ALLISON SCHRAGER
Senior Fellow, Manhattan Institute
May 2, 2024
Chairman Brown, Ranking Member Scott, Members of the Committee:
thank you for the invitation to discuss with you today how price
increases, shrinkflation, and technology may be harming consumers. I am
a senior fellow at the Manhattan Institute, where I research fiscal and
monetary policy and financial markets. I am also a columnist at
Bloomberg Opinion.
---------------------------------------------------------------------------
The Manhattan Institute for Policy Research does not take
institutional positions on Federal, State, or local legislation, rules,
or regulations. Although my comments draw upon my research and writing
about the economy as an Institute fellow, my statement is solely my
own, and should not be construed as my employer's.
---------------------------------------------------------------------------
The high inflation environment we are in is a terrible economic
burden for American households--especially those living paycheck to
paycheck, who are struggling to afford groceries, let alone enjoy the
occasional meal out with their family. It has also proven more
persistent than policymakers hoped. It is tempting to blame whoever
raised the prices we see, the firms we buy goods and services from, who
appear to be getting rich from our rising bills. But they are not at
fault; they are merely reacting to the realities of the high and
uncertain environment we are all facing.
Firms can increase prices several ways: they can simply increase
the prices we all see--the sticker price, they can reduce volume of
what we buy but still charge the same price-shrinkflation, or they can
practice dynamic pricing--charging only some customers a higher price.
All of these feel unfair to many consumers. But it is the high
inflation environment that's harming consumers, not how firms respond
to it.
In order to bring inflation down, we need to understand it, how it
started, and why it persists. History has shown that misdiagnosing the
problem and then implementing misguided policies will create more harm
for American households.
Inflation accelerated coming out of the pandemic, when the economy
faced constrained supply, from pandemic related shortages, and high
demand, the result of people emerging back into the economy after being
at home with nowhere to spend money, and extremely accommodative fiscal
and monetary policy. Some of that policy could be justified at the
height of the pandemic, and it was a lifeline for many Americans who
were unable to work. But the expansionary policy was too large and went
on for far too long and ultimately contributed to inflation. Economists
estimate expansionary fiscal policy contributed as much as 4 percentage
points of our excess inflation. Today inflation is lower, down to about
3 to 3.5 percent from the high of 8.6 percent.
The fact that inflation is still high in the service sector--and
wage growth is more than 4 percent--suggests that it may stick around
for the foreseeable future. In short, the supply constraints have
largely been resolved, but demand remains elevated, and the higher
inflation has permeated into our economy. Our current fiscal policy
stance is not helping. While monetary policy has become more
restrictive, fiscal policy remains very loose, with continued
infrastructure spending, subsidies to industries such as chip
manufacturing, clean energy, and student loan forgiveness. This loose
policy worsens inflation by adding more demand to the economy and
adding further to the debt.
Greedflation
Inflation cannot be blamed on greedy corporations. First, there is
no reason to think corporations have suddenly become greedy. It is
natural to increase prices when facing a period of high demand. This
can feel unfair sometimes, but it is an important part of market
functioning.
Take the example of an umbrella salesman in the rain. It may feel
unfair that he increases his price when it rains, but if he didn't
increase prices when it started to sprinkle, there would be no
umbrellas left when there is a downpour. Or, if he can't make more
money in the rain--why would he bother selling umbrellas and sitting in
the rain himself?
We see a similar story playing out in other markets today. Prices
are increasing because demand is still high: consumer spending is still
up, there is a vigorous labor market, and GDP is growing. And prices
tend to rise more when demand is high. This price adjustment is how the
market rations goods.
It is true that there was an increase in corporate profits in 2021
when inflation first spiked. But profits peaked in 2022 and have
decreased and leveled off since then.
One way to understand what happened is that, initially, firms
raised prices in response to increased demand and limited supply, just
like the umbrella salesman. They did so because:
1. The high demand environment pushed prices up, and consumers were
willing to pay more because there was more money in their
pockets coming out of the pandemic.
2. Firms rightly anticipated a higher inflation environment that
would also increase the costs of their inputs, including labor,
and they needed to increase prices to stay in business.
This is why profits initially increased. At first their costs of
inputs did not go up as much as prices because many firms had
previously locked in wage and input costs. But as inflation continued,
firms renegotiated those contracts and gave their workers wage
increases, which eroded profit margins.
Shrinkflation
In addition to higher prices, many consumers are getting less for
their money--for example: fewer potato chips in a bag. This so-called
shrinkflation is just another way for firms to increase prices. This
isn't a driver of inflation--it a manifestation of it.
Rather than increase the price consumers pay, they might shrink the
size of their product instead. Again, this can be extremely frustrating
for consumers because they are getting less and paying more. But it is
another way for firms to deal with price pressures from increased
demand. The alternative is to simply increase prices, but whether one
approach is better than the other is hard to say. Charging more may
price consumers out of the market entirely.
Dynamic Pricing
Another way that firms can respond is not increasing prices for
everyone, but only for consumers who use goods or services in high
demand times or are willing to pay more. This is known as dynamic
pricing--and it is another frustration for many consumers.
Wendy's recently attempted this when they floated the idea of
charging more during peak times. Technology is aiding this effort
because firms can collect data on potential customers and gain insight
into their willingness and ability to pay.
An example of dynamic pricing that predates our current inflation
era is airlines. They charge more for peak time flights or by charging
for services that were once included in the quoted airfare, such as
checking a bag or picking your seat. This is another way of passing on
higher costs to some customers. This is especially attractive for
airlines who face pricing pressure to keep fares low because of
technology that enables consumers to comparison shop.
Believe it or not, dynamic pricing can be better from a consumer
welfare point of view than increasing prices for everyone. For example,
airlines may price discriminate, but the cost of flying has fallen and
it has become more accessible. In the 1980s, about 30 percent of
Americans had flown in the last year; now it is more like 50 percent--
in large part because lower income Americans have a cheaper option,
even if it means worse service.
The same is true for Wendy's, who can either increase prices for
everyone in response to higher input costs or can increase them only
for customers who value convenience more and thus put a higher premium
on eating at peak times. The result is more people can go to Wendy's,
because a price increase for everyone excludes more people from the
market. It may feel unfair, but economists generally agree that
including more people in a market is beneficial for consumers.
We can probably expect more firms to dynamically price in the
future. Technology empowers firms to target individuals, to show them
ads for the goods they want and charge them more than other consumers.
Artificial Intelligence has the potential to turbo charge this
practice, in the not-too-distant future we may all see different goods
and prices when we shop online.
But while technology can make dynamic pricing easier for firms, it
also can empower consumers. Algorithms can help customers find products
they most want and best suit their needs. Technology also facilitates
comparison shopping and allows consumers to post reviews, a very
valuable resource for future shoppers. Online marketplaces may mean
more complex pricing, but they also enable more price comparison for
consumers, compared to visiting a brick-and-mortar store. Research
suggests that this technology contributed to the low inflation
environment before the pandemic.
It feels unfair, because it is different to what consumers have
become used to--though everyone paid different prices when people
haggled for goods. But a more personalized shopping experience may end
up creating a more inclusive marketplace where more people can afford
to participate and it is easier to find the goods and services that
best suit their needs.
Conclusion
We remain in a high inflation environment; this is what is harming
consumers--not greedy corporations who also face pricing pressures.
This is largely the result of a still growing economy, and it is made
worse by Government policies that continue to stoke demand. We are
still increasing the debt and giving households handouts. One benefit
of this environment has been rising nominal wages (something many of us
wanted), especially for lower earning Americans. But it also means
inflation is still high--and it means rising costs for goods and
services for these same people and the rest of the population.
There is no way around the fact that this elevated demand will
increase prices. Firms can increase prices in in a number of ways:
increasing the sticker price, providing less for the same price, or
dynamic pricing. All provide understandable frustration for consumers,
but these are the results of a high and uncertain inflation
environment--not the cause.
Past attempts to keep companies from raising prices, such as price
controls, have proved counterproductive. They create shortages, reduce
the incentives to sell or produce, and worsen inflation. The best way
to fix this is to not undermine the Fed's attempts to control inflation
and pull back on spending, stop handouts, especially to higher earners
who don't need them, and to reduce the debt.
______
PREPARED STATEMENT OF ALI R. BUSTAMANTE
Professor of Practice, University of New Orleans Department of
Economics and Finance, and Director, Worker Power and Economic Security
Program, Roosevelt Institute
May 2, 2024
Chairman Brown, Ranking Member Scott, and Honorable Members of the
Committee, thank you for inviting me to speak on the pressing issues
surrounding how corporate pricing strategies are impacting prices, and
their implications for consumer finances.
In my testimony I will make three points:
1. Inflation is being driven, in part, by corporate profiteering
related to firms' price-setting power.
2. Corporate profiteering is harming consumers, workers, and other
businesses.
3. Government has tools that can restrict corporate profiteering and
protect consumers and small businesses.
First, there is evidence that large corporations are engaging in
pricing strategies that are contributing to elevated prices. Research
conducted by my colleagues and I at the Roosevelt Institute has found
that a recent sharp rise in markups by large corporations is
contributing to inflation. \1\ Markups are the difference between the
prices consumers pay for goods or services and how much it costs to
make or provide them. Markups are low in competitive markets but as
corporations have accumulated significant market power over the years,
they have been able to increase prices without sacrificing profit. Our
research finds average markups grew from 48 percent above cost in 2014
to 69 percent above cost in 2023 and that this growth is being driven
by a few large corporations. \2\
---------------------------------------------------------------------------
\1\ Konczal, Mike, and Niko Lusiani. 2022. ``Prices, Profits, and
Power: An Analysis of 2021 Firm-Level Markups''. Roosevelt Institute,
June 21, 2022. https://rooseveltinstitute.org/publications/prices-
profits-and-power/
\2\ Bustamante, Ali R., and Ira Regmi. 2024. ``Fast-Food Industry
Profiteering: Why California Businesses Can Absorb a Higher Minimum
Wage''. Roosevelt Institute, March 28, 2024. https://
rooseveltinstitute.org/publications/fast-food-industry-profiteering/
---------------------------------------------------------------------------
For consumers, markups can take several forms through various
pricing strategies employed by corporations:
Standard Retail Markup: This is the most straightforward
markup, where sellers add a percentage to the cost of goods and
services to generate profit.
Shrinkflation: Reducing the quantity or size of a product
while maintaining or increasing the price.
Dynamic Pricing: A method of price discrimination whereby
prices adjust in real-time using pricing algorithms and
sophisticated consumer data, often with new artificial
intelligence (AI) methods.
Decoy Pricing: Pricing structures where firms introduce a
third, less attractive option to lead consumers to choose a
more expensive option than they originally might have.
Bundling: Bundling products together to sell them at a
price that seems to offer a savings compared to buying each
item individually but that often includes a markup.
Markups, and the sophisticated pricing strategies that are driving
them, are on the rise because of large corporations' outsized pricing
power. Research finds that smaller firms in less consolidated
industries have not driven explosive markup growth. \3\
---------------------------------------------------------------------------
\3\ De Loecker, Jan, Jan Eeckhout, and Gabriel Unger. 2020. ``The
Rise of Market Power and the Macroeconomic Implications''. The
Quarterly Journal of Economics 135 (2):561-644.
---------------------------------------------------------------------------
Take the fast-food industry for example: my recent research of
markups finds that the average markup in the fast-food industry grew by
14.7 percent during the past decade. \4\ When analyzing markups at the
10 largest fast-food firms in 2023 we found that they were the highest
at Wendy's, McDonald's, and Restaurant Brands International (the parent
company of Burger King and Popeyes). At these firms, prices were
between 80 and 91 percent above companies' marginal costs. These large
companies are charging consumers above and beyond what is necessary for
typical profit margins.
---------------------------------------------------------------------------
\4\ Bustamante, Ali R., and Ira Regmi. 2024. ``Fast-Food Industry
Profiteering: Why California Businesses Can Absorb a Higher Minimum
Wage''. Roosevelt Institute, March 28, 2024. https://
rooseveltinstitute.org/publications/fast-food-industry-profiteering/
---------------------------------------------------------------------------
Second, there is ample evidence that markups--and corporate
profiteering in general--by large corporations are harming consumers,
workers, and small businesses.
Consumer surplus, how economists measure the social economic
benefits of consumption, would have been 14 percent higher in 2019 if
markups had remained stable at 2006 levels, and 50 percent higher if
firms passed along the reductions in their costs over that period to
consumers. \5\ This hits low-income consumers the hardest, as their
disposable income is stretched even thinner, forcing them to make
difficult decisions about the basic necessities and bills they need to
cover.
---------------------------------------------------------------------------
\5\ Dopper, Hendrik, Alexander MacKay, Nathan Miller, and Joel
Stiebale. 2022. ``Rising Markups and the Role of Consumer
Preferences''. 3939126. Rochester, NY: Social Science Research Network.
---------------------------------------------------------------------------
Workers are also being squeezed: research shows that increases in
markups lead to a decline in wages of approximately 12 percent, because
markups lead to a reduction in the aggregate demand for labor. \6\ The
harmful effect of markups on workers is also visible in the declining
share of income going to workers. \7\ Rather than rewarding workers who
drive productivity in the first place, these large corporations driving
growth in markups are the same ones returning higher profits from
markups to wealthy shareholders via stock buybacks and dividends. \8\
---------------------------------------------------------------------------
\6\ Deb, Shubhdeep, Jan Eeckhout, Aseem Patel, and Lawrence
Warren. 2022. ``Market Power and Wage Inequality''. Institute for
Fiscal Studies, Working paper 22/40. https://ifs.org.uk/publications/
market-power-and-wage-inequality
\7\ Autor, David, David Dorn, Lawrence F. Katz, Christina
Patterson, and John Van Reenen. 2020. ``The Fall of the Labor Share and
the Rise of Superstar Firms''. The Quarterly Journal of Economics 135
(2):645-709.
\8\ Palladino, Lenore, and William Lazonick. 2021. ``Regulating
Stock Buybacks: The $6.3 Trillion Question''. Roosevelt Institute,
Working paper, May 10, 2021. https://rooseveltinstitute.org/
publications/regulating-stock-buybacks-the-6-3-trillion-question/
---------------------------------------------------------------------------
Furthermore, markups reflect a ``winner takes most'' economic
environment where large corporations with price-setting power also have
the capability to reduce competition by creating barriers for new firms
to enter the market, crowd out smaller firms, and squeeze supplier
margins in order to protect and expand their market share. \9\
---------------------------------------------------------------------------
\9\ Autor, David, David Dorn, Lawrence F. Katz, Christina
Patterson, and John Van Reenen. 2020. ``The Fall of the Labor Share and
the Rise of Superstar Firms''. The Quarterly Journal of Economics 135
(2):645-709.
---------------------------------------------------------------------------
Lastly, I'd like to discuss the myriad of available Government
tools that can restrict corporate profiteering and protect consumers,
workers, and small businesses:
We need to enforce and strengthen antitrust laws to prevent
monopolistic practices and ensure competitive markets,
particularly in industries where a few companies control
significant market share, leading to higher markups.
Policymakers can move to create guidelines and restrictions
around the use of dynamic and personalized pricing to prevent
unfair and deceptive practices by requiring businesses to fully
disclose the pricing structure of their products and services.
This would disincentivize corporations from employing these
predatory pricing practices.
To improve fairness and transparency in pricing,
administrative agencies like the Consumer Financial Protection
Bureau can mandate clearer disclosure of pricing components and
service fees and enforce rules against deceptive pricing
practices or hidden fees. This is particularly impactful in
sectors prone to high markups, such as financial services and
health care.
There are great economic benefits to be gained by reining in
markups and unfair corporate pricing strategies, including lower prices
in the short term and a more competitive economic environment for
businesses and workers in the medium and long term. Yet, inaction from
both regulators and legislators will enable corporate profiteering that
continues to elevate prices, harm consumers, and squeeze small
businesses.
RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
FROM BILAL BAYDOUN
Q.1. One thing shrinkflation and pricing technologies have in
common is that it's difficult or impossible for consumers to
know how these pricing mechanisms are being used to adjust the
prices of the goods and services they're buying.
What sorts of disclosures are needed to let consumers and
researchers understand how prices are changing?
A.1. Regarding shrinkflation, one approach may involve product
labels that notify consumers of a change in a product's per-
unit price. In France, for example, products that have been
reduced in size without a commensurate decrease in price will
require product labels to disclose the change. \1\ Stores must
comply with this change by July 1st of this year. France also
empowers consumers to report such product changes to
authorities via a consumer protection phone application.
---------------------------------------------------------------------------
\1\ https://www.nytimes.com/2024/04/19/business/france-economy-
food-prices-shrinkflation.html
---------------------------------------------------------------------------
As discussed in this hearing, companies have also deployed
personalized pricing practices, which involves tying price to
individual consumers' characteristics. There could be three
general approaches to disclosures related to this practice. \2\
The first is to require disclosure that the price is
personalized. The second is to require disclosure of how the
price is personalized, i.e., according to which consumer
characteristics or behaviors. Third, regulators can require
disclosure of how the personalized price compares to the
``regular'' price.
---------------------------------------------------------------------------
\2\ https://www.europarl.europa.eu/RegData/etudes/STUD/2022/
734008/IPOL-STU(2022)734008-EN.pdf
---------------------------------------------------------------------------
Technologies have also been used to stagger certain fees
throughout the process of making a purchase, a practice known
as ``drip pricing.'' The classic case-in-point here is for-
profit tax-filing services, which have in the past advertised
free or discounted services, only to add additional fees as the
consumer is filling out the required forms. The most effective
solution on this front would be the establishment of a national
standard for price display that requires disclosure of the
total cost up front, inclusive of all fees. Lawmakers have
pushed for this approach to improve hotel cost transparency,
\3\ as the short-term lodging industry is notorious for the
practice of drip pricing and junk fees.
---------------------------------------------------------------------------
\3\ https://castor.house.gov/news/
documentsingle.aspx?DocumentID=404398
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
FROM ALI R. BUSTAMANTE
Q.1. Since the onset of rising inflation, corporate profits
have reached record highs, surpassing levels last seen in 1947.
\1\ As noted in your testimony--``average profit markups grew
from 48 percent above cost in 2014 to 69 percent above cost in
2023.'' \2\ Your analysis also finds that ``increases in
markups lead to a decline in wages of approximately 12 percent,
because markups lead to a reduction in the aggregate demand for
labor.'' \3\
---------------------------------------------------------------------------
\1\ Sellers' Inflation, Profits and Conflict: Why Can Large Firms
Hike Prices in an Emergency? Isabella M. Weber and Evan Wasner
(February 2023). Economics Department Working Paper Vol. 343. https://
scholarworks.umass.edu/econ-workingpaper/343/
\2\ United States Senate Committee on Banking, Housing, and Urban
Affairs Hearing on ``Higher Prices: How Shrinkflation and Technology
are Hurting Consumers' Finances''. May 2, 2024. Testimony of Dr. Ali R.
Bustamante
\3\ Ibid.
---------------------------------------------------------------------------
Can you further elaborate on how workers have been faring
in the current macroeconomic condition? Additionally, can you
contrast to how CEOs have been faring?
A.1. Response not received in time for publication.
Q.2. One thing shrinkflation and pricing technologies have in
common is that it's difficult or impossible for consumers to
know how these pricing mechanisms are being used to adjust the
prices of the goods and services they're buying.
What sorts of disclosures are needed to let consumers and
researchers understand how prices are changing?
A.2. Response not received in time for publication.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM ALI R. BUSTAMANTE
Q.1. I introduced the Fair and Transparent Gas Prices Act of
2023 (S. 67) to investigate unfair practices, provide market
transparency, and prevent price gouging in the oil and gas
industry. Specifically, the bill requires the Federal Trade
Commission (FTC) to investigate anticompetitive, collusive, or
other conduct related to oil and gas companies and markets.
How would an investigation into the anticompetitive,
collusive, or other conduct related to oil and gas companies
provide more insight into rising gas prices?
Can higher gas prices partially be attributed to
anticompetitive practices in the oil and gas industry?
A.1. Response not received in time for publication.
Q.2. In S. 67, the bill directs the FTC to work with State
attorneys general to carry out this investigation into the oil
and gas industry.
Why is it important to coordinate and empower state
attorneys general offices to combat unfair and deceptive
pricing practices?
A.2. Response not received in time for publication.
Additional Material Supplied for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]