When a company experiences an unexpected cost, what happens? Is the cost passed down to "us" (the consumer) or does the company just lose money?
Intriguing question. I have mulled this over for several months. The question first entered my mind during a Legal Enviroment of Business class at my university. This class was extrordinarliy dull, but on this particular day, a debate had sprung among a few of my fellow students. I distinctly remember two students bringing up some interesting points. I do not remember the names of the students involved, but for the purposes of this writing, I shall give them names. Fighting out of the blue corner, was a non-traditional student. He was a polite, middle-aged man, say, 42 years old, who often contributed to class discussion. From this point on, I will call him Steve. In the red corner, we had your typical college student. He was about my age, red-headed, and passionate about random subjects for unknown reasons. He will be known as Brian.
Now, as I said, the class was extremely boring, so I do not exactly remember the subject of that day's class, but somewhere along the line, the class started discussing the frivolous lawsuits that you see so often against companies, in this day and age. Some in the class seemed happy that the consumer (the little guy, the underdog, cinderella) is being protected heavily from exploitation by the companies (the fatcats, bourgeoise bastards, the guy with the cigar from monopoly). Obviously, your typical Democrat vs. Republican battle would ensue. But a certain exchange of words stuck out to me. Paraphrasing (heavily paraphrasing)-- "It's important to have laws in place to protect people like you and I from being taken advantage of by companies that can afford the best lawyers and such," said Brian. Steve responded without hesitation, "Yes, but it's also important to create a business friendly enviroment. The welfare of the major companies is very much connected to the welfare of the average person. After all, when a company experiences a cost, from something such as a lawsuit, who do you think pays for it? You and I do. I own a small business, and when I receive an unexpected cost, I raise prices and pass it down to the consumer."
At this point, alarms are going off in my brain. As a student of economics, I assume that all for-profit organizations are always attempting to operate at a profit maximizing level. That was econ-speak for - you want to make as much money as you can. Assuming a firm is operating at a maximum profit price-level, why would a company adjust it's prices after an unexpected expense? If they were truly operating at full-profit, then changing prices, either an increase or decrease, would only decrease profits for the firm.
I considered calling Steve's bluff right then and there, but I decided not to. Besides, I liked Steve. Not enough to remember his given name, but I liked him. I could have spoken with him after class, but I did not have time to fully shape my thoughts. Had there been enough time for my humble thoughts to evolve, I would have asked him why, if he thought he could increase profits by adjusting his prices, why had you he not done so before he incurred the unexpected expenses? Was Steve just that nice of a guy? I don't think so.
As for Brian, he lost the debate, even though Steve's argument may have been flawed, but Brian will live to fight again.
Now, to answer my question -
When a company experiences an unexpected cost, is it passed down to the consumer?
As I see it, no. I just do not see it. Of course, I could be wrong, and I will continue searching for a more definitive answer. But, for now, the answer is NO.
Thomas Sowell makes a similar argument to Steve's in Economics Facts and Fallacies. Sowell claims that rent caps for one apartment causes rent to rise in another. Apartment owners raise their prices in certain apartments to make up for revenue lost due to rent caps in another apartment. See the flaw in Sowell's logic? I do. Sowell, however, is a well known Conservative, so I wonder, does he truly believe what he is saying or does he organize facts to fit his agenda? Could be both. Given the title of the book, I would have liked for Sowell to look deeper into the issue and take a more logical approach. Oh well.
It is an interesting topic for me. Many people do not see it as I do. Either I am wrong or the general public, Steve, and Thomas Sowell are wrong. Without a doubt, someone is wrong (or lying).
