Professor says price gouging is simple supply and demand at work

Discussion
7-Eleven distributes free water; Consumer complaint - Sources: 7-Eleven; Twitter
Sep 11, 2017
Tom Ryan

By Saturday afternoon, Florida’s Attorney General Office had received more than 8,000 complaints of price gouging tied to Hurricane Irma. But are artificially inflated prices only following the basic laws of supply and demand?

Speaking to CNN on Saturday, Steve Horowitz, an economics professor at Ball State University, said raising prices on a temporary basis helps ensure existing supplies get used in “the most important ways.”

He added, “One of the advantages in letting prices rise is it forces people to make the tough decisions. If I‘m going to buy bottled water, I’m going to use it to drink or to help my elderly parents. I’m not going to use it to bathe my dog.”

Michael Smerconish, the CNN host, pointed to shopping carts full of bottled water seen earlier last week as an example of irrational purchasing.

Secondly, the higher prices provide an incentive for those outside the state to expend the time and money to restock those resources, as shown in past similar disaster situations. The professor added, “Without that price going up, that process does not work nearly as well.”

News reports, spurred on by photos on social media, have been filled with incidents of gouging in Florida as well as in Texas caused by Hurricane Harvey, including $99.99 for case of bottle water sold by a third-party on Amazon.com. Many 7-Eleven stores were called out for selling cases for a more-reasonable $24. Gas, hotel rooms and airline prices were also under scrutiny.

Mr. Smerconish suggested that the poor were perhaps “screwed” regardless because they either faced shortages or couldn’t afford the higher prices.

Prof. Horowitz said the choice isn’t between “cheap plentiful gas and expensive plentiful gas” but “expensive gas that’s actually in the pump and cheap gas that’s gone.”

He also said raising prices won’t help everybody. Said the professor, “We’re in an emergency. Supplies are short. There’s no perfect solution. Markets that let prices rise aren’t perfect. There are people that will suffer from it.”

DISCUSSION QUESTIONS: Should prices be allowed to go up to better balance supply and demand in emergency situations as seen in Florida and Texas? Are price controls necessary to prevent excessive gouging or is that counterproductive? Should retailers rethink pricing for future crisis situations?

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"You know what tops economic supply and demand arguments? Humanity! "
"What we don’t want is to create an economy where only the rich can survive."
"Being free means being free to be stupid, frivolous or greedy. But there is always a price to be paid."

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24 Comments on "Professor says price gouging is simple supply and demand at work"

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Ben Ball
BrainTrust

Whether pricing is gouging or balancing supply and demand is all about perception. Is the pricing action balancing the value of good caviar with supply this year? Or is the pricing extracting exorbitant temporary premiums from ordinary people for a commodity they need? The difference between gouging and balancing is glaringly obvious to all. Arguments to the contrary may gain a passing grade from your economics professor — but they will fail miserably with John Q. Public.

Max Goldberg
BrainTrust

There is no justifying price gouging during an emergency. Period.

Charles Dimov
BrainTrust

All the above is sound reasoning, and the clear economics of a free economy. You could argue that during times of crisis, temporary measures are often needed. However, price controls feel wrong for a free society. After all, the goods or inventory are owned by the retailer. Government agencies should be at the scene providing emergency goods, that are essential (water, food, medicine, shelter, transportation out, etc.).

That said, then retailers should be allowed to do as they feel fit (including raising the price of bottled water to $24 per case). In the end, the price gougers will negatively impact their brand — which will have a long-term impact on their business.

For the large brands, they will do the right thing for the survivors and stricken consumers … otherwise they will have a backlash. That will do a better job of correcting the problem than a price control that people will look to circumvent.

Ben Ball
BrainTrust

I concur that price controls just feel wrong in a free society. Being free means being free to be stupid, frivolous or greedy. But there is always a price to be paid. American Airlines (and perhaps others — I happened to be on AA this weekend) notified travelers that they could change their travel plans at no charge due to the storm. And fellow travelers in O’Hare told of AA selling them tickets from Miami to O’Hare for $99 on the day of the flight. In contrast, some retailers suddenly wanted $25 for a case of water. Guess which will be remembered and rewarded (or punished) in the coming months by affected consumers? Letting the free economy work makes sense — particularly in the long term — even though it can be very painful in the present.

Anne Howe
BrainTrust

Prices edging up as a result of supply and demand is a different scenario than gouging in a disaster situation. Brands and retailers that engage in gouging leave shoppers with distaste and distrust. Those things will deteriorate a franchise over time. On the other side if that coin, locking in on a reasonable price (like JetBlue did) for needed services will do way more to build loyal customers!

Dr. Stephen Needel
BrainTrust

While I’m a big fan of capitalism, warts and all, there are times when we, as a society, just need to say no. This is one of those times. Georgia, for all its backwardness, has anti-gouging laws that kick in once the Governor declares a state of emergency — roughly a 10 percent cap on price increases. Neither Publix, Kroger, nor Walmart, which ran out of bottled water on Friday in our area, raised their prices — when they easily could have. Publix had signs apologizing for the out-of-stock and promised more the next morning. They took the good corporate citizen approach.

Neil Saunders
BrainTrust

In an economic sense, Professor Horowitz is technically correct. However, there is also the question of morality: here, companies and individuals must decide where they stand and face the consequences of public reaction.

As to price controls: absolutely not. They’re anti-freedom, they don’t work and they are totally unenforceable in an emergency situation.

Peter Fader
BrainTrust
Idiot economist. The net present value of a customer (or a customer base) is never maximized by price gouging — the key is to build a profitable relationship that will growing and manifest over time. So when times are tough, you should allocate scarce resources carefully, but not by seeking out the highest bidder. Yes, you should give preferential treatment to some customers over others, but it should be based on *projected lifetime value,* not just the wad of cash they’re showing you today. Customer-centric thinking is the right mindset for retailers to understand how and why they should avoid for the temptation to gouge customers, and it’s the same mindset that they should use to avoid getting all caught up in Black Friday nonsense that is just starting up for the upcoming holiday season. At first glance, it might seem that these two business settings are unrelated, but think about it — they’re very similar and very dysfunctional. I like to envision an ideal world where retailers “get it,” and so they wouldn’t even be tempted — and thus regulators wouldn’t even have to think about impacting market mechanisms when supplies are tight. But as long as economists are… Read more »
Ian Percy
BrainTrust

Your first sentence says it all, Peter.

Kevin Graff
BrainTrust

You know what tops economic supply and demand arguments? Humanity! Let Karma deal with the price gougers accordingly. Look after people in times of need. The good news is that for every story about greed, there are hundreds of stories about good people doing good deeds to help others in crisis. Those are the stories that should get more press coverage.

Cathy Hotka
BrainTrust

It’s nothing short of reprehensible to mark up basic commodities during an obvious emergency. Price controls probably aren’t necessary when the public’s deep sense of shame and blame will shine a spotlight on the acts of a despicable few.

Art Suriano
BrainTrust
There are some things we can control and some things we can’t. Yes, it’s supply and demand but also greed; a chance to make a “killing.” I don’t see price controls being effective any more than our “Do Not Call” lists because the scammers and the greedy always find ways to succeed. If the individual can live with themselves taking advantage of someone else’s misfortune, so be it. It happens every time we have a tragedy. It’s sad and it’s wrong but, unfortunately, it is what it is. The problem with a hurricane is that we don’t know how bad it will be until shortly before it hits landfall. It would be smart for retailers to stock up on extra items and have promotions but that’s just not realistic because we have had many false alarms. We knew a week ago that Irma might hit Florida, but it wasn’t until two days before it got there that the public paid close attention. Hopefully the solution going forward is not price gouging but a better understanding of these storms, how to prepare for them and a more accurate projection of time so that people can get out safely with an opportunity… Read more »
Ron Margulis
BrainTrust

To preface my comment, I don’t get to use my graduate education all that often so please bear with me. I have a graduate degree in economics from NYU, one of the bastions of the Austrian School, which Professor Horowitz clearly supports. The Austrian School, as I recall from my advisor who wasn’t a member, doesn’t like using math to measure or validate its central theses because it would poke huge holes in them. More germane to this topic, the Austrian School is libertarian at its roots and wants the market to determine practically everything in society. By extension, as Professor Horowitz suggests, pricing in a crisis should be left to supply and demand. This is callous at best and dangerous at worst. Like other critics of the Austrian School, I believe its ideals are outdated and don’t consider a wide range of variables facing 21st century economics, including the impact of advances in technology and climate change. I guess the real question is what kind of society do we want — one that helps the neediest in times of peril, or one that charges them 20 times the cost for water?

Ian Percy
BrainTrust
I heard this guy on Sunday. The title today refers to “simple supply and demand at work.” To a simple-minded observer like him perhaps it is simple. I have a feeling he came up with this notion far away from this horrendous situation and thought it would be a good way for some notoriety. Sometimes this academic “logic” seems so utterly shallow. What he’s missing is that those opportunists who would come in to “help” others in dire states solely for the money are seriously impoverished spiritually and morally. Instead he makes them entrepreneurial heroes. On the anniversary of 9/11 I wonder how we would have all faired with this mindset of “simple supply and demand.” A first-responder demanding triple pay before going into the building. A nearby restaurant doubling the price of a sandwich instead of feeding responders for free. Withholding a bottle of water to wash off the ash-covered face of a survivor until they paid for it. Instead, then and now, we saw human nature at its true and majestic “simplicity,” doing what is right, the greater good, sacrificing all you have for your neighbor. What will always amaze us all is just how far some will… Read more »
Robert DiPietro
BrainTrust

Price adjustment in an emergency doesn’t work! That is not supply and demand — it is a crisis.

Maybe the guy at the red light selling water can bump his price from $1 to $20 but not a corporation which is also likely donating to the cause.

Steve Montgomery
BrainTrust

I am definitely in support of a free market. However raising prices to the level reported on a temporary basis as some have been accused of before, during and in the aftermath of Harvey is not insuring supplies get used in “the most important ways.” It is taking advantage of people’s desperation.

Not the same thing but, I worked for Amoco Oil in Florida during the 1990-91 Gulf War. People lined up at our locations filling up their cars almost immediately after the war broke out. My boss who ran the eastern half of the U.S. immediately issued a rule that said no one was to raise the price of fuel. He said we do not take advantage of our customers. This is a rule everyone should remember.

Meaghan Brophy
BrainTrust

There is a difference between supply and demand and price gouging that takes advantage of a crisis situation. I don’t understand the mentality behind raising prices in a time of crisis. For local store owners, they are directly hurting their friends and neighbors. For major corporations, it’s a huge PR nightmare, to say the least. I would think any temporary financial gain from jacking up prices would be outweighed by the damage that will be done to your reputation.
Just take a look at what happened with the airline flights. Delta and American were selling flights out of Florida that normally cost less than $200 for thousands of dollars. JetBlue announced they were capping prices at $99, and other airlines were forced to follow suit. All it takes is one or two companies doing the right thing and the majority will follow.

Jasmine Glasheen
Staff

I am so relieved to hear the BrainTrust saying a collective “no” to price gouging in life or death situations such as the recent hurricanes.

Capitalism should never come at the cost of one’s humanity, and the lives of the poor are no less valuable than the lives of the wealthy.

What we don’t want is to create an economy where only the rich can survive.

J. Peter Deeb
BrainTrust

The real issue is the supply chain mechanics. If the manufacturer of the product (i.e. bottled water) does not change the price (due to short supply) and the wholesaler or retail warehouse does not change the price then the retail price should not be changed at the shelf. It’s a bogus argument to say that how the product is used (for instance, to bathe the dog) should determine the price. Water, gas and other basics should be available at reasonable prices for a disaster scenario. Some of these prices were on par with the criminals who were looting immediately after the storm passed!

Ralph Jacobson
BrainTrust

The human side of this question may or may not be taken into account by the merchant. There is no law that demands this. So whether we’re talking about the latest, in-demand mobile device or drinking water in a hurricane-ravaged area, the merchant has the right to select their pricing. However it certainly may sting long-term loyalty when the customer remembers who took care of the neighborhood after the mess is cleaned up.

Bob Phibbs
BrainTrust

At the risk of being the only naysayer here , say you leave the water at $10 a case. And someone comes in and buys all 20 cases of yours. You’re out. Now what can you do for your neighbors? I don’t pretend to know what anyone in a hurricane disaster faces but I do understand things are rarely as black-and-white as they appear to those of us on the outside looking in.

Shep Hyken
BrainTrust

While there isn’t a law against it, I think that capitalizing on the pain of others during a catastrophic event (like hurricanes, earthquakes, etc.) is wrong. Raising prices simply because people are in trouble and will pay “almost anything” to get what they need (such as batteries, gas, generators, etc.) is a short term gain that leaves a sour taste in the customer’s mouth.

I always marvel at certain companies for stepping up and helping communities in tough times. Congratulations to the companies that step up and do the right thing.

Christopher P. Ramey
BrainTrust

Life and death trumps supply and demand.

Manish Chowdhary
BrainTrust

The economic arguments outlined are sound. Supply and demand will, as stated above, encourage suppliers outside the affected area to move more product into the affected area.

I recall a blackout in Manhattan. Cash machines weren’t working. Credit cards couldn’t be processed. A bodega let me stock up on water and canned goods on store credit. He didn’t double his price. Instead, he gained a customer for life.

The retailers with the long term view will think about how they can help their customers, neighbors and community make it through the tragedy. They’ll prevent people from hoarding goods by rationing. While that’s not a free market approach, it’s a humane one.

People remember who helped them and who did not. They remember which stores doubled the price of air conditioners in a heatwave, or doubled the price of snow shovels after a storm. And they will remember the stores who seemed to genuinely care about helping everyone weather the storm.

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Braintrust
"You know what tops economic supply and demand arguments? Humanity! "
"What we don’t want is to create an economy where only the rich can survive."
"Being free means being free to be stupid, frivolous or greedy. But there is always a price to be paid."

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