Confession: I listen to KPCC in Pasadena instead of our local NPR station, KQED. If you don’t understand that, I invite you to download the NPR player for iOS and try both of them, preferably between 9 am and 1 pm.
In any case, this morning’s Take Two included a segment about rising food prices, specifically beef. The Supermarket Guru Phil Lempert opined that retail beef prices in the U.S. have not risen as much as wholesale prices because Japan has been importing more U.S. beef. Mr. Lempert believes beef exporters are passing their increased costs along to the Japanese market. In this case KPCC and the Supermarket Guru jointly fail.
Economists call this price discrimination. And we know for sure there are three conditions required for a business to be able to price discriminate:
- The buyer must be unable to resell the product.
- The seller must have market power.
- The seller must be able to identify different buyers (or groups of buyers) at low cost.
It’s surely easy to distinguish Japan’s market from the U.S. And, while buyers can resell the product, there are significant costs — import licenses from the Japanese government and transportation costs are two examples. You can imagine a U.S. buyer traveling to Japan with a suitcase full of frozen steaks. Expensive and probably not profitable.
So there is some wiggle room for price discrimination. But that second condition is troubling. Are there really only a few companies exporting beef to Japan? Are they really managing to avoid competing with each other? I’m skeptical.
It seems to me there is a simpler and more direct explanation: demand. Higher prices for any product reduce quantity demanded. And for a specific item such as beef, demand elasticity is likely to be fairly high. The reason firms are not raising retail prices is simple: it would not be profitable because they would lose more unit sales than they would gain from the higher price.
Thus ends our microeconomics 1 lesson for today.