It's good to be an egg producer

The Justice Department is reportedly in the early stages of investigating egg producers for antitrust violations, but proving criminal activity won't be easy.

Why it matters: High egg prices alone don't suggest collusion is happening. To understand why, we need to turn to Microeconomics 101, and specifically the question of price elasticity.

The big picture: Price elasticity measures the degree to which consumers are willing, or unwilling, to pay higher prices for certain items.

• Eggs, it turns out, have astonishingly low price elasticity: Demand barely falls as price rises. As a result, even modest reductions in supply are likely to result in huge price increases.

Follow the money: Berkeley economist Aaron Smith has run the numbers on egg price elasticity and found that it took a 228% increase in the price of eggs to reduce the number of eggs purchased by a mere 4%.

• Elasticity is determined by a mathematical formula, where the closer you are to zero, the less elastic the price of a commodity is. Overall, Smith found demand elasticity for eggs to be somewhere between -0.02 and -0.06.
• That's astonishingly low, lower even than the super-low price elasticity for eggs of -0.1 cited in "Microeconomics," the standard textbook by Paul Krugman and Robin Wells.
• By comparison, gasoline has a short-run price elasticity of around -0.3, some 15 times greater than we've recently seen in the egg market. (Over the long run, when consumers can switch to more fuel-efficient vehicles, the price elasticity is closer to -0.5.)

How it works: "Egg demand is inelastic because there are few good substitutes and it doesn't take up a huge portion of most people's budget," Smith wrote. While it's not pleasant to pay more for eggs, he noted, "most people are willing and able to do it."

Where it stands: Wholesale egg prices have finally started to fall, but that's more because there have been no significant outbreaks of the avian flu over the past couple of weeks, per the USDA, than because demand is fallen in response to high prices.

• The respite, USDA staff wrote, "has provided an opportunity for production to make progress in reducing recent egg shortages."

• And as Karyn Rispoli, managing editor for eggs in the Americas for price-reporting service Expana, told Axios' Kelly Tyko, "the market is suddenly faced with a surplus of eggs" and therefore a potential decrease in prices.

Between the lines: It's great to be in a business where price elasticities are low and supply is shrinking, because whatever you lose in volume, you more than make up for in higher prices.

• Normally, those excess profits get competed away: Your competitors will invest in new supply and undercut you unless you lower your prices. But that takes time.

The bottom line: When shrinking supply is the result of a shock like bird flu, it can take a full year for the industry as a whole to rebuild supply, during which time it may make very fat profits.