By attacking ‘price-gouging’, Kamala Harris punishes intangible assets

A sudden price jump is a great way to annoy customers, but it’s a bit disingenuous to claim a business is “price gouging” just because goods are more expensive.

Over the past month or so, US presidential candidate Kamala Harris has deployed a set of talking points blaming cynical businesses for high consumer prices. If elected, Harris has promised to ban what she calls “price gouging” to help keep the costs of groceries down and bring relief to American households.

The message has resonated with voters. Since August 2022, prices for food at home have climbed 13.5% compared with a year earlier (data for 2023/24 is unavailable yet). This has led to record profits for corporates, such as Amazon, as buying patterns continue to go more online after Covid-19.

It may be true that some corporates have taken advantage of the market disruptions. After all, businesses want to make a profit, and no CEO will leave money on the table. But things aren’t that simple.

Companies can’t arbitrarily raise their prices because their competitors will immediately undercut them with lower prices. And despite the myth of businesspeople gathering in smoke-filled rooms to conspire to fleece the unwitting customer, there is very little collusion at the top of the business world. Most CEOs aren’t even connected on LinkedIn.

And even if they did coordinate, not even a huge company like Amazon has any power compared to the force most responsible for rising consumer prices: inflation.

Put it this way, most Western governments have printed more money since Covid than ever existed in their economies before 2020. The US alone has printed nearly 80% of all US dollars in circulation over the last few years. To put that in perspective, at the start of 2020 about $4 trillion existed, now there is an estimated $19 trillion in circulation – a 375% jump in three years!

Basic economics predicts that increasing the supply of something, relative to demand, will inevitably decrease its value (and its price). Broadly speaking, this is how inflation works. When the amount of money in the system expands, the purchasing power of each single dollar drops.

So, according to the CPI calculator, $1000 back in the year 2000 is today now worth only $560, a drop in value of 44% over 20 years. If you want to see how bad things really are, consider that $1000 in 1913 is only worth $32 today. Said differently, the US dollar has dropped in value by 96.8% over 100 years.

Companies that refuse to raise prices in such horribly inflationary conditions like this would very quickly find themselves out of business.

The real question, then, is not whether companies are “price gouging.” Rather, Harris should be asking why companies like Amazon have survived. Why weren’t they crushed by inflation? Most importantly, why haven’t their prices increased to match the real (low) value of the US dollar? Prices for groceries should probably be at least one or two magnitudes higher than they are today.

The answer comes from the “natural selection” theory of company success. Some businesses survive, while others fail. The winners are better adapted to the changing environment. Many companies might look the same, but there’s always a crucial – intangible – difference that allows the winners to pass through the fire. Those aspects are “worth more” and do a lot to justify a company charging higher price. From the outside, this can appear like price-gouging.

Prices are higher than ever today, but Americans should be thankful that prices are still low compared to what they could be. It is actually a miracle of business agility that price gouging isn’t happening nearly as much as it should. That miracle is all down to intangible assets.

Amazon is a good example of this miracle. Not only was it large enough to weather the pandemic, its survival is almost entirely due an impressive constellation of intangible assets.

Amazon has spent years developing deep and wide supply chains in China and other manufacturing bases. When Covid-19 arrived and slowed everything down, many companies lacked the same level of redundancy. Amazon, on the other hand, could pivot quickly to different suppliers to get the job done.

The e-commerce giant has also built an efficient software suite that made it easier for people who were stuck at home to order their groceries online. Connecting them to the thousands of Amazon’s fulfilment centres dotted around the world, shoppers learned to trust that their goods would arrive on time – even in the middle of a pandemic. And they did. This is a huge intangible asset.

Amazon’s brand enhanced this sense of trust. If a buyer wasn’t happy with their purchase, Amazon offered a money-back guarantee, no questions asked. Even better, customers never need to interact with another human to return a product. They simply package up the goods and leave them outside the house for a courier to collect. All this efficiency was made possible by Amazon’s intangible assets and the company has generated billions in profit since 2020.

But Kamala Harris would like everyone to believe Amazon’s profits were only possible due to “price gouging.” The reality is that Amazon’s prices have risen because thousands of smaller businesses collapsed during Covid-19, disrupting the market and forcing Amazon to dig deeper into its supply chain to stay alive.

Life has gotten immensely more difficult for Amazon since Covid, not easier. The company could have (and perhaps should have) increased its prices by a far greater quantum. But its constellation of intangible assets allowed Amazon to hold price rises to a manageable level, and thereby outcompete its rivals.

What Harris is suggesting is that Amazon should instead be valuing its intangible assets at $0. Harris wants the power to decide the cost of a carton of milk. Who cares how much effort Amazon and other businesses spend on getting that carton of milk to the customer? All that work to develop a robust supply chain or create a trustworthy brand should never be reflected in the price, according to Harris.

The truth is that a company’s intangible assets are a giant part of what separates it from its competitors. If a company is smart enough to build processes that help it survive a downturn, such intangible assets are not free. The cost is always reflected in the price of the goods.

If Harris wants to lower the price of groceries, a better strategy would be to loosen regulations and allow more competitors into the market. After all, only by increasing the supply will prices decrease. That’s just basic economics.