Fairlife Refuses to Inflate Prices

In order to get more protein in my diet, I frequently consume Fairlife Nutrition Plan protein shakes. They have 150 calories, 30 grams of protein, and taste just like chocolate milk. It’s a great product, but, at the prices Fairlife charges for the shakes, demand regularly outstrips supply, making it quite difficult to actually find the product available for purchase.

In light of the general inflation discourse (see my entries here and here), I’ve found myself oddly fascinated by Fairlife’s pricing decisions. When every other company is increasing prices, Fairlife is stubbornly refusing to do so even though it’s clear that it is being swamped by “excess demand.”

I even emailed the company about the situation and got a response acknowledging that they are aware of the problem:

We are sorry that you’re having trouble finding Nutrition Plan. This is a very popular product and the increase in demand has resulted in limited availability at retailers across the country.

If Fairlife behaved in the “normal” way, it would simply raise its prices and increase its profits. This would then show up as profit margin expansion and some would even call it “greedflation.”

Instead, Fairlife has chosen to respond to excess demand, not by raising prices, but by simply selling out of their product. As I noted back in December of 2021, this is one of the non-inflationary ways of managing excess demand:

At times, proponents of the view seem to point to higher profits mostly as a way of saying that companies do not need to raise prices in response to excess demand. This is true of course: if a company, industry, or whole economy is swamped with more orders than it can fill, it could respond by raising prices or it could respond by selling out, limiting order size, creating waitlists, or similar.

The latter rationing approaches would avoid inflation but would result in similar kinds of frustrations for consumers. In all of the cases, many consumers would find themselves unable to buy what they want to buy, whether because it is unaffordable in the case of inflation or because it is unavailable in the other cases.

One of the things I still don’t quite understand about people who talk about greedflation is whether they are implicitly arguing that all or most companies facing excess demand for their products should be doing what Fairlife is doing, i.e. selling out of their product rather than increasing prices and profits.

Or more generally, do these advocates simply favor other rationing approaches over price-rationing approaches? I don’t think that’s necessarily unreasonable. In fact, in certain sectors like medicine, need-based rationing in the form of triage is much better than price-based rationing in my opinion. But if this is where people are going with this line of argument, then I think they ought to spend more time fleshing it out.

The case of Fairlife’s sticky prices provides some additional insights into what happens when a company chooses to hold down prices in the face of excess demand.

The Fairlife shakes do not need to be refrigerated and have very long shelf lives. These characteristics, combined with the product frequently being out of stock, causes some customers to hoard the product any time it hits the shelves. On Reddit, you can find people boasting about the hundreds of bottles they have snatched up and stored in their basement. This of course makes the availability problems of the product even worse.

Some resellers have also taken advantage of the situation by snatching up the product from retailers whenever it is available and then selling it on Amazon for triple the price. I don’t think this technically counts as inflation in the government statistics, but obviously it amounts to the same thing.

Would raising prices be a better approach? Again, I think the answer to this question is not necessarily obvious. For a product like this, which is not essential and for which there are many competitors, you’d ideally want to ration excess demand by allocating scarce supplies to those who want the product the most.

When you use price increases to ration excess demand, what you end up doing is allocating the scarce supplies to people based on an index of their ability to pay and desire for the product. In societies with more equal distributions of income, desire for the product makes up a bigger part of that index. In societies with less equal distributions of income, desire for the product makes up a smaller part of that index. We of course live in a highly unequal society, meaning that price-rationing will be far less welfare-maximizing in the sense of allocating scarce goods to those who enjoy them the most than in a highly equal society.

Still, it seems hard to imagine that for a product like this that it is better to have the product frequently sold out, hoarded, and marked up by resellers than to simply increase the price, even if doing so means you have “inflation.”

Update One: Today, at Costco, I noticed that for the first time in a long time, the Fairlife shakes were available for sale. And, for the first time, there was a 36-bottle purchasing limit. This means that Fairlife has adopted the second non-price-based strategy for managing excess demand that I mentioned in my blockquote above: limiting order size. I tried to purchase more than 36 bottles to see if the limit was enforced and the cash register threw up an error indicating that I could not purchase more than 36 bottles. I asked the cashier why the change and she told me that too many people were “overbuying” it.

So, this change was presumably made in response to the hoarding and reselling problems they are having. Limiting order size like this rations out a small amount of the product to a larger group of people. The fact that the product was actually on the shelf indicates that it is at least somewhat effective, though I wonder how hard it would be to simply buy 36 bottles over and over again. We shall see.

Update Two: Fairlife announced on May 11, 2023 that it is building a new giant manufacturing plant to increase the supply of its products.