Price Gouging and other such issues

[marcusmarcusrc]

I have a number of economic/policy/market imperfection posts that I've been tempted to post about for a while. In the wake of Sandy, a friend's post about hour-long lines at a gas station in NJ, and a Slate article that was surprisingly close to my own view on it, I'm going to address Price Gouging. Hopefully more to follow.

So, the question is, to what extent should there be government and/or societal pressure against so-called price gouging? My current stance is that we should allow much more than we do, but perhaps not an infinite amount. I can think of a couple of reasons to allow price gouging, the end effect hopefully being to increase the number of people who can acquire emergency goods as well as reducing crazy lines (maybe).

1) "Gouging" can prevent or reduce hoarding. People would be less likely to fill their gas tank up to the top if gas is $10 a gallon during an emergency, and will take just what they need to make it for a couple of days.

2) To increase supply: This can work at various stages: a) before an emergency is even projected, by leading to companies always keeping more potential emergency stock on hand just in case they can make a profit on it. b) in the lead up to an emergency, because it is worth it to ship in more supplies just before the storm. c) even during the emergency, by increasing incentives to ship more stuff in even while the emergency is on-going. Also, as pointed out in the Slate article, something I hadn't thought of before is that this also can increase the incentives to pay employees extra during the emergency so that they are more likely to go to work in order to sell the goods in question.

Potential Drawbacks:
I can imagine extreme cases where gouging crosses a morality line. E.g., if Person A is drowning, Person B should not be asking how much will Person A pay to get the nearby lifesaver thrown to them.

There is a subtle difference between morally appropriate price elevation and morally inappropriate market manipulation (see, e.g., Enron and California). I could imagine situations in which sellers might create an artificial appearance of scarcity to encourage people to pay inflated prices. Collusion could be a problem.

This could potentially lead to companies who profit from emergencies discouraging NGO and government aid, which would cut into their profits. E.g., reductions in FEMA funding.


Potential Alternatives:
Unlimited gouging! Let the wild market rumpus begin!

Putting a cap on price gouging that is much higher than present, but not infinite: e.g., maybe allowing a doubling of price? (NJ apparently has a 10 percent cap currently)

Having quotas during emergencies, rather than price increases. This addresses hoarding, but does not lead to increased supply incentives.

Any others?

For further reading, I thought that this Slate article was pretty decent.

Comments

[desireearmfeldt]

A thing you don't seem to have addressed yet: Free market solutions benefit the buyers who have lots of money, at the expense of those who don't. If gas is $10 a gallon, rich people can still afford it and poor people can't. (Not that this isn't also true in business-as-usual, non-price-gouging/non-emergency capitalism. But the effect is exaggerated.)

[dcltdw]

Not surprisingly, others are commenting on this.

http://blogs.reuters.com/felix-salmon/2012/11/01/should-gas-prices-be-soaring/

[nuclearpolymer.livejournal.com]

I got the impression that in countries where charging interest is considered immoral, they have somewhat suffered from the consequences of people not being able to borrow money.

I'd go with the principle that one should have the rules that seem to produce the desired effects, and so some kinds of price gouging are okay and others are not. I don't think it's okay to charge prisoners so much for their phone calls that the service providers are making a huge profit, because it seems to work against the idea of keeping people in touch with their families so they can re-integrate to society. But it's fine to charge millions for some artwork, because there's plenty of free or low priced art that people can look at.

I would think that stores already have some financial incentive to stock up, since they make a profit even when things are selling at the regular price, and they know certain items are going to be big sellers in some situations. I guess the question is how much more would they need to charge during emergencies in order to actually improve the supply due to a change in how much they preorder or try harder to make available. It may be the case that it wouldn't work at all for some items - gas stations can't really stock up ahead of time, and they are probably already trying as hard as they feasibly can to get resupplied. My impression is that many retail businesses rely on just-in-time stocking in order to be profitable, so it would be hard to get them into the idea of stocking up just in case, especially for things that expire or are bulky to store. In terms of discouraging hoarding, it seems like it would just be more direct to impose quotas or rationing, since many stores already do this for special sales, and so have a process in place for doing it.

[katestine.livejournal.com]

I know you'll be unsurprised to hear I'm pro-unlimited gouging, assuming there are enough competitors in the market. If there are many gas stations and one does something particularly egregious, people will shame them (using the Internet!) and remember and punish them after the event. Most gas stations are repeat businesses, so game theory suggests they should behave ethically.

I'd also be fine with quotas, as long as they were set sufficiently high, like enough for a sedan to fill completely. It's the sort of thing that makes people think the government is helping, that things are more fair, without majorly distorting the market and/or leading to scarcity.