OnPoint by Keith Ng

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OnPoint: On Price Gouging

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  • Scott A,

    Thanks Keith. Ever since I started to hear stories of service station owners and supermarkets deciding to self-ration how much petrol / bread / water they sold to customers rather than price gouge I thought it was an interesting reflection on classical free-market economics. Perhaps it is the simplest and most direct example of how such theories are nice and simple, but just doesn't do anything to explain or predict how people actually behave in socio-economic communities.

    And, as you explain so well, in such a potentially free-wheeling market as a city after a disaster, it was the choice of people to ratio and control the market that provided the efficient provision of needed goods.

    The wilds of Kingston, We… • Since May 2009 • 118 posts Report Reply

  • George Darroch,

    I think you make very clear points.

    To use the language of economists, you increase the cost of cooperation, and you destroy social capital. Decreasing the cooperative state of a body is harmful under normal circumstances, as fascinating new research shows. Isolating antagonistic actors is highly important for maintaining the unity of a group.

    under stress, social networks either end up all agreeing or splitting into two opposing factions. Either condition is referred to as "structural balance."

    In this situation, the costs are much higher. Anti-social actions are both unpriced externalities, so it is right that social opprobrium is used to increase their cost to actors. Where the state has been able to price anti-social behaviour, by imposing costs, it has, in quite dramatic ways. This is why looters are being given much harsher treatment by the courts than would ordinary thieves taking the same would.

    Classical economics is weak, often perverse. The poor person starving and the rich person hungry both have similar needs, but one is priced out of the market immediately. This is why prices are poor expressions of preferences - rather than perfect ones as stupid economists like Mr Crampton assume - in anything other than an egalitarian society.

    The People's Republic of … • Since Nov 2006 • 2078 posts Report Reply

  • Lew Stoddart,

    Damned right.

    One thing to add: Eric, in the aftermath of the last quake argued for price gouging on goods other than petrol; specifically, water. He blogged on the topic and published effectively the same argument as an op-ed in one of the daily papers (I forget which); and then we rehashed it in discussion at my blog after the Queensland floods, after I wrote about how local political leaders had explicitly placed the sort of social cohesion you write about ahead of notional ‘efficiency’. So he’s on the hook for both your objections, not just the first.

    L

    Wellington, NZ • Since Aug 2010 • 105 posts Report Reply

  • Emma Hart,

    But the price of this is that people will despise their corner dairies and resent their rich neighbours, who will in turn be suspicious of them.

    This. We love our corner dairy for their behaviour in both earthquakes. We will preferentially use them for little things, rather than going down the road to larger shops which are slightly cheaper anyway. So in the long term, by not price-gouging, they have benefitted economically. It's called good will, and I seem to remember putting it on double-entry accounts at high school.

    Christchurch • Since Nov 2006 • 4286 posts Report Reply

  • Isaac Freeman,

    I'm not certain how fair the reports of "panic buying" of petrol are. The service stations have certainly had huge demand with queues running down the roads, but people are also genuinely driving out of town. As I understand it, about 10% of the population of Christchurch is currently elsewhere, and while many have flown out, many will also have driven. It seems possible that people are genuinely buying the petrol they need to do what they intend to do, which is to all drive a long way at the same time.

    Christchurch • Since Feb 2007 • 127 posts Report Reply

  • Emma Hart, in reply to Isaac Freeman,

    It's been weird. When we drove to Ilam on... Thursday, I think, some service stations had huge queues out the forecourts. Ones just down the road were just doing normal business. I wonder if people go past a busy one and think, "Shit, people are panic-buying, better make sure I get some too."

    Christchurch • Since Nov 2006 • 4286 posts Report Reply

  • Lew Stoddart, in reply to Emma Hart,

    So in the long term, by not price-gouging, they have benefitted economically.

    This is one of Eric's points: society punishes vendors much more harshly for gouging in order to maintain supply than for running out. I see this as a beneficial reflection of social cohesion; pro-gougers sees this as inefficient.

    One suggestion that Eric made to overcome this in the case in point was for vendors to donate the excess charge to the Red Cross, so no argument of profiteering could be made against the vendors. In this way it would be more like an involuntary surcharge, and the situation would (in principle) be the best of both worlds: price signals, no profiteering, and the bonus of a windfall for disaster provision.

    The trouble, however, is that those who can't afford to buy at the inflated price still get left out. And there's no practical way of verifying that the price excess has been transmitted up the chain. And then there's the general confusion and increase of irrationality and panic caused by a sharp jump in pricing. I mean, look at the conniptions a 15% holiday surcharge gives people...

    L

    Wellington, NZ • Since Aug 2010 • 105 posts Report Reply

  • Idiot Savant,

    But the price of this is that people will despise their corner dairies and resent their rich neighbours, who will in turn be suspicious of them.

    And in extremis form lynchmobs, the prevention of which is basically the State's reason for existence.

    Price gouging takes us back to the State of Nature. And we really, really do not want to go there, ever.

    Palmerston North • Since Nov 2006 • 1592 posts Report Reply

  • Christopher Dempsey,

    I'm left wondering how Mr Crampton responded to the 6.3 aftershock/quake with a force of 1.9g's. Did he abandon his homo econmis in favour of drawing on, and contributing to social capital, or was he resolute in applying "rational" economics to the situations he found himself in?

    Parnell / Tamaki-Auckland… • Since Sep 2008 • 635 posts Report Reply

  • Keith Ng, in reply to Lew Stoddart,

    Thanks Lew! Just read your piece - we made many of the same points. I particularly like your description of why price rationing is divisive:

    it draws a distinction between those below and above the newly-established price margin which dispels the illusion of shared experience

    I think the argument with water is the same as with petrol - both are cases of hoarding. However, the social cohesion argument applies to any good, including petrol and water.

    The trouble, however, is that those who can't afford to buy at the inflated price still get left out.

    Exactly. And while there might be less ill will towards the shop, the problem of inequality between neighbours remains.

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • Keith Ng,

    Price gouging takes us back to the State of Nature. And we really, really do not want to go there, ever.

    Oi! Shuddup! *I'm* the Hobbesian around here.

    But seriously though, I've always thought a lot of the civil society stuff was fluff compared with black and white lines of coercive force and law. This has made me rethink that.

    We're not talking about inequality shifting people from business-as-usual to lawlessness, but about it stopping people from going to an extraordinary degree of civic-mindedness.

    None of the Hobbesian life and death stuff comes into play, nor is this about the relationship between individuals and the state. It's made me realise that there could be many more shades of nasty and brutish even in a stable society, and it's made me glad that we're not there!

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • Neil Morrison,

    ...they did a much better job of efficiently allocating resources (that's Economistspeak for “helping people and getting shit done”) than the market ever could.

    How is people freely choosing to allocate resources according to exchange criteria of their own choosing not a free market?

    Since Nov 2006 • 932 posts Report Reply

  • Keith Ng, in reply to Neil Morrison,

    How is people freely choosing to allocate resources according to exchange criteria of their own choosing not a free market?

    I was specifically using the word market to mean resource allocation based on price signals.

    Can't have a market without trade. It's not trading if you don't ask for anything in return. Hence, no price = not market.

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • Emily Perkins,

    Thanks, Keith. This makes me think of some of Rebecca Solnit's writing about the extraordinary behaviour of communities in disaster. Reading her essays about say Katrina or Haiti also makes it clear how much the response and recovery depend on what a place is like *before* disaster strikes.

    http://www.yesmagazine.org/issues/a-resilient-community/in-new-orleans-kindness-trumped-chaos

    Auckland • Since Feb 2011 • 5 posts Report Reply

  • Matthew Poole, in reply to Idiot Savant,

    And in extremis form lynchmobs

    Totally. A strong economic argument for not gouging is, “If I price in all the demand signals (gouge, in the layman’s English), it’s entirely possible that those who are now priced out of the market, or who feel that their own needs are not served by my pricing-out of those at the bottom of the market, will respond by advising me of their displeasure (fucking me and my shit up, in the layman’s English) rather than seeking an alternative supplier.”

    Also, as others have said and ignoring basic human psychological motivators around altruism, observed economic practice says that the short-term gain to be had from gouging (because, let’s face it, the decision to gouge is not about economic factors relating to rationing supply and countering demand, it’s all about making money) will be thoroughly negated by the long-term impact on the business once things return to normal. The market has a memory of players’ behaviour, and if the only way to counter the memory is to discount heavily, whatever extra profit was made during the hey day of the crisis will be lost to reduced profits over a much longer period in the future. Potentially the business will be destroyed as a result of the market response to pricing decisions.

    The pit from whence crawl… • Since Mar 2007 • 3733 posts Report Reply

  • Rich of Observationz,

    There are a bunch of businesses that have a model which enshrines "price gouging" though - TradeMe sellers, airlines, even the NZRFU all run systems that are designed to increase the price as demand increases (or to give a good deal when there's low demand, but isn't that just another side of the same coin).

    What about them?

    Back in Wellington • Since Nov 2006 • 4218 posts Report Reply

  • Bart Janssen,

    So to summarise economists are, and have always been, full of shit.

    What is more obscene though is that most (all?) economists we hear from have vested interests in the policies they propose. I'd have much more trust in an unemployed economist on the DPB talking about the value of price gouging than one who owns shares in BP and Progressive enterprises.

    Auckland • Since Nov 2006 • 3114 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    They're not selling goods/services under crisis conditions, though. A key requirement for a functional market is rational behaviour by all players, and the aftermath of a lethal earthquake destroys that premise. Noone suggests that not getting a ticket to the RWC final, or a particular flight, or winning that auction will be the literal difference between life or death - unless you're an emo who just missed out on the last seat and ticket to the last concert of your favourite band, I guess. That's not true in Christchurch.

    Context is key. In an ordinary market, you have the choice to walk away and not risk death. That's not true in Christchurch - psychologically, at least, if not literally - which is where gouging happens. If you can only take the price offered, with no alternative except death or serious harm, you cannot make a rational decision. Same reason that free-market healthcare is such an abominable concept.

    The pit from whence crawl… • Since Mar 2007 • 3733 posts Report Reply

  • Tom Ackroyd, in reply to Matthew Poole,

    Isn't "economic factors relating to rationing supply and countering demand" the same as "all about making money"?

    Wellington • Since Nov 2006 • 152 posts Report Reply

  • Bart Janssen, in reply to Matthew Poole,

    rational behaviour by all players

    I've always found it better to translate this as

    "we expect people to be selfish untrustworthy bastards, like us"

    I find it quite amusing when real people fool economists by being generous altruistic and ... nice

    Auckland • Since Nov 2006 • 3114 posts Report Reply

  • George Darroch,

    What about them?

    Demand is elastic. Under normal circumstances, these people are okay. If someone wants to watch the rugby, they can pay for it, because they have other options for entertainment, like watching it on television, seeing a lower division match, or spending their entertainment dollars elsewhere.

    Food demand is pretty inelastic. You can normally subsitute for cheaper food down the chain, but when a crisis hits and all food is valuable, substituting from food to not-food is simply not possible. This is why gouging is egregious in this situation. Similarly for transport - with limited transport options, gouging on an essential service is seen in a highly negative light.

    The People's Republic of … • Since Nov 2006 • 2078 posts Report Reply

  • Keith Ng,

    I'd emphasis again that the price of price gouging is NOT lynchmobs, at least not in our society. What it damages is people's willingness to go above and beyond for their community, which is a really big deal in the circumstances.

    There are a bunch of businesses that have a model which enshrines "price gouging" though

    People don't act selflessly towards those businesses. It's a normal economic relationship.

    What I'm saying is that if we want to preserve the *extraordinary* relationships that people have at the moment, we must avoid price gouging.

    Auckland • Since Nov 2006 • 522 posts Report Reply

  • George Darroch,

    Same reason that free-market healthcare is such an abominable concept.

    Yes, and because most states are not prepared to have citizens dying on the street, even in developing countries and the United States, there is a provider of last resort, offering very poor service but sufficient to keep most people above death.

    A suitable comparison would be a restaurant operating beside a Red Cross tent. I think people would think the patrons to be wankers, but they would not consider the restaurant highly morally unfit. That's differentiation of markets. What gouging is in this context is a person or company exploiting a monopoly on supply for short term gain.

    The People's Republic of … • Since Nov 2006 • 2078 posts Report Reply

  • George Darroch,

    gouging on an essential service is seen in a highly negative light.

    And the opposite, offering an essential service at highly reduced rates, as Air New Zealand did with their $50 fares to and from Christchurch, is seen in an incredibly positive light. It increases the tendency of people to work together.

    It may have cost them millions, but it will have generated considerable brand loyalty. Qantas' charge to the NSW police force for the charter flight will have done the opposite to their brand.

    The People's Republic of … • Since Nov 2006 • 2078 posts Report Reply

  • Keith Ng,

    So to summarise economists are, and have always been, full of shit.

    They are not full of shit. They are asking a vital question: If there's a fixed amount of resources, how do we distribute it? It's a difficult question because sometimes, there's just not enough to go around. Somebody needs to be the bastard who figures out who misses out.

    Economists should and do think about issues like fairness, morality and being a fricking human being. Some give it more consideration than others.

    And the answer is always shit - but that's just because the question was shitty to begin with. If there's not enough, *someone* will have to miss out.

    Auckland • Since Nov 2006 • 522 posts Report Reply

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