Price-cost margins have been growing

A new study by Harvard Business School economist Alexander MacKay shows that profit margins rose by 25 percent between 2006 and 2019.  They find profits are rising because of cost reductions, not rising prices.   

Textbook economic models predict that firms should lower their prices when costs go down.  By doing so they can increase profits by selling the cheaper goods to more price sensitive customers.  But prices would stay the same, or even increase, if customers become less price-sensitive.  MacKay's study shows consumers have become more brand-loyal and less likely to use coupons.  

This could have implications for the high inflation rates we see today.  We know that costs are rising because of supply chain issues and labor shortages.  If consumers continue to become less resistant to price increases, then we could expect firms to respond accordingly.