The Business of Buck-passing Boosts Prices

The Journal of Commerce is a daily (Monday-Friday) commercial newspaper with substantial national circulation and advertising. Its editorial columns frequently rail against inflation which it blames on the government.

About three years ago, the Journal sold for 25 cents a copy at the newsstand. Two months ago it was still selling for 50 cents a copy. As of Oct. 1, the price went up to $1 per copy, making the Journal the highest priced daily newspaper of mass circulation in the country.

One dollar for a newspaper would seem to call for an explanation. But a reader calling the Journal’s office received a general grumble about rising expenses. Its closest counterpart, the Wall Street Journal, manages to do very well on 25 cents a copy.

A major explanation for the $1 price is that the Journal of Commerce’s buyers are business people who deduct the cost as ordinary business expenses. They’re relatively inelastic consumers who are able to pass costs on to the final consumer where the buck stops.

If price resistance by buyers is an important factor in price stability, the distinction between these two levels of consumers is important.

Consider some illustrations. In Washington, D.C., office space is being scooped up by law firms, accounting firms and trade associations at record rental rates. One large builder remarked that it is as if “money means nothing to them.” These business tenants are intermediate buyers whose clients in turn can write the expense off or pass it on themselves to the final consumers.

By contrast the non-business tenant increasingly confronts rental rates made possible by the business tenant’s willingness to pay the asking price. When you’re not really paying, why bargain?

As the price of Eastern Airlines’ shuttle between New York and Washington goes up every few weeks the non-business travelers (families, old people, students, etc.) are squeezed. But the business travelers could care less about Eastern’s shuttle prices even when told that the Los Angeles-to-San Francisco run by other airlines is half the price per mile flown. The same response is usually given by those who travel at government expense.

Buyers who use other people’s money can cost consumers who have to use their own money a great deal if the former are not price-conscious. When the late Carl Madden was chief economist for the U.S. Chamber of Commerce, he thought that the large corporate buyers of health insurance, such as General Motors and U.S. Steel, could be tougher bargainers with the health insurance industry. His failure to succeed in getting the Chamber to act vigorously in this area was one reason, he said, for leaving his position.

Fortunately, the Chamber has come to recognize a need for stronger negotiating vigor by corporate buyers of such insurance.

There are three ways to make business or expense-account consumers behave in a manner that benefits rather than harms the average consumer. First is for the consumer movement and other like-minded groups to impress upon business consumers that they should not act as sieves for sellers. A public awareness and strategic advocacy here, like the rise of the non-smokers’ alertness, is not inconsequential.

Second, the tax laws should tighten up on the deductibility of certain expenses. Perhaps a graduated tax on business expenditures replacing the business tax on income would encourage price resistance and thrift.

Third, anti-monopoly laws should be enforced to permit good old-fashioned competition. This is starting to occur in the airline industry with recent revocation of the airline cartel known as the Civil Aeronautics Board rate approval system.

With these three forces, the willy-nilly tack-it-on phenomenon by business buyers using other people’s money would diminish.

In the meantime, readers can double up on their Journal of Commerce or demand a price rollback. The savings can buy two cups of tea–maybe.