When Businesses Don’t ‘Gouge’

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Some of my friends up north are about to get shellacked with snow. Some people are scared, but most seem excited.

A facebook friend from SLU shared a picture of her local market, where bananas and breads were sold out completely. I commented that shortages can happen when businesses don’t raise prices on goods to reflect a demand spike.

I’m sure that, if this storm is bad, we will hear stories from every local affiliate about how businesses are “price gouging” when they’re really not. (If you’re interested, former room mate and quasi-New Yorker Andrew Heaton and I did a podcast about this after Sandy.)

Before storms, businesses typically don’t raise prices, even though they should. They do this, presumably, to avoid bad publicity. Or fines by regulators.

Having the real price of a good reflected in its sales price would discourage hoarding and allocate more efficiently the goods to those who need them. Me, I only tend to hoard alcohol during storms, since my food supply is always pretty good. But I’m sure you recall a time where you went out and irrationally purchased a bunch of stuff for a storm that you didn’t actually need.

Odds are, this is because prices were kept below what they should have been. People, like my friend, may have wanted a banana. But when they got to the store, there weren’t many bananas at all, except maybe the crappy ones. Were prices higher and more realistic, maybe you would have purchased fewer bananas or maybe chosen a substitute good like SPAM.

It’s like when Lowe’s or Home Depot says “we won’t raise prices on shovels, generators, etc.” before the storm. Relieved, you go there and they’re already sold out. At least that was the case for me during snowmageddon three years ago.

After a storm is when prices tend to rise (unless the heavy hand of government prevents it) because the replacement cost of shovels, bananas, or gasoline, is higher. There are obvious reasons for this, but a few would be that people may have to work overtime to get the goods to you, there could be fewer means of getting the goods there because of damage or destruction, the risks are higher because of the storm … you get the point. These higher replacement costs, in addition to higher demand, are reflected in the price.

Over at AEI, Mark Perry writes:

Rising, market-based prices following a disaster are the most effective method possible of allocating scarce resources, eliminating shortages, and attracting essential supplies to the areas that need them the most. In fact, market-based prices are also the most effective method possible of allocating scarce resources, eliminating shortages, and attracting essential supplies to the areas that need them the most before a disaster – wind and rain don’t change that reality.

Some stores, especially small, family-owned businesses tend to close early during a disaster. Often times, the threat of being accused of being a “greedy gouger” outweighs the benefits of keeping a store open to sell their wares. At higher prices, absent the threat of gouging accusations or the heavy hand of the law, it would probably be worth it to stay open.

Until the general public has a better understanding of basic economics, we’ll be stuck with businesses avoiding economically unjustifiable fines and bad “gotcha” stories from the local news agency, and in many places, politicians controlling the price of goods and services in lieu of the market. Which is to say that we’re much worse off than if we went along with the so-called “gouging.”

If you’re really in for a long read, check out The Virtues of Price Gouging by FTC economist David Meyer.bsig

UPDATE: Friend of the blog Hartley Brody introduced me to a new term that describes economic misunderstanding in the wake of Nemo — #Nemonomics. Reader David writes in to clarify that he, and not Hartley as I first wrote, coined the term first — but I could not see that because his twitter account is protected.

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One Thought on “When Businesses Don’t ‘Gouge’

  1. Hello, Jim. I have just discovered your blog and am enjoying perusing it. I found you because in Twitter I picked #Nemonomics in Search, where I noted in the thread that “credit” for the term was mistakenly given by you to someone other than myself. I introduced the term first (to my knowledge) in Twitter about 3:00 PM yesterday. I realize that because I have a protected account, you could not have known this. Your post is a good discussion of the economics involved in such events.

    In a few other tweets around that time I gave the stages of Nemonomics – Panic buying good for businesses, followed by closures and loss of business, followed by third stage of tradespeople restoring and repairing damaged stores and offices. Hartley Brody also wrote later along those lines.
    My point is that I don’t seek any recognition, but it might be a useful example of how much we are all at risk of writing/saying things that are not accurate, simply because all facts are not always clear. Please think of this as a cautionary reminder.

    Meanwhile, I’m remembering that Presidents Day Sunday in 1978 when we were buried in the inch-an-hour storm in Washington. Hope you do not have that much show.

    David

    (Oh yes, I can send you a screen scrape of my 3 PM Tweet, but don’t know how to attach it here. If you wish to see that, please tell me how to get the pdf to you. Thanks.)

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