TheGuySwann on Nostr: You are correct. A way to visualize incentives here is with a simple example: Let’s ...

You are correct.

A way to visualize incentives here is with a simple example:

Let’s say someone is making really high quality wine. If prices for everything rise with inflation, then customers end up being more strained during shopping, which means price will end up being one of the lead concerns over quality. So say wine maker A waters down their wine so they can keep the price stable, while winemaker B keeps the quality up, but raises prices. Most consumers are simply going to see winemaker A as consistent, the quality loss is easier to hide, especially if he can put some extra coloring in it, and add some cheap corn sweeteners to fake the taste. While winemaker B looks greedy and inconsistent. Customers slowly migrate away from B, until A becomes the norm, and we end up in an endless cycle of dilution until they are just buying a bottle of a red food coloring sugar drink.

In the reverse, when prices naturally fall, the customer’s top concern will tend away from needing the cheapest option. And will instead go with what matches the quality of life they are seeking. In this case Winemaker A is going to be dropping their prices the fastest and will be perceived as the cheap alternative, while Winemaker B is more likely to have less frequent but manageable price decreases while they focus on having the best quality product possible, extending their storage time, increasing the quality of the inputs, putting higher value on *how* it’s made and what other practices they support in their supply chain, all while still continuing to be more affordable over time.

TL;DR
• persistent inflation stresses customer wallets and makes price moves up the hierarchy. Cheapest ends up dominating.
• persistent deflation gives customer optionality, price becomes less of a concern. Highest quality ends up dominating.