10/31/2012

$4 for a Can of Coke? Price Gouging Hits New Level


With the aftermath of Hurricane Sandy looming over the people in the hardest hit areas of the United States many people are finding price gouging is taking place.  With supply now less than demand in these areas store owners are raising their prices in order to maximize profits on the items they have available to sell to consumers.  Even though this is illegal in New York and New Jersey there are still examples of people charging as much as $4 for a can of Coke.

Are these store owners really doing an in justice to the people in their areas, this article argues the opposite.  If we did it the United States Government’s way there would be a run on the stores and the first people there would get to buy everything and then they would have to opportunity to horde or sell the extra goods at huge markups to individuals who still need them.  The way the store owners are doing it lowers the demand for goods, so people only buy the items they need to stay alive, allowing the stores to keep providing items of necessity to the masses.

When the Government sticks it nose into economics, shortages are created, people can starve or die of thirst because demand is greater than supply.  These regulations create riots and other unwholesome activities in order for people to survive.  But when the stores are allowed to apply basic economic principles to their stores everyone wins.  The stores make more money, the masses get the food and beverages they need, everyone may not be happy, but everyone is alive.  Why is it wrong for store owners to profit from managing their prices so that they can stay open and continue to provide essential goods to the people?
http://finance.yahoo.com/news/4-coke-price-gouging-hits-153919655.html

9 comments:

Zach said...
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Zach said...

Price is determined by whatever a consumer is willing to pay for a good. If someone is willing to pay $4 for a Coke then that is what it is worth. Some might argue that $230 for a share of Amazon stock is outrageously overpriced and that they are gouging the market. After a lack luster earnings announcement Amazon's P/E ratio has skyrocketed to over 3,000!!!! The average P/E ratio for the market is 12! This is equivalent to a can of Coke costing $250 (assuming a normal price of $1)!!! But, there are people willing to pay the high prices

Moh A said...
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Moh A said...

To answer your question, there is nothing wrong with this at all.

Pesky government regulations are always in the way of store owners trying to make a buck. It is well known that there is no room for human decency or ethical responsibilities to disaster victims in the towers of capitalist efficiency. If I can charge exorbitant prices for food, drinks, and medicine than hooray laws of supply and demand. Never mind that price gouging doesn't solve the problems of shortage, as demand for food and water are inelastic and people will have to buy them no matter what they are charged. Never mind that there are anti-hoarding laws to prevent the type of scenario the yahoo article's author suggest will happen with anti-gouging laws. Never mind that in disasters, especially in the short term, many of the assumptions of basic supply and demand do not hold.

Evidently common sense and morals are also in short supply, but with all the money going into buying $4 cokes, who can afford them?

Dave Tufte said...

Owen: 82/100, for mistaking one word for two, a sentence with two instances of poor punctuation, and an incorrect word substitution.

Zach: 47/50 for mistaking one word for two as well.

Moh A: 41/50 for making an incorrect word substitution, for a capitalization error, and for a singular/plural disagreement.

I tend to agree with Owen's point. It's hard to swallow, but our tendency to judge harshly those who change their prices in response to events in inexplicable. There are plenty of places where people happily pay $4 for a Coke when they don't really need one; so why complain about paying $4 when you do need one?

Zach: you'd better watch your back ;-) Comparing Apple to price gougers will upset a lot of people.

I can't tell if Moh A is being satirical or not. I'm going to take it as not satirical. Moh is right that price gouging doesn't solve the problem. But no one claimed that it did. Instead, the signal of high (gouged) prices is what solves the problem by encouraging a supply shift. I also don't think that anti-hoarding laws, written in response to the failure of anti-gouging laws, are likely to be effective, so why bring them up? And actually, there's a ton of evidence that supply and demand actually works best as a summary model of behavior "when the pressure is on", as in a disaster.

As to the moral issue, I think the moralists are forgetting that there is more to the cost of a product than it's price. There is also the time spent waiting, and the substitution for other goods. Why is it more moral to sell all your products quickly at the old (and now too low) price to people who happen to show up first, than to sell them at the new and higher price to people who are willing to make that tradeoff? Unfortunately, I think the moralists stop thinking before they get to analyzing this tradeoff.

Moh A said...

Professor Tufte:

Actually I was being sarcastic. I understand the argument against anti-gouging laws. The law acts as price ceiling which increases quantity demanded while suppressing quantity demanded. The higher price acts as a signal for to producers increase supply.

However I find economic argument unconvincing, not to mention morally reprehensible.

As we have learned in this and other economics classes, demand is the willingness and ability to pay for goods. In disasters such as hurricane Sandy, power is one of the first infrastructures to go, and when power goes so does electronic payment, ATMs, banks. Without electricity, the higher price does not restrict demand to those who value them most as the anti-gouging arguments suggest, rather it will benefit those who happen to have a lot of hard currency on hand. Raising the prices just replaces the arbitrary first-come-first-serve rule with whoever happens to hold cash.

In the short run, and without power, it's not reasonable to expect higher prices can transmit to unaffected areas in time for other suppliers outside to organize and ship the goods to those in need. More importantly in large disasters where the roads are blocked, and emergency personnel are trying to reach those in need, it's not likely entrepreneurs with an eye for profit can reach affected areas even if they want to. The difficulty of getting more supply is not a failure of price to signal profit but difficulties that arises from navigating roads, and other physical encumbrances.

Essential goods shouldn't be sold on first come first serve basis, but given to those who happen to have hard currency is just as arbitrary. It's far more fair to divide food, medicine, and supplies on a per capita basis. Sometimes economists focus too much on the laws of supply and demand and forget the economically optimum situation is not always one that is socially optimum. :)

Moh A said...

correction: suppressing quantity supplied

Dillin said...

I think I am a pretty nice guy. I still don’t think there should be laws against price “gouging.” Let’s say that I live in a state that was just outside the storm’s wrath. I could stay where I am now and sell my coke for $1 a can, or I could pack up my truck and head into the areas that need my coke more and charge $4 a can. The problem with the “no gouging” law is that the incentive to sell my products in the devastated area is weakened. I would have increased costs if I traveled to sell my products.

This is unfortunate for the people that really want/need a coke. This issue seems like a supply issue. I can’t see the demand for coke increasing so dramatically. I can see the supply chain disrupted though. If shop owners were just being rude and raising their prices even with a full supply, other shops would price their coke at more market reasonable prices. If there was a real supply problem, the “no gouging” law is creating a shortage. The law creates a price ceiling that keeps new suppliers out of the market.

The images I’m seeing out of the North East are classic “shortage” images. I admit, I sound heartless, but in the end, shortages end up hurting a lot more people.

Dave Tufte said...

Moh A: 47/50, I accepted your correction, but you still have weak grammar in the second paragraph.
Dillin: 50/50

Dillin's comment is fine, but let me spend some time on Moh A's comment. I did get the satire the first time around, but I also go the economic arguments ... I just wasn't clear which one I was supposed to focus on ;)

I think your position about cash is well-taken. We've done a disservice to our own society by encouraging people not to use and/or accept personal checks. In our quest to reduce the risk in our lives from bad checks, we've voluntarily removed ourselves from a society in which people can create (inside) money as needed, and as can be supported by the level of currency available. The phenomenon of people only accepting cash in disaster areas is feature of the last generation or so ... and it's not an improvement to society.

As to the moral reprehensibility, we need to first divide between currently available goods, and those that will be available in the future.

For either, transactions can occur with one of four mechanisms: lottery, command and control (which includes making some sort of judgement call about who is most deserving, and then acting on that), first come first serve, and the price mechanism. Claiming that the price mechanism is morally inferior is a claim that one of the other three methods is morally superior. Yet, the only one of the four that can make any claim to systematically improving social justice in a Rawlsian sense is command and control; and yet this is precisely the one that tends to get abused the most in practice. Your suggestion to divide things on a per capita basis is another form of command and control, and is likely to guarantee very small Rawlsian improvements, and further, has Rawlsian improvements that are easy to further improve with other command and control methods.

More practically, there is a rather explicit morality test whose existence if often denied by those who oppose using the price mechanism. Consider distributing goods via lottery, via command and control (say, by the per capita division you recommend), or by first come first serve. What exactly does it mean if the recipients of goods redistribute them using one of the other methods?

For example, suppose you distribute goods by per capita division. Call that Round 1. And some of those recipients end up with excess goods that they choose to redistribute. Call this Round 2. If they do this on, say, a first come first served basis, then the moral question to ask is how society was improved by doing per capita division in Round 1 and first come first serve in Round 2, when you could have just done first come first served in Round 1? The answer is that it usually isn't morally improving.

The reason I bring this up, is that in almost all situation where a lottery, command and control, or first come first served is used in Round 1, the response of people with excess is to shift to a price mechanism in Round 2. This suggests that the moral case against the price mechanism is a lot weaker than most people are willing to admit.

Then there is the second part: consideration of how we get goods to people in the future. The only one of the four mechanisms that can make this happen is using the price mechanism in Round 1. This signals that reward will go to the people who make the initial effort.

Your concern about transportation difficulties is well-taken. But here, we have the example of places like Wal-Mart and Home Depot, which are very good at getting merchandise where it will be needed before the transportation system clogs up, and who then don't increase their prices much. These firms are taking the bigger strategic view, and playing this as if it were an infinite rather than a one-shot game. They view maintaining prices as enhancing brand loyalty ... a valuable demand shifter in its own right. I think it is an open question whether this is a good practice or not. If it were, it would probably be more common.