Pricing Power: Lost But Not Forgotten?
Washington -- Contrary to popular belief, Federal Reserve Chairman Alan Greenspan is capable of speaking clearly. A case in point was earlier this month, up on Capitol Hill, when he held forth on the mundane but vital issue of pricing.</br></br>"A striking feature" of the current economic cycle, the Fed chairman said, "has been the virtual absence of pricing power across much of American business."</br></br>Well said, Mr. Chairman. Raising prices has always been an art form, but these days it is approaching the status of a lost art form. Yes, there are the usual suspects that can achieve "pricing power" in good times and bad. They tend to be the rare "service" providers without global competition: universities that raise tuition; hospitals jacking up fees; or near monopolies such as cable-television operators. Indeed, cable-TV giant Comcast Corp. has raised prices steadily all through the economic downturn, and in some markets, Comcast prices are up 15% since mid-2000.</br></br>But for every business operating in a Comcast-type world these days, many more operate in what might be called a Wal-Mart world of flat or falling prices. Wal-Mart is famous for extracting ever-lower prices from its global army of suppliers. In turn, this forces suppliers to stay profitable by means of productivity gains instead of price increases. It's a powerful force that James Smith, an economist at the University of North Carolina, dubs "the Wal-Martization of the U.S. economy."</br></br>Thus, as the economy gathers strength, there's a big question looming. When will the discounting, rebating and price-cutting reverse course? What happens if industries shutter excess factories around the world or if inventories are trimmed? What happens to prices if industries become more concentrated oligopolies?