Taming the Pricing Beast

This article appears in the June 2024 issue of The American Prospect magazine. Subscribe here.

The responsibility for reining in high prices has in recent decades been relegated to a single body: the Federal Reserve. Since May 2022, the Fed has raised interest rates to slow the economy by making it more expensive to borrow money. When businesses can’t borrow, the story goes, they’re less likely to expand operations and hire people—and when families can’t borrow, they buy less. The goal is to ensure people have less money to spend “chasing goods,” thereby cooling the economy.

Of course, this theory falls flat when it is collusion, price-maximizing algorithms, and opportunistic price-gouging driving up prices, as opposed to high demand. Indeed, despite these interest rate hikes, the economy has not slowed down, and while inflation has eased—mainly thanks to supply chains returning to normal—it has not returned to the 2 percent target level, as corporate pricing strategies persist.

Over the past four years, inflation of housing, food, and gas prices has garnered widespread attention and angered millions of Americans. Yet over the same period, federal regulators have uncovered actual price-fixing conspiracies in rentals, meat processing, and oil and gas. In the latter, price-fixing may have accounted for 27 percent of inflation in 2021, according to estimates from Matt Stoller, research director at the American Economic Liberties Project.

Low corporate taxation is a key yet underdiscussed enabling force of this new pricing regime.

Yet somehow, the anti-inflation response remains the same: keep interest rates high until prices (as measured by the Consumer Price Index) are tamed. In the case of housing, rate hikes have had the opposite effect, fueling a vicious cycle in which the Fed thumps the housing market in the name of price stability, only to push those prices higher in turn by driving up mortgage rates and stifling new housing construction.

The Fed’s outdated theories have obvious limitations in an age of monopolistic concentration, low taxation, and high-powered algorithms. As corporate America’s pandemic profiteering spree demonstrates, pricing is often a function of power, not demand. And the Fed’s principal tool—tinkering with interest rates—is woefully inadequate to deal with the market muscle that inevitably leads to predatory pricing. When corporations are too powerful, they will use that power to strong-arm both American workers and consumers. That’s particularly true when they can capture so much data about their customers, and use so many high-tech tricks and traps to get them to pay more.

The Fed can’t implement price controls, break up big corporations, or sue companies for anti-competitive practices. The Fed cannot control algorithms used by corporate landlords to drive up rent prices, or force the largest credit card issuers to stop collecting predatory junk fees. Yet all of these are imperative components of a strategy to combat predatory pricing. The Fed has a single blunt tool—interest rates—that scapegoats workers and makes them poorer. And in this era of pricing, it doesn’t really work that well.

A new paradigm is needed to deal with high prices, one that involves Congress, executive branch regulatory and law enforcement agencies, state attorneys general, and the White House working in tandem to tackle the corporate power that enables predatory pricing. It means shaking off our obsession with “inflation,” and instead thinking broadly about affordability and fairness.

How Tax Reform Can Change the Rules

Low taxation is a key yet underdiscussed enabling force of this new pricing regime. Companies may be able to hike prices by taking advantage of their market power, technological innovation, and economic emergencies like the pandemic recession. But those higher prices reap supernormal profits because of tepid taxation, creating a perverse incentive to profiteer.

A February paper from the Institute on Taxation and Economic Policy that studied 342 profitable corporations found that these companies paid an effective tax rate of 14.1 percent, well below the historically low statutory rate of 21 percent signed into law by the Trump administration in 2017. At the same time, we have seen record corporate profits since 2021, culminating in an all-time high in the fourth quarter of 2023. Companies seek out excess profits in increasingly harmful ways, because they get to keep more of those excess profits.

This is where the tax code deserves attention as a regulatory tool. The tax code doesn’t just raise revenue for investments. It’s arguably the single most important rulebook that structures incentives throughout our economy. This is why, at its inception, corporate taxation was seen as an anti-monopoly tool. When the first corporate tax was enacted in 1909, the Taft administration was waging a battle against the big oil and tobacco trusts, and envisioned corporate taxation as a way to complement ongoing antitrust litigation by limiting the earnings stockpile in their corporate treasuries, what can be used to buy rivals or outpace competitors. Excessive corporate power has always threatened economic stability and democracy.

But many of the antitrust functions of that tax were soon rolled back, and over the last century corporate taxation as a percentage of GDP has steadily fallen. The 2017 Trump tax law made permanent changes to corporate taxation that opened the floodgates for predatory profit-seeking. But the expiration of most of that law’s provisions at the end of 2025 offers an opportunity to fundamentally remake the tax code in a way that curbs bad behavior.

Scholars like UCLA law professor Kimberly Clausing, who worked in the Treasury Department during the Biden administration for two years, have noted the promise of a graduated corporate income tax, which offers a targeted approach to the challenges posed by rising market power among corporations. Under this system, companies reporting larger profits—above, for example, $10 billion—would pay significantly higher tax rates on those profits.

This approach targets above-normal returns to capital, which often signifies a company’s significant market power. The implementation of a graduated tax system could potentially reduce predatory pricing by disincentivizing the pursuit of supernormal profits, which are frequently a result of exploitative market practices rather than innovation or efficiency.

This tax structure aims to curb the incentives for companies to engage in anti-competitive behaviors that lead to higher profits. For example, a corporation that has cornered a substantial portion of the market might find its additional profits taxed at a higher rate, diminishing the financial benefits of spending money to grow through acquisition, or otherwise maintain such dominance. This approach not only fosters fairer pricing but encourages a more competitive marketplace, aligning corporate behaviors more closely with societal and economic health.

As any proponent of tax fairness would point out, corporate taxation is a game of whack-a-mole, and reforming the system has to be a package deal that includes measures against international tax avoidance, or large firms masquerading as small businesses. The president’s budget includes several additional provisions that would fortify corporate taxation and disincentivize harmful behaviors. It includes quadrupling the already-successful tax on corporate stock buybacks, raising the corporate tax rate to 28 percent, and expanding the alternative minimum tax on large corporations from 15 to 21 percent.

The goal would be to reduce the incentives for price-gouging by making it far less lucrative to do so.

Public Options

The tax system also includes tax administration. The IRS Direct File program acts as a built-in junk fee eliminator, offering a stark contrast to the predatory pricing practices of for-profit tax filing services like TurboTax.

By successfully processing over 140,000 returns in 2024 and saving users approximately $5.6 million in unnecessary tax preparation fees, this initiative directly challenged the deceptive advertising and hidden costs that have plagued consumers using commercial tax software. According to a recent survey, approximately 90 percent of Direct File participants rated their experience as “excellent” or “above average,” underscoring its effectiveness as a consumer-friendly alternative that can significantly alleviate the financial and administrative burdens of tax preparation for millions more if expanded.

Public, nonprofit competition to the most egregious predatory pricers could significantly benefit consumers. Several communities with little access to fresh and abundant food have opened public, nonprofit grocery stores, which would be less likely to trick shoppers and monetize their data. Illinois Gov. J.B. Pritzker (D) recently allocated $20 million to stand up public grocery stores in food deserts across the state.

The Consumer Financial Protection Bureau (CFPB) decided to crack down on bogus credit card comparison-shopping websites, which charge companies for access to the top of their ratings, by creating a public alternative. When complete, it would offer comprehensive data on dozens of credit cards, including those offered by regional banks and credit unions, so people could clearly see interest rates, fees, and other features. If picked up widely, it could create real competition for an industry that has been charging more for credit.

Many other public options could be created to keep businesses honest and give consumers an alternative to endless price-gouging.

The Revival of Antitrust

At the heart of pricing power is market power, the anti-competitive edge that allows companies to price their way to record profits. Antitrust enforcement offers a crucial tool in curbing these burdens on American consumers by addressing the core issue of concentration.

This tool has largely sat on the shelf for decades. But over the last several years, agencies like the Federal Trade Commission (FTC) and the Department of Justice’s Antitrust Division have revived antitrust as a cornerstone of economic fairness, leveraging their powers to challenge anti-competitive behaviors that lead to unjustified price increases.

One of the most potent powers in the antitrust arsenal is the ability to challenge and block mega-mergers. The FTC’s decision to block the $24.6 billion merger between Kroger and Albertsons is a good example of preventing concentration in the supermarket sector, which could result in higher prices and lower service quality for consumers, not to mention the combination of massive amounts of consumer data that could lead to more novel pricing strategies. By preserving competition between these grocery giants, the FTC is actively safeguarding competitive prices and quality, benefiting both consumers and workers.

The DOJ has gotten involved too. Its successful challenges to JetBlue’s acquisition of Spirit Airlines and its proposed Northeast Alliance with American Airlines preserved competition, including from low-cost carriers, that prevents the dynamic of market power leading to price inflation.

The bully pulpit can serve as a pivotal tool in the battle against predatory pricing.

Beyond mergers, the FTC has tools to address anti-competitive practices. Last November, the FTC challenged improper patent listings in the FDA’s Orange Book—a tactic used by some companies to prolong the monopoly status of their drugs. This challenge not only disrupts monopolistic practices but also accelerates access to affordable alternatives. It has already led to inhaler manufacturers withdrawing those patent listings and dropping their prices to $35 a month.

FTC chair Lina Khan has also signaled that the FTC will treat algorithms no differently than human agents that facilitate collusion. Algorithmic price-fixing technologies can distort prices in sectors ranging from retail to specialized services, and the FTC’s proactive stance highlights its commitment to adapting antitrust tools for the digital age. On March 1, the FTC and DOJ filed a joint brief on addressing allegations against landlords using Yardi Systems’ pricing algorithms to artificially inflate rental prices in violation of the Sherman Act. Last September, the DOJ sued Agri Stats, Inc., for allegedly organizing a scheme that facilitated the exchange of competitively sensitive information among major meat processors, thereby manipulating market prices and output levels.

And there are always straight-up monopolization cases, as is expected soon by the DOJ against event ticketing monopolist Live Nation, perhaps the nation’s biggest purveyor of junk fees.

The collaboration between the FTC and state attorneys general has also intensified, enhancing the capacity to enforce antitrust laws effectively. This partnership is crucial in marshaling the necessary resources and expertise to tackle complex antitrust cases, including those involving intricate corporate maneuvers designed to circumvent competitive constraints.

These decisive actions tackle the core issue of excessive market power, which can lead to predatory practices such as unjustified price increases. Through their efforts to keep the market diverse and competitive, the FTC and DOJ are not just preventing price hikes; they’re also fostering an environment where companies continue to innovate and improve. This kind of vigilance is crucial for protecting consumers and ensuring a healthy, competitive market.

Anti-Price-Gouging Rules

On a national level, Sen. Elizabeth Warren’s (D-MA) Price Gouging Prevention Act aims to extend price-gouging protections across the United States by creating a federal anti-price-gouging statute. This proposed legislation would empower the Federal Trade Commission and state attorneys general to enforce a federal ban against excessive price increases, regardless of a seller’s position in the supply chain. It targets dominant companies that exploit consumers by unfairly leveraging their market position to implement unjustified price hikes. Additionally, the act seeks to increase transparency by mandating that public companies disclose changes in their pricing strategies in their SEC filings during significant market shocks.

If passed, the Price Gouging Prevention Act would represent a critical step toward establishing a nationwide safeguard against predatory pricing practices, especially during periods of crisis. Sen. Amy Klobuchar (D-MN) has a somewhat related bill, the Preventing Algorithmic Collusion Act, which would codify that price-fixing through an algorithm is indeed illegal.

These federal statutes would reinforce efforts at the state level. California, Illinois, and New York all have initiatives aimed at protecting consumers from corporate price-gouging. In California, legislation specifically targeting the oil industry, which has habitually charged higher prices for gas in the state, mandates unprecedented transparency. Companies are required to report daily on market conditions and import levels, and must provide advance notice of refinery maintenance schedules. If successful, it would showcase the direct benefits of regulatory intervention on pricing.

Illinois has tackled the issue in the pharmaceutical sector by implementing a law that caps the annual price increases of essential generic drugs. By tying allowed increases directly to actual cost changes, the state protects consumers from sudden and unjustified price hikes, addressing the potential for abuse in the pharmaceutical industry’s use of market power.

New York’s strengthened price-gouging statutes under Attorney General Letitia James set clear, actionable standards. The regulations define a 10 percent price increase during an abnormal market disruption as potential gouging, providing a clear standard for enforcement and making it easier for both consumers and businesses to identify and challenge exploitative pricing.

Unfair and Deceptive Practices

Recent actions by federal regulatory agencies, particularly the CFPB, demonstrate significant progress in addressing unfair and deceptive practices in the marketplace, further showcasing the reach of antitrust tools.

The CFPB’s focus on junk fees, for instance, has resulted in substantive policy changes that promise to protect consumers from predatory fees. Nowhere is this clearer than the Bureau’s rule capping late fees at $8. Prior to the adoption of this rule, credit card issuers could charge fees as high as $41 for a late payment, due to an immunity provision inserted into the implementation of the CARD Act by the Federal Reserve. The CFPB did some math and challenged companies to justify these exorbitant late fees based on the cost of collecting them. There was no justification.

Far from incentivizing on-time payments, these fees have been built into issuers’ business models because they’re immensely profitable. The new regulation is expected to save American consumers over $10 billion annually. This policy not only alleviates the financial burden on consumers but also challenges financial institutions to justify any higher charges, ensuring that fees are more aligned with actual costs. (The rule is currently on hold as it works through the courts.)

Similarly, the CFPB’s proposal to reform overdraft fee regulations aims to realign overdraft fees with the actual costs by allowing banks to charge overdraft services at a break-even cost or a benchmark fee as low as $3. This is a stark contrast to the $12.6 billion generated in 2019 from these fees. By imposing stricter standards on these fees, the proposal seeks to curb their disproportionate impact on low-income consumers and prevent banks from exploiting these fees for profit.

In cases where companies have resorted to outright deception, Congress has put forward strong bills to restore pricing fairness. The Shrinkflation Prevention Act of 2024, introduced by Sen. Bob Casey (D-PA), empowers the Federal Trade Commission to categorize shrinkflation as a deceptive practice under Section 5 of the FTC Act. By defining shrinkflation this way, the bill would authorize the FTC to pursue civil actions against corporations that reduce product sizes while maintaining prices, a practice that effectively raises the unit price without consumer awareness. (In France, supermarkets must put actual warning labels on products whose volume has decreased without a concurrent reduction in price; the FTC could take that on as a fairness measure.)

Moreover, the CFPB’s actions against UDAAP (unfair, deceptive, or abusive acts or practices) could be put to use in a broader federal commitment to consumer protection. The enforcement of UDAAP regulations ensures that financial institutions cannot engage in practices that exploit consumers through hidden fees or misleading financial products. In a series of interesting data broker cases, the FTC has argued that the collection and sale of personal data is an unfair practice. This could frustrate efforts to combine data in a way that allows companies to personalize prices to each individual.

By establishing clear rules and enforcing them rigorously, agencies like the CFPB and FTC are helping to create a more transparent and fair marketplace, demonstrating the tangible benefits of regulatory vigilance in promoting economic fairness and consumer welfare.

The Bully Pulpit

Interestingly, CFPB director Rohit Chopra’s description of overdraft as a “junk fee harvesting machine” and threats to take action on new rules in 2021 had a significant catalyzing effect. Chopra’s leadership prompted several major banks to adjust their fee structures or even eliminate overdraft fees altogether. Consumers felt the relief well before any rulemaking came out.

The episode showed how the bully pulpit can serve as a pivotal tool in the battle against predatory pricing, leveraging the president and his team’s influential platform to advocate for consumer protection policies and shape public opinion.

This strategy is evident in President Biden’s concerted efforts to spotlight and tackle high prices and junk fees. The last two State of the Union addresses contained long sections rallying support for combating these deceptive corporate practices. “Junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in, like many of you did,” Biden told Congress in 2023.

Furthermore, the White House recently announced the launch of a Strike Force on Unfair and Illegal Pricing, co-chaired by the Department of Justice and the FTC. This initiative underscores the administration’s commitment to enhancing interagency efforts to root out and penalize illegal corporate behaviors that inflate prices. By focusing on sectors like prescription drugs, health care, and financial services, the strike force aims to strengthen enforcement against anti-competitive, unfair, and deceptive practices that burden American families.

In the 1960s, President John F. Kennedy sought to break a coordinated price hike by the steel industry. His first tool of response was a television camera. In a prime-time press conference, he highlighted the industry’s increasing profits amid lower costs, adding: “The American people will find it hard, as I do, to accept a situation in which a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility can show such utter contempt for the interests of 185 million Americans.” Four days later, the steel companies rolled back their prices.

Eventually, those price increases came back. There are limits to the bully pulpit, just as there are to everything else. But combined with concrete regulatory actions, government can mitigate unnecessary costs that make life more unaffordable for Americans. In a time when companies think they can use novel pricing strategies with impunity, it’s important for someone in power to tell them no.