America Is Electing A Chief Pricing Officer

Dear Friends,

Last summer my co-author Arnab Sinha and I asked the question: "Do Prices Decide Elections?" The answer was “yes” and that “yes” is even stronger for the upcoming election in the United States.

By November 5th, tens of millions of Americans will have cast their votes for the nation’s next President, who will also assume the role of the nation’s Chief Pricing Officer. If that statement sounds exaggerated or biased, because we are pricing consultants, then you should look at what consumers – and what the two candidates themselves – are saying about kitchen-table issues and about prices in particular.

In survey after survey, consumers are still citing inflation, costs, and affordability as their top concerns. The two major party candidates – Kamala Harris and Donald Trump – are broadly aligned on the fundamental pricing challenges the country needs to address, and even share some ideas on how to address them.

In this newsletter we will look briefly at the latest consumer sentiments, look at how the two candidates plan to respond, and explore the potential effects and unintended consequences of some of their key ideas.

?

Consumers want lower prices

The annual inflation rate in the US has indeed slowed, but many consumers still feel the latent and compounded effect of high inflation over the last couple of years.

Recent polling by Pew Research lists the economy as the top overall issue in the election. It is the top issue for likely voters for Donald Trump, and the third-highest priority (behind health care and Supreme Court appointees) for likely voters for Kamala Harris. The University of Michigan’s latest Index of Consumer Sentiment rose slightly in September from the previous month, and the accompanying report noted that “while sentiment remains below its historical average in part due to frustration over high prices, consumers are fully aware that inflation has continued to slow.” The Conference Board was more pessimistic, however. It reported that US consumer confidence declined in September and explained that “September’s decline was the largest since August 2021 and all five components of the Index deteriorated.”

?

The candidates have plans to deliver lower prices

To avoid apparent bias in this next section, we flipped a coin to determine which candidate to mention first, with Harris as heads and Trump as tails. The coin landed on heads.

Below is the table of contents of the Harris campaign document called “A New Way Forward for the Middle Class: A Plan to Lower Costs and Create an Opportunity Economy.”

The introduction states that Harris and her running mate Tim Walz “know that prices are still too high for middle-class families, which is why their top economic priorities will be lowering the costs of everyday needs like health care, housing and groceries, and cutting taxes for more than 100 million working and middle-class Americans.” After the first chapter on cutting taxes, the next six chapters address their plans for lowering prices in specific areas.

The analogous document on the Trump campaign’s website is broader in scope and shorter in length and detail. The first chapter is entitled “Defeat Inflation, and Quickly Bring Down All Prices” and the fourth chapter is about making the American Dream “more affordable.” The contents of that chapter, shown below, define similar issues and intentions to the Harris campaign’s:

In Game Changer we defined a pricing strategy as “a business leader’s conscious decisions on how to shape their market by determining the amount of money available, how that money flows, and to whom.” That statement applies to government pricing strategies as well, whether they take the form of taxes, tariffs, regulation, or other levers.

Barring any major geopolitical or unanticipated events in the next 29 days, this US presidential election will likely boil down to which candidate Americans think will do a better job of managing prices over the next four years. That’s where the candidates have some similarities as well as sharp differences.

?

No taxes on tips!

The policies of each campaign are similar here. The Harris document claims that the administration “will fight to raise the minimum wage, end the sub-minimum wage for tipped workers and people with disabilities, and eliminate taxes on tips for service and hospitality workers. This will help put more money into workers’ pockets.” The Trump campaign promises “large tax cuts for workers, and no tax on tips!”

Such a policy change may bring several unintended consequences. First, it could lead to an even greater proliferation of tipping at a time when consumers are growing tired of what we refer to as the swivel, the turn of the screen at checkout when the seller displays some preset tip amounts. As we wrote about a year ago, the greater the emphasis a business places on tipping, the greater the risk that it subjects its employees to the biases and whims of customers.

What is a better answer than eliminating taxes on tips via federal policy? We don’t know the answer to that, but we would be more inclined to trust the experimental power of Americans at the state, local, and entrepreneurial level. Cities such as Chicago and states such as California are experimenting with higher minimum wages for service workers. Some restaurants are eliminating tips and changing their menu prices and their communication strategies, as this recent article in the New York Times pointed out. These experiments may yield results that other cities or companies could adopt or encourage others to do experiments of their own.

?

Price gouging regulations

The Harris document calls for “Congress to pass the first-ever federal ban on price gouging.” Defining incidences of price gouging are always subjective, though they tend to be easier to agree on in the aftermath of natural disasters such as the recent devastation caused by Hurricane Helene.

But how will the government define “excessive profits” in other circumstances? When are price increases on the basis of higher input costs excessive? The Harris document admits that it is “well established that price fluctuations are normal in free markets, that increased input costs can spur price increases to maintain normal profit margins, and that pricing can at times signal to markets to increase supply.”

One challenge is that the definitions of costs, competition, and value are fluid. As we describe in Game Changer, the drivers of all three inputs to pricing decisions include location, time, customer segment, occasion, supply and capacity, volume, and channel. Beyond the definitional challenges, there are also unintended consequences such as the distortion of market signals that under normal circumstances would spur increased supply and provide impulses for innovation.

?

Tariffs

The main issue with tariffs from a pricing standpoint is that they tend to be inflationary, not deflationary. They raise costs for sellers and therefore increase optimal prices, assuming constant elasticity. These higher prices discourage the purchase of imported goods and thus increase the likelihood that more locally produced goods are purchased. If we assume that American producers or consumers had previously not chosen the domestic goods because they were more expensive, the switch to local production would also increase the average price paid by consumers and therefore increase inflation.

Now, inflation is not the only effect of tariffs. Numerous reports such as one from the Cato Institute and one from the Council on Foreign Relations indicate that many factors determine who ultimately bears the cost of a tariff between US consumers and foreign producers, especially because the Trump document claims that “As Tariffs on Foreign Producers go up, Taxes on American Workers, Families, and Businesses can come down.” From a tax standpoint, the only direct way to offset the impact of tariffs on consumer inflation would be to reduce sales taxes. The US has no national sales tax, though. Those taxes are set and administered by state and local governments, not the federal government. Unless there is a transfer mechanism in place, tax cuts would likely reduce state and local revenues, independent of how much revenue the federal government generates from collecting tariffs. ?

Therefore, while on Harris’s side, there are uncertainties about how much impact her plans will have on bringing down prices, the main uncertainty on Trump’s side is how much prices would increase.

The contested title on November 5th may say “President” in the Constitution, but from a kitchen-table standpoint, the 2024 election in the United States is about pricing. Americans will also be electing a Chief Pricing Officer.

As always, please continue to share your thoughts and questions with us. If you haven’t ordered your copy of Game Changer yet, you can do that HERE. Thanks for your interest and support.