$4 to make the thing, get it to you, and pay all taxes inherent to all the jurisdictions involved in producing and selling the thing to you. Let's even assume I'm the most amazing business man, and I've trimmed the process down to the absolute minimum possible cost per unit by nailing every optimization under the sun.
and $1 profit to come out ahead.
Now. That $1 profit is totally open to get undercut by a competitor.
We've pinned that $4 as the minimum possible cost to make that widget based on the laws of physics and business. Even if my competitors are all as amazing as me, they too hit $4 spend to produce 1 widget.
The next day, a tax is imposed. Not on the consumer, but on the businesses; this increases the floor cost per widget produced from $4 to $4.50 cents.
I priced things at $5 a widget. I'm still in the black with no adjustment. I have two choices: increase cost to keep making the same relative profit (if the market will bear it) in terms of cash, or convert some of that cash profit to "Goodwill" by basically taking a haircut and eating the tax. This could get me brand recognition or attract a certain type of investor.
My competitor, Sudden But Inevitable Undercut Inc. Priced their widget at $4.50 previously only pocketing 50 cents.
Unfortunately, they have no wiggle room any further. They drop out of the market, as to them the thought of increasing the price is unthinkable.
Any other competitors are left with the same choice as I had:
A) increase price to get same relative profit
B) cash in on Goodwill
But as more companies choose B, the value of B plummets. No one cares if you ate the tax if everyone does it, and in fact not doing it when everyone else does attracts an equally large set of particularly minded investors
The consumer still ends up ultimately eating it because supply just shrunk, demand stayed the same, (price goes up) because a supplier was just priced out of the market in a poof of non-profitability.
BUT! The ones who dropped out liquidated their stuff! Who'll buy it? Probably suppliers still making widgets. Who has the most to throw around? Me, of course. I could grab all those assets to prevent my competitors from being able to utilize them to scale, or to bolster my own production to be able to service more demand! I can do this, because growth can only be bought with money now. I have money now! Yay, greed!
So now, you're left resolving that Goodwill spread across your supplier population. In my experience, there is a far smaller set of Stakeholder value centric companies than Shareholder centric value companies.
Let's say it's 50/50 though, lets assume the market bears my elevated cost for buying the widget without much complaint. What does next quarter look like?
The ones who readjust up for the same relative profit may be able to capture fulfillment for a higher fraction of the finite demand. At first, this may seem advantageous to those who took a haircut, because that essentially turns into a bump in supply, pushing prices down; but as long as the higher priced widget sellers keep improving faster than the competitors that took the haircut, over time they (the less altruistic bunch) may be able to drive more benevolent competitors out of profitability, recapturing their (the more altruistic, but slower growing suppliers) now unprofitably serviced chunk of demand.
Boo! I say as the highest price supplier, I didn't make as much as I wanted in end consumer sales, but hey, wholesale is better than no sale, right? And I can still play the ole M&A card to acquire other suppliers to increase the shadow I cast in terms of effect on price.
If the market doesn't bear the higher cost, it can go the other way of course, and if one makes the dangerous assumption of rational homo economicus, the more benevolent actors may hold out, but they still won't won't grow as fast as their less altruistic competitor, (growth requires cash now, not goodwill).
So say our more altruistic company charges less most of the time, they're still going to have to price in the difference in response to the proportion of increased demand by consumers drawn by their normally lower prices, the max demand they can in house satisfy with their own production, and the elevated cost of sourcing more expensive supply from a less popular supplier due to their higher price to keep customers happy. Their prices are still pegged high, and they are vulnerable vulnerable to shakedowns by their upstream supplier if they want to keep that goodwill flowing.
A final equilibrium is reached only when there is no more room allowed by regulators for M&A until there is a breakthrough or change in the laws and physics of business, to bump that floor price down.
In reality, all businesses make these types of decisions all the time. The hard truth remains though: if you tack on higher costs to produce, there is nothing to stop businesses from passing that cost along. Not passing it along can net some goodwill, but rapidly hits diminishing returns as more companies do it, and hamstrings your growth potential if the population of the type of investor your goodwill piques the interest of ever shifts substantially, and in particular, shrinks. I've met far more pragmatic, profitability driven investors than ideal driven, so I'd wager your idealists are way less common than your "lets make lotsa money" investors.
Cash buys you more throughput. Goodwill may get you more demand, but inability to keep up and fulfill that demand means you're delegating business, and customers to a more costly supplier eventually anyway. Which raises the question, if you can't give everyone the lower price now, why not pass on the cost of that tax, reclaim your profit, possibly innovate, and give it to them later? Or why not have it be your hand on the till? I mean you had good intentions. You're just reacting to the market! You'll make it up to the consumer! Just... Later.
Several years later, you get faced with the same decision again and wonder if now is the time... Rinse, repeat.
Greed, in this sense, subverts the "virtuous" cycle.
But lets get back to iteration 1.
The end consumer though... after the tax is imposed is still paying at least $4.51-$5.50 where yesterday, they were paying $4-$5.
So, no... While I think you can cross your fingers and hope a bunch of people famous for being cutthroatly pragmatic will out of the goodness of their heart eat a tax for you...
I've gotten to the point I've thrown in the towel on that, and assume the traders are right
The scenario you present is so oddly specific and contrived I don't really know how to respond to it.
The fact that you mention investment potential as a downside of eating the tax is really amusing to me: is it so hard to imagine a sustainable business that actually makes money? Pumping up the numbers to attract investors is not something that matters to a well established profitable business. Half the economy is small businesses, and the owners tend to be a lot more pragmatic than boardrooms.
> While I think you can cross your fingers and hope a bunch of people famous for being cutthroatly pragmatic will out of the goodness of their heart eat a tax for you...
You've completely missed the point. What I'm pointing out is that, sometimes, cutting prices is the cutthroaty pragmatic choice, because undercutting a competitor may net you more total money at a lower profit.
That moderates the effect of taxes, and prevents them from being fully priced in. Even if nobody actually does it, the risk that somebody might affects the market.
Demand for what you do/sell is what fundamentally limits how much money you make, not profit margin. Increasing demand enough can offset decreasing margin.
Arbitrary example: Walmart can absorb a local tax increase which other small local retailers can't because Walmart's tax burden is spread across many tax localities. They get more business and make more money. It isn't goodwill, it is rational.
Just look at tariffs we've seen in the past few years: did all prices instantly jump by the amount of the tariff? Nope.
$4 to make the thing, get it to you, and pay all taxes inherent to all the jurisdictions involved in producing and selling the thing to you. Let's even assume I'm the most amazing business man, and I've trimmed the process down to the absolute minimum possible cost per unit by nailing every optimization under the sun.
and $1 profit to come out ahead.
Now. That $1 profit is totally open to get undercut by a competitor.
We've pinned that $4 as the minimum possible cost to make that widget based on the laws of physics and business. Even if my competitors are all as amazing as me, they too hit $4 spend to produce 1 widget.
The next day, a tax is imposed. Not on the consumer, but on the businesses; this increases the floor cost per widget produced from $4 to $4.50 cents.
I priced things at $5 a widget. I'm still in the black with no adjustment. I have two choices: increase cost to keep making the same relative profit (if the market will bear it) in terms of cash, or convert some of that cash profit to "Goodwill" by basically taking a haircut and eating the tax. This could get me brand recognition or attract a certain type of investor.
My competitor, Sudden But Inevitable Undercut Inc. Priced their widget at $4.50 previously only pocketing 50 cents.
Unfortunately, they have no wiggle room any further. They drop out of the market, as to them the thought of increasing the price is unthinkable.
Any other competitors are left with the same choice as I had:
A) increase price to get same relative profit B) cash in on Goodwill
But as more companies choose B, the value of B plummets. No one cares if you ate the tax if everyone does it, and in fact not doing it when everyone else does attracts an equally large set of particularly minded investors
The consumer still ends up ultimately eating it because supply just shrunk, demand stayed the same, (price goes up) because a supplier was just priced out of the market in a poof of non-profitability.
BUT! The ones who dropped out liquidated their stuff! Who'll buy it? Probably suppliers still making widgets. Who has the most to throw around? Me, of course. I could grab all those assets to prevent my competitors from being able to utilize them to scale, or to bolster my own production to be able to service more demand! I can do this, because growth can only be bought with money now. I have money now! Yay, greed!
So now, you're left resolving that Goodwill spread across your supplier population. In my experience, there is a far smaller set of Stakeholder value centric companies than Shareholder centric value companies.
Let's say it's 50/50 though, lets assume the market bears my elevated cost for buying the widget without much complaint. What does next quarter look like?
The ones who readjust up for the same relative profit may be able to capture fulfillment for a higher fraction of the finite demand. At first, this may seem advantageous to those who took a haircut, because that essentially turns into a bump in supply, pushing prices down; but as long as the higher priced widget sellers keep improving faster than the competitors that took the haircut, over time they (the less altruistic bunch) may be able to drive more benevolent competitors out of profitability, recapturing their (the more altruistic, but slower growing suppliers) now unprofitably serviced chunk of demand.
Boo! I say as the highest price supplier, I didn't make as much as I wanted in end consumer sales, but hey, wholesale is better than no sale, right? And I can still play the ole M&A card to acquire other suppliers to increase the shadow I cast in terms of effect on price.
If the market doesn't bear the higher cost, it can go the other way of course, and if one makes the dangerous assumption of rational homo economicus, the more benevolent actors may hold out, but they still won't won't grow as fast as their less altruistic competitor, (growth requires cash now, not goodwill).
So say our more altruistic company charges less most of the time, they're still going to have to price in the difference in response to the proportion of increased demand by consumers drawn by their normally lower prices, the max demand they can in house satisfy with their own production, and the elevated cost of sourcing more expensive supply from a less popular supplier due to their higher price to keep customers happy. Their prices are still pegged high, and they are vulnerable vulnerable to shakedowns by their upstream supplier if they want to keep that goodwill flowing.
A final equilibrium is reached only when there is no more room allowed by regulators for M&A until there is a breakthrough or change in the laws and physics of business, to bump that floor price down.
In reality, all businesses make these types of decisions all the time. The hard truth remains though: if you tack on higher costs to produce, there is nothing to stop businesses from passing that cost along. Not passing it along can net some goodwill, but rapidly hits diminishing returns as more companies do it, and hamstrings your growth potential if the population of the type of investor your goodwill piques the interest of ever shifts substantially, and in particular, shrinks. I've met far more pragmatic, profitability driven investors than ideal driven, so I'd wager your idealists are way less common than your "lets make lotsa money" investors.
Cash buys you more throughput. Goodwill may get you more demand, but inability to keep up and fulfill that demand means you're delegating business, and customers to a more costly supplier eventually anyway. Which raises the question, if you can't give everyone the lower price now, why not pass on the cost of that tax, reclaim your profit, possibly innovate, and give it to them later? Or why not have it be your hand on the till? I mean you had good intentions. You're just reacting to the market! You'll make it up to the consumer! Just... Later.
Several years later, you get faced with the same decision again and wonder if now is the time... Rinse, repeat.
Greed, in this sense, subverts the "virtuous" cycle.
But lets get back to iteration 1.
The end consumer though... after the tax is imposed is still paying at least $4.51-$5.50 where yesterday, they were paying $4-$5.
So, no... While I think you can cross your fingers and hope a bunch of people famous for being cutthroatly pragmatic will out of the goodness of their heart eat a tax for you...
I've gotten to the point I've thrown in the towel on that, and assume the traders are right
It's priced in.
And this is why we can't have nice things.