A Follow Up- Who Really Pays the Price?

In my previous post, the question was posed- When a business incurs and unexpected cost, is it passed down to the consumer? I came to the conclusion that it was not, but promised I would take the question into further consideration. Well, after months of deliberation, I have a definitive answer. I know all 3 of you eager readers out there have been waiting for a follow up. I will not disappoint.

While trying to answer the, by now, age-old question, there was a flaw in my thought process. I was attempting to find a general answer for a question that needs to be addressed on a case-by-case basis.

Let's look at the question from perspective of a large corporation, McDonald's. When Mickey D's experiences an unexpected cost (maybe they lost a lawsuit over hot coffee), does the price of a Big Mac rise? In this scenario, my logic works well. McDonald's would have already been charging the profit maximizing price. An increase or decrease in the price of a Big Mac in response to the unexpected outside cost, would only decrease McDonald's profits.

Now, we'll attack this question from another view point. A poor college student decides to start producing and selling bowls. One day, while deliver bowls, the entrepreneur is ticketed for speeding. Would this mean an increase in the price of bowls? Most likely, yes.

What's the difference? A large corporation will likely have large amounts of excess/rainy day funds. When they receive an unexpected cost, they can use these excess funds to maintain the same level of production of services or products (in this case, Big Macs). So for McDonald's, the supply curve doesn't shift leaving them at the same profit maximization price.

On the other hand, the poor college student likely has very limited excess funds. That means that they will be able to afford less resources, after the unexpected cost. In turn, they are not able to produce as many bowls. This would be a negative supply shock for the poor college student, increasing the profit maximization price.

Obviously, most businesses are somewhere in between, but in each case, the answer to the question depends on whether or not the business has enough in reserve to make up for the cost. If they do, it would be in their best interest to maintain the current level of profit. Meaning, there would not be a change in prices. If they do not, you could realistically see the customers pay the price. To summarize, it is possible that consumers would pay for an unexpected cost to a particular firm. Does that mean it's likely? Since most businesses seem to have some sort of excess or rainy day funds (especially the ones that would be subjected to the most extreme unexpected costs), I would think not.

So there you have it. I will now consider this case closed, as I have spent way too much time on it.