Ko-Fi Prompt from Eli:
do landlords have price wars? it seems like with the insane way rents are going it wouldn't be hard for them to undercut competition. but it also doesnt feel like thats happening.
Oh, this is a fun one. Let's talk about price elasticity!
Note: I will be including graphs in this post. While it's helpful as a visual aid, there is no way to describe it that actually helps explain the premise that isn't already in the post's body of text. As such, I will not be providing image descriptions beyond the short sentence before or after stating what it's meant to represent, since further information wouldn't be of any use to those with screen readers.
In the field of microeconomics, one of the basic models everyone learns is the supply and demand curve. Here's a visual example:
Image Source: Wikimedia Commons
Traditionally, a product with an elastic price is one where demand fluctuates directly in response to cost, isolated from other factors*. A basic example is affordable luxury goods, say, a nice steak. If the cost goes up by a dollar, a certain portion of the population will decide it's no longer worth the cost, and will switch to something cheaper, like a chicken breast, instead.
* Other factors include, but are not limited to, luxury appeal, subsidized costs, and the lipstick effect. This post is already pretty long, so I can't go into many details on those situations.
The Demand curve is specifically a visualization of how much of a product can be sold for, not necessarily how much the product can be sold in quantity. As a general rule, it's easier to think of Price as the independent factor for Demand (and quantity as the dependent), and quantity as the independent factor for Supply (and price as the dependent).
With a traditional S&D curve, the intersection of the Supply and Demand curves is the optimal price point from both ends. The X-axis is supply quantity, which a lot of people find unintuitive... but that's where it's been for years and that's where it's staying.
If there is a great quantity of a product, with healthy competition levels, then the supply line moves to the right. The intersection of the lines then drops, and prices go down, as businesses lower prices to gain more customers.
If there is a small quantity of a product, due to limited raw materials or unique patents or skills, then the supply line moves to the left, and they can charge more for the product.
Here is a visual of what I mean by the supply curve moving:
(Source: Wikimedia Commons)
The text is fairly small, so I'll describe here: The image states that factors that can increase supply (shift to the right) include favorable conditions for production, falling input prices, improved technology, and lower taxes or regulation costs. The second graph describes a decrease in supply, causing a shift to the left, the factors of which are the exact inverse of the first graph for increased supply.
A good example of a shift in supply resulting in a change in cost is gas: prices go up when supplies go down, whether due to higher taxes/regulations (e.g. the current refusal to trade with Russia), or disappearing raw materials (diminishing quantities of oil and natural gas, as finite, unrenewable resources). Comparatively, other forms of energy, like solar, have had their quantity lines shift to the right (cheaper) as the technology becomes more efficient and cheaper to produc.
Now, in areas that genuinely do not have enough housing, this is part of why prices go up: options are limited enough that they can get away with charging more. Due to zoning laws, construction costs, etc. they cannot add more housing, and so the supply curve is further to the left (pricier).
Here is a similar example image for the Demand curve, and how it shifts:
(Source: Wikimedia Commons)
The factors, here, are more intuitive. If demand goes up for reasons like trends, population, rise in general disposable income, changes in the costs of competitors or accessories, or expectations of investment viability, then the demand curve shifts to the right, and costs can increase without losing market share. For the reverse causes, the curve shifts to the right, and fewer people are willing to buy at that same cost.
Let's consider laptop computers: they have gotten more popular. A larger portion of the population has reason to buy them than twenty years ago. For that reason, the price can go up without necessarily losing market share (shifting to the right). However, income across the board has dropped, and there is a reasonably cheaper substitute (smartphones) for some uses, so the demand is lower (shifting to the left).
If you are in a city where there are suddenly a lot of people moving in for some shiny new company, then there is a greater population trying to buy, and so the demand curve shifts to the right, and prices can safely go up without losing market share.
...but that's with elastic pricing and competition.
Elastic pricing and costs are for most traditional goods. For specific foods, you can usually just... buy something else. If a plague wiped out half the crop of lettuce for the season, the costs will rise on the supply side (shift to the left), but there are unaffected substitutes, like broccoli and cabbage and tomato, for general use, so demand will also drop (also shift to the left). This means that prices go higher, but they are further to the left for both, meaning the quantity sold is lower.
Selling four million units at $3 vs. selling two million units at $6. The final amount of money changing hands is the same, but it's at a different cost and quantity.
Summary:
Supply moves to the left: less product, higher price from the seller to cover costs
Supply moves to the right: more product with healthy competition, lower price from the seller
Demand moves to the left: less interest in the product, customers need a lower price to buy the same amount
Demand moves to the right: more interest in the product, customers will tolerate a higher price to buy the same amount
But again, this is for elastic products.
What's an inelastic product?
Well... housing, actually, but let's start on the other side this time.
Products with inelastic demand are ones where customers cannot respond to changes in cost or supply. It doesn't matter if the cost goes sky high, and you know the profit is 96% because the cost of production is 4% of the price you paid; you can't afford to not buy it.
You know how insulin prices in the US spent decades being prohibitively expensive because diabetic individuals could not survive without buying it? That's inelastic demand.
(Source: Wikimedia Commons)
If you look at the image above, you see a 'perfectly' inelastic demand curve. It is a straight, vertical line, where the quantity is immovably stuck at 150 no matter how high the cost goes.
In the real world, very, very few products are perfectly inelastic. Even insulin is... well, some people can move abroad. Not many, so it's pretty close to vertical, but some.
With housing, demand is fairly inelastic. The vast, vast majority of people do need housing. There are very few substitutes for this need, and while there is a range of prices and options, it does sort of... flatten out early.
If you demand that people spend $3000/month in order to live within 50 miles of their place of work, and everyone else is also demanding $3000/month, then there aren't any other options. The person either gets a new job elsewhere, spends a few hours a day on a commute, or pays those $3000.
Inelastic supply is the other side of that coin. The very limited quantity, and the high costs of expanding that supply, mean that the line shifts pretty far to the left, causing prices to rise. The line is also nearly vertical. With housing, there exists an argument that it is often cheaper to let the apartment sit empty than to rent it out too cheaply, due to maintenance costs and property taxes or what have you. Unless there's an exorbitant mortgage that needs to be contributed to by the tenants, though, those numbers don't quite work out.
So... if the Demand curve is nearly vertical, and the Supply curve is also nearly vertical, and there are no viable substitutes other than exiting the market entirely, you have a situation where the Supply side has nearly all the power and an excuse for why they're raising prices that doesn't actually reflect the reality.
Because there's plenty of housing being built, just, you know, not in the tax bracket that needs it. (Remember, a very large portion of Billionaire's row is currently unoccupied.)
You could argue that this is a form of price-fixing, which is an illegal act in which competitors in the same industry agree to collectively raise, lower, or stabilize pricing of a product. If 90% of microprocessor companies raise their prices simultaneously without cause, consumers will have to bite the bullet and buy the product at that new cost, as there aren't enough substitutes to find another option.
(If this sounds like a monopoly to you, good job! It's the same principle: control pricing for enough of the market that you can raise it higher than demand justifies. It's just done by making deals with the competitor instead of buying them out.)
However, due to the shape of the supply and demand curves in this housing market, and the very gradual way in which this situation has developed, it's not really a deliberate, organized price-fix, just something that came about as landlords realized that tenant's rights and alternate options (e.g. the council/public housing, affordable housing lotteries) weren't keeping up with their ability to continue to nudge prices upwards without losing out on money.
(Most of the time. Price-fixing does still happen, in pockets.)
Long story short: landlords don't have price wars because the demand curve is so inelastic that they can basically get away with anything.
(Prompt me on ko-fi!)
