Market Power Theory of Inflation
When one seller or a group of seller in the market combine to establish a 1’1ice different I’Will a cumpctitivc level. we call it the market-power price. Thrx group or groups can raise prices to any level they hin!” profitable to themselves irrespective of the sut- Icing inflicted Oil the public. Sometimes.this group, market-power can be onl y one force causing inflation, but not the exclusive force. They tryto explain inflation in terms of structural maladjustments in the country itself or of certain institutional features of the business world. Several explanations of inflation are put forward by these economists such as the Mark-up Theory, the Bottleneck Theory, and the Demand-composition Theory. Mark-up Theory. Prof. Gardner Ackley puts
forward the mark-up theory of inflatio n. He says thatit is wrong to attribute inflation exclusively either to demand or cost. Actually, inflation is caused both by
demand-pull and cost-push factors. The demand-pull inflation is caused by excessive demand for goods so that it is natural that their prices go up. But the increase in prices stimulates production and causes excess demand for factors of production and, as a result, costs rise and prices rise. Sometimes wages may rise (as a result of trade union pressure) without excess demand for the product. This would mean that at the prevailing level of prices (which have gone up as a result of increase in spend more on goods. When goods are sold to firms, and not to consumers, the price rise becomes also a cost rise resulting in further price increases. Similarly, when wages increase costs increase resulting in higher prices. We, therefore, find that an inflationary situation ‘may be built up or initiated either by excess commodity demand or by an autonomous increase in wage rates. To strengthen the mark-up inflation analysis, Professor Ackley suggests that average
level of mark-up used by the firm s tends to rise astotal demand for goods increases, and conversely it tends to fall as demand decreases. Similarly, the mark up that unions supply to the cost of living in setting their wage rate demand also tends to rise and fall as the volume of employment respectively rises and falls.
Since, according to Cackle. total demand contributes to inflation, the tools of monetary and fiscal policies will be found somewhat useful in checking inflation, though in themselves they will not be sufficient to curb inflation.Bottle-Neck Involution According to Professor Otto Eckstein, the wage price spiral is an important cause of inflation. All the same, it does not mean that either a simple wage push theory or the market-power theory is an adequate explanation of inflation. After examining empirical evidence regarding inflationary periods. Eckstein came to the conclusion that the recent inflation was associated with capital goods boom and with a wage price spiral. He found that although prices of manufactures rose generally but one or two particular industries had a very sharp increase in prices. 11e calls these ‘bottle-neck industries’ and it was his opinion that general price rise was substantially due to such industries. Of these steel was a chief bottle-neck industry. Inflation, he found was not entirely due to excess demand because there was wide-spread prevalence of excess productive capacity. It was the concentration of demand on the products of the bottleneck industries that accounted for a considerable share of inflation.