Generally speaking, if you have the foresight to anticipate that people might want a commodity, and you put your own money on the line to try to profit from that — well then, good for you. If the demand doesn’t materialize, you’ve lost your investment. If it does, you make a profit. That’s the way markets work.
The same rules don’t apply when you’re trying to profit off a catastrophe.
We all get a warm feeling when brewers stop production of beer and use their supply lines to provide millions of cans of water to people after a flood, or hurricane. Or when Chick-fil-A employees take free food to people stuck on a highway after a horrible wreck.
But when some guy tries to hoard lots of hand sanitizer to sell it to people during a health crisis, the public collectively gives him a middle finger.
Also, you don’t need hand sanitizer. Washing your hands for 20 seconds with soap and water is more effective anyway.
I’ve spent more time than I should lately explaining why I think “price gouging”, aka “surge pricing” aka “flexible pricing”.. aka simply “pricing”, is a good thing, not a bad thing.
LCCers (“Large Canadian City” is my supersecret code for the city where I live, which just happens to have a hockey team, a basketball team, and a baseball team.. hopefully no one will crack this puzzle!), as part of the madness of crowds, are stockpiling random items including tissue of all sorts. A local paper has reported that Shoppers Drug Mart, a pharmacy-themed chain store which also carries groceries, has been “accused” of “price gouging” because they’ve raised the price on toilet paper– although they claim they haven’t, they’ve only not continued a sale price. (Not sure if they’re being honest, because the social price of being honest requires being made of sterner stuff than most company drones.) The same article notes that “Walmart Canada currently has the exact same item listed for $6.97 (*though it is, of course, out of stock.*) [emphasis mine].”
These two facts, (1) that the expensive place still has some for people to purchase, because the rise in price discouraged hoarding, and (2) that the place which did not raise the price has none to sell any more, because people irrationally purchased large amounts given the gap between the published price and their new subjective valuation, are considered unrelated coincidences by the twitter mobs. They’re just, you know, two things which kind of happened at the same time.
It doesn’t matter if we set legal limits on price as in socialist states or if we use strong social pressure in allegedly free market states to prevent people from adjusting it in response to changing desires. If the price of toilet paper were raised to 50$/12, people would buy what they thought they needed. If it’s fixed at 7$ even though they’d be willing to pay $20, they buy three, leaving two people without.
As frustrating as I find these panic-induced empty shelves, it’s at least somewhat comforting to see a real-world example of something which is textbook econ 101 playing out exactly according to theory.
Interesting thoughts.
To me, there’s a difference between pricing based on supply and demand, and intentionally profiting off a crisis. Maybe it’s a subtle difference, but I think it’s a real difference.
TBH that sounds like “I’m determined, he’s stubborn” to me. You can only “profit off a crisis” if you give people what they want at a price they’re willing to pay for less than it took you to create or obtain what they want in a crisis, which is a good thing. I think you’re going to have a tough time distinguishing your two cases in a way which makes sense.
Another bad consequence of socially fixing crisis prices at a low, pre-crisis level: you remove the incentive for people to redirect resources to solve the problem. At 7$ a package, it’s not worth it for companies to modify factories which make something else to make tissues. The companies currently producing tissue can ramp up creation before they could, and it’s so not worth the risk. OTOH, if it’s 50$/package, you start saying “well, we know it’s only a spike.. but if it lasts two months we can make a lot of money” and more production comes on line as people realize you can make substitutes out of thin polystyrene sheets or whatever.
Prices are information in a system; suppressing price change deliberately throws that information away, leading to misallocation. We then try to patch that problem by instituting arbitrary quotas (e.g. 2 per person, which is many times what I need, but might be less than a family of seven might need, and simply leads to people leaving and coming back in and whatnot.)
The “physics” of the problem don’t change because of the circumstances any, even if we feel like they should. And you don’t make a successful system by giving purchasers incentives to act irrationally, and creators incentives to pass on creating, or by hoping that everyone will act in a supererogatory fashion. You make a successful system by designing the incentive structure to pull everyone toward doing what makes sense, and prices encode that.
Consider these cases.
1. Some topic starts to become very popular. I buy several internet domains relevant to that issue. I stock up on products that are related to that issue. I make videos about the issue. When the issue takes off, I make lots of money. Similar domains and products shoot up in price.
Nobody is harmed, I just anticipated and profited from a change in the market.
2. There’s a new, better, cheaper way to make paper that relies on bamboo. I buy up a lot of bamboo-producing land when it’s cheap. People can still make paper the old way, but if they want to make it the new way, I’ve positioned myself to profit.
Nobody is harmed, I just anticipated and profited from a change in the market.
3. I know there’s a hurricane about to hit New Orleans. I buy truck loads of bottled water at 20 cents a bottle and sell it to displaced people for $10 a bottle.
I think that’s different.
I think store-imposed limits beat flexible pricing every time. The flexible pricing keeps the last two cans of beans on the shelf. It doesn’t allow the guy who can only afford normal priced beans to have any. He’s no better off. Sure he’ll be better off if the factory ramps up the lines to produce more beans and the price drops back down to where he can buy them. Problem is, his kids need dinner tonight.
If the store insists you can’t buy more than X cans of beans, that leaves beans on the shelf and the guy with $2 left can still buy them.
You need a reasonably stable society for that to work, but I haven’t heard of deadly riots anywhere in the U.S. where that’s been imposed, even in our current state of panic.
In theory, I agree that flexible pricing is way better than price controls, and if those are our only choices, then I have to go with the flexible pricing. But they’re not.
DSM, I hope you are reading this with Rapt attention as a Blue Jay is sitting outside your window, calling from the branch of a Maple tree.
I agree that store-imposed limits are good method. Sure, it’s not perfect, but it has a lot of pluses:
1. It can be implemented and removed quickly on a per-product basis by the entity that well knows their supply-chain inventory issues.
2. It keeps pricing reasonable for the poor.
3. It discourages hoarding with the hope of reselling at exorbitant prices (since the reseller will be competing with those stores that are slowing sales, but keeping prices lower)
4. It discourages panic buying because buyers will have more confidence there will be inventory when they actually need it.
@DSM, I’d make a similar point as pentamom. It’s all good until you’re talking about people who “need” something essential but can’t afford it at an elevated price. There seems to be something morally wrong when it’s a crisis and the vendor knows the elevated pricing could disenfranchise the indigent (having no other means to get required supplies). Within this context, it can have harsh and cruel repercussions.
To me the key moral turning point is when a seller is artificially preventing inventory from being available for sale and using that as a means to artificially jack up the price. Enron used that trick when they crippled the California energy market 20 years ago. They bought a bunch of power and then paid other power plants to go offline so they could sell the power they had at 10x the normal pricing. That’s not supply and demand, that’s gaming the market by manipulating inventory.
To bring that to the here and now, there was an article recently about a handful of Amazon sellers of in-demand items who are just regular folks who went around and cleared out the inventory of every store they could find. To defend themselves they used the supply and demand argument, but what they’re either ignorant of or purposely avoiding discussing is that they are (at least a part of) the reason the supply is so low. It’s not supply and demand, it’s inventory manipulation.
I’m not sure how the government can well define the difference between supply and demand as compared to inventory manipulation and appropriately regulate that without unintended consequences. But even if it’s not easy to control, I think there’s a pretty clear moral difference.
Flexible pricing is the way to go, so everyone, including the indigent, has a chance. Otherwise, the only ones who end up with anything are the hoarders.
How I coped with shortages… I knew a store that no self-respecting white person would go to, and I went there. Store is across the street from section 8 housing and has a crime rate probably double the rest of our city—so, according to my wife, way safer than any city in Mexico. A store 2 miles north of this store was sold out of TP. Store 1 mile East and a miles south was also sold out. This store had all you could want. We went there last Thursday night thinking…better go before people get paid tomorrow or the welfare money comes in. Went back Saturday morning and they still had plenty.
My daughter tried to buy some TP today and the store she went to was out. Told her about this store and told her to keep it secret. She had no problem buying TP. But, told her to only go there during the day.
My wife also said the mercados she goes to had TP…but the prices are higher than Walmart or the local supermarket chain. The Mexicans go to Walmart too because they like to save money as well.
Funny… most white people are terrified of this corner and the majority of the people in any direction a half mile from the corner are white. On Saturday, the store had a truck picking up TP from this store to take it to other stores in the chain that were sold out. We paid like $4.79 for 12 rolls…so no gouging.
Walmart within walking distance of my house was sold out. Sam’s Club less than a mile away same.
The Walmart closest to my house, that I normally avoid because it’s not a well run store, is patronized significantly by minorities (quite likely the maority, but I’ve never spent time counting) and a lot of white people are scared to go there.
And it’s getting cleaned out of stuff, too. I don’t know what makes the difference between your area and mine.
@Scott, so what happens when flexible pricing has successfully kept essentials out of the hands of the hoarders but is too expensive for the indigent?
EXHIBIT A—He planned to sell 18,000 bottles of sanitizer (click link).
https://apc01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.cnn.com%2Fvideos%2Fus%2F2020%2F03%2F16%2Ftennessee-hand-sanitizer-price-gouging-mxp-vpx.hln&data=02%7C01%7C%7C736dac2532f74a0a392a08d7ca82325a%7C84df9e7fe9f640afb435aaaaaaaaaaaa%7C1%7C0%7C637200532844342842&sdata=5GIMl3XmMNYDYYWZSVDDlARfyoHsbg2CoOlgKnIEjok%3D&reserved=0
William, here are some thoughts:
1) In the fixed price model, desirable commodities are monopolized by hoarders , so that rich and poor alike are faced with empty store shelves.
2) Almost all ‘necessities’ (hand sanitizer, TP, bottled water, to name a few) are only ‘perceived’ necessities. E.g., Greg mentioned using old-fashioned soap and water.
3) Many items can be rationed so that they last much longer than normal.
3) For the few true necessities, a crisis is the time for those in need to seek charity. If no charity is available, then society has a bigger crisis than just shortages.
@Scott, thanks. First, I was only referencing “essentials” in my question to you. So, I agree, hand sanitizer et. al. wouldn’t fall into this category. Second, charity is a reasonable answer but is not always necessary or may not be reliable enough (for time-sensitive needs). Fixed pricing and flexible pricing both have their limits and could leave the indigent in a lurch (in this context). Albeit not a panacea, it seems a reasonable/practical solution would be to limit the amount per customer. In that way, there’s potential for enough supply to meet the need of “most”. As well, the indigent may still be able to afford it on their own without having to wait for or be dependent on charity. Also, it provides the merchant the opportunity to sell all or most of their supply at a profit.
That said, I still think there’s a moral issue with merchants deliberately raising prices for “essential” items making it impossible for those in greatest need to purchase them (in a crisis situation).
@sm — good story.