XPost: talk.politics.guns, alt.fan.rush-limbaugh, sac.politics   
   XPost: alt.politics.economics   
   From: democrat-criminals@mail.house.gov   
      
   https://mattstoller.substack.com/p/concentrated-firepower-what-high?s=r   
      
   Concentration is increasing prices and keeping them high. The ammunition   
   duopoly and the "Great Ammunition Shortage" is just one example.   
      
   Covid has done a lot of things to our society. But talk to anyone who   
   enjoys hunting, and they’ll tell you one of result is the ‘Great   
   Ammunition Shortage of 2021.’ "5.56 ammunition for an AR-15 used to be   
   about 33 cents a round," said Mark Oliva, director of public affairs for   
   the National Shooting Sports Foundation. "Now you're looking at closer to   
   almost a dollar a round. So it is much more expensive and it is much more   
   difficult to find ammunition."   
      
   One of the more interesting questions in the discussion over inflation is   
   the relationship between concentration and pricing changes. Most   
   economists believe that supply shocks are increasing profits, but that   
   this increase will serve as an inducement to more productive capacity.   
   "Capitalism is on our side,” said economist Alan Blinder in the Wall   
   Street Journal. “Shortages raise prices, but high prices create   
   opportunities for profit, which attract capitalists to alleviate the   
   shortages." If Blinder were correct, then one would expect lots of new   
   productive capacity and new entrants into this market.   
      
   Ammunition is a highly concentrated industry. There are many ammo brands,   
   like CCI, Federal, Remington, Winchester, and Speer, but they are all   
   controlled by two firms - Vista Outdoor and the Olin Corporation. As Elle   
   Ekman wrote in the American Prospect, Vista and Olin rolled up the   
   industry through mergers, as well as taking advantage of the privatization   
   of government facilities making ammunition and government contracts.   
      
   During the pandemic, a lot of people decided they wanted to buy and use   
   guns, either for hunting or personal protection. The 12 million new gun   
   owners, plus existing activity, meant that the industry experienced the   
   same demand shock that lots of outdoor activity segments saw. The result   
   has been a shortage of ammunition, and higher prices.   
      
   Like a lot of industries, there are cost pressures in ammunition; the   
   price of raw materials, like brass, have gone up. Additionally, the State   
   Department has blocked imports from Russia, adding to the pricing   
   pressure. But the cost story is really a sideshow; the pricing increase is   
   going almost entirely to profit. For Vista, margins skyrocketed in 2020,   
   and continued to increase in 2021. As the CFO of Vista, Sudhanshu Shekhar   
   Priyadarshi, told investors in November, margins rose to a record 27% in   
   Q2 of 2021, on top of an already extraordinary 2020.   
      
   According to Blinder, and most economists, competitors should enter the   
   market and invest in new factories, or existing firms should expand   
   existing capacity to seize market share, eventually leading to reduced   
   prices. But the industry hasn’t experienced such competitive dynamics.   
   Profits, said Priyadarshi, have gone to share repurchases and paying down   
   debt.   
      
   There are several reasons for this, but the main ones are consolidation   
   and high barriers to entry in the industry. Ammunition is difficult to   
   produce, as it requires careful manufacturing processes to safely handle   
   explosive materials. Vista recently bought its competitor Remington out of   
   bankruptcy, lowering the number of firms in the industry that could even   
   build a factory and distribute ammunition effectively. And the limits on   
   capacity were explicit. The head of ammunition for Vista, Jason R.   
   Vanderbrink, explained that the “most important” reason for the Remington   
   acquisition was “added capacity to Vista without increasing the overall   
   market capacity."   
      
   This isn’t purely a story of informal cartel engaged in profit-seeking,   
   but also risk-management. Like a lot of commodity businesses, the   
   ammunition industry is cyclical, with shortages and price hikes when   
   demand increases, followed by collapses as capacity increases and demand   
   stays level or declines. Industry executives know this, and are intent on   
   that not happening again. Here’s Christopher T. Metz, the CEO of Vista,   
   talking about their purchase of Remington, a competitor in the industry.   
      
   Because of some of the consolidation we've done with Remington, even if   
   you look long term, we don't see the same type of price compression the   
   industry may have experienced in previous times.   
      
   Vista has set up two pricing programs to ensure high prices and stability.   
   The first is a subscription service for ammunition, which gives them a   
   steady flow of ammunition demand and lets them plan production more   
   easily. The second is, well, an informal form of price-fixing, or output   
   reduction. They aren’t totally explicit about it, but they use code words   
   to make the point. Here’s Metz explaining that they collude with their   
   competition to keep capacity lower than it should be.   
      
   "Now with ammunition being the largest part of our business. I mean,   
   clearly, buying a Remington, we've created what we feel like is an even   
   more disciplined industry now as we go forward. We've got, I think, like   
   competitors in the sense that they watch growth, they watch their margin   
   profiles. And we feel like we've got a disciplined industry."   
      
   And I've mentioned previously that we studied, as best we can…industry   
   capacity and making sure that we're not only managing our capacity, but   
   very mindful of what's being brought into the industry, so we don't get   
   over our skis, if you will.   
      
   In other words, Vista executives are planning to ensure that prices won’t   
   come down. They have expanded some capacity on the margins, but because   
   there are only two real firms now, they can easily pull that extra   
   production offline if necessary. We’ve seen the management of pricing   
   across economic cycles in other concentrated industries. Chris Leonard   
   wrote about Tyson Food’s control of the poultry business, and how during   
   the financial crisis this meant the entire industry could raise prices by   
   all cutting production at once.   
      
   No one in the room was excited about the idea of a production cut. It was   
   Tyson’s nuclear option. It meant the company would intentionally scale   
   back its business, cutting down its sales. It also meant farmers would get   
   fewer deliveries of chickens, reducing their income even as their debt   
   payments stayed the same. But Smith decided that a cutback was inevitable.   
      
   Ultimately, Tyson cut its production by 5 percent in December. Around that   
   time, the industry as a whole was estimated to have cut back the placement   
   of new eggs between 6 and 7 percent.   
      
   In a matter of weeks, the price of a boneless, skinless chicken breast   
   rose by about 20 cents, according to an industry estimate. Within a short   
   few months, Tyson’s chicken business was profitable again.   
      
      
   [continued in next message]   
      
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