Why Don't Dying Firms Raise Prices?
By Bryan Caplan
“Demand is more elastic in the long-run than the short-run.” It’s a textbook truism. Implication: Raising prices is often a bad idea even if profits instantly rise. In the long-run, demand will get more elastic, and the price-gouging firm will discover that its behavior was penny-wise and pound-foolish.
This all makes sense, but there is an awkward implication: Once firms realize that they’re dying, they ought to raise prices. By the time long-run demand elasticity kicks in, they’ll be out of business. Why not opportunistically take advantage of the situation?
Yet as far as I can tell, this almost never happens. When firms are on their last legs, they tend to cut prices, or at least hold them steady.
What gives? Is the textbook truism false? Is this a corporate governance problem – the current CEO never wants to admit that the end is nigh? Or what?