8.8.06

PRICE TAKERS. Rising input prices induce leftward shifts of supply curves, but substitution behavior by producers and consumers matters.

In 2005, Briggs [and Stratton] blamed high costs of steel, aluminum, copper, plastics and energy for a 4.5% price increase for the hundreds of thousands of engines it built for the lawn-and-garden industry. If ever there was a year that a price increase was justified, 2005 was it, Chief Financial Officer James Brenn said in a conference call with analysts.

The same could be true for many companies this year. In a recent national survey of manufacturers, 59% of the respondents said they added surcharges on products to help cover higher commodity costs. Sixteen percent said they would move factories overseas to get relief from high prices.

Companies have had mixed results in recovering their material costs, said Dan Meckstroth, chief economist with Manufacturers Alliance, the Arlington, Va., trade group that conducted the survey.

"Often it comes down to who has the most muscle," he said. "If you have a strong market position, your customers might not have a choice but to accept price increases. But if you are one of many suppliers for the same product, it may be very difficult" to get customer cooperation.

High material costs have pushed some automotive industry suppliers into bankruptcy. The automakers, with their own problems, have been reluctant to accept price increases from suppliers.

Thus, more challenges for policy analysts. On one hand, "muscle" means consumers have fewer options to play one vendor against another: textbook price searching behavior. On the other, "muscle" might mean figuring out ways to serve consumers more cheaply, such as using cheaper labor, where available, with the more expensive materials.

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