Bryan Caplan asks:
“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?
I can think of a few examples of this phenomenon. Dying academic book publishers for instance seem to be raising prices. This also may explain some aspects of the market for oil. Arguably to the extent Saudi Arabia perceives itself as running out of oil, they feel less need to keep the market price down to limit investment in energy substitutes. But why are there not more examples? Is demand too low for reasons of selection? Does internal collapse within the firm, and personnel departures, raise the shadow value of bringing in revenue sooner rather than later?