Price Gouging Is A Myth

[mr.72]

Just thought I'd open up a new thread to discuss so-called "price gouging".

It is a myth.

Supply is limited, at all times, for virtually everything you may want to buy and this rule does not exclude necessities like fuel or food or evacuation supplies simply because you believe you need them right now. Given limited supply, the only thing that works against unmitigated demand depleting the limited supply is price.

The classic example is a hotel room. Neal Boortz made this example after Katrina, and since he has a home in FL he saw this as a close-to-home issue. Let's say your family of four and your mother-in-law have to evacuate from a coming hurricane. Now, normally the hotel you are going to get is $50 per room. So you would prefer to get at least two rooms, one for you and your family, and one for your mother-in-law. Maybe you want three rooms, including one for the kids. But the prices are raised to $150 per room, 3x their normal price. Since the price is higher, you won't get two, or three, rooms. You will just get one and grandma or the youngest kid has to sleep on a cot. As a result, the hotel can accommodate more guests, and therefore more people can find shelter even at the elevated price.

Someone else on this forum in one of the Ike-related threads pointed out the gasoline situation. Gas station owner is selling gas normally for $3.50/gal, but they are limited to only the gas in their current inventory and they expect that the supply line (freeways with fuel trucks) are going to be restricted, blocked, or at least delayed. So given the huge amount of demand for people trying to refuel so they can evacuate, gasoline prices are raised to $5 per gallon and gas cans are raised to a very high price in order to discourage people from buying more fuel than will fit in their own car's tank. This higher price increases the number of people who can be served by the fuel, since it discourages anyone from buying more than they actually need.

So if you are the person paying $150 for the hotel room and having to keep your mother in law with you in the room, or if you are the person spending 40% more to fill up the tank than you would have otherwise, then you are annoyed and you cry about "price gouging". However if you are the person with the mother and law and kids in the car having to sleep in the car because there are no more hotel rooms available, and then having to walk because the gas stations ran out of government-price-controlled fuel, then you might not be so opposed to so-called "price gouging".

IMHO!

Discuss :)

[Liko81]

$6.00 gasoline immediately following 9/11 was no myth. Rural gas station owners, hearing about 9/11, immediately jumped to the conclusion that the U.S. would very soon thereafter turn the entire Middle East into superheated glass. When you have one choice of suppliers, or a choice between two who are colluding, price gouging is very real.

If you're saying that what is happening to oil, copper, zinc, lead etc is not price gouging, I agree with you; China's buying everything it can to fuel its industrial revolution and the speculators are buying up what's left just to hold it.

[Xander]

When you have one choice of suppliers, or a choice between two who are colluding, price gouging is very real.

Who gets to determine what is "price-gouging" and what's a fair price? The right answer is the market. If people will pay $6.00 a gallon for gas, and the station owner is willing to supply gas for $6.00 a gallon, and there aren't shortages, then that's the right price.

Here it is explained by an economics professor:
http://www.marginalrevolution.com/margi ... to-my.html" onclick="window.open(this.href);return false;

When you try to interfere with "price-gouging" you get, surprise, surprise, shortages. You get shortages not because you've conquered the evil price-gougers and they've taken their balls and gone home, but because you've artificially held down prices and disrupted the relationship between supply and demand, and all the balls are gone, taken by those who wouldn't have added to the demand if the free market was allowed to set the price properly.
http://cafehayek.typepad.com/hayek/2008 ... -choi.html" onclick="window.open(this.href);return false;
(Another professor of economics.)

[pt145ss]

Anti price gouging laws are by in large a Marxist ideal and goes against everything we as Americans stand for.

$6.00 gasoline immediately following 9/11 was no myth. Rural gas station owners, hearing about 9/11, immediately jumped to the conclusion that the U.S. would very soon thereafter turn the entire Middle East into superheated glass. When you have one choice of suppliers, or a choice between two who are colluding, price gouging is very real.

If you're saying that what is happening to oil, copper, zinc, lead etc is not price gouging, I agree with you; China's buying everything it can to fuel its industrial revolution and the speculators are buying up what's left just to hold it.

In this situation the market dictates that if you are not willing to pay that price, then you go somewhere that sells the product for a price you are willing to pay. One of two things will occur…either the business owner will lower their price because everyone refuses to pay $6/gal or shortages will occur and at some point you will be willing to pay $6/gal because that is the market rate.

The other answer to this problem is to reduce the barriers to market so there is more competition in the market place.

[The Annoyed Man]

When I am the owner of a business that sells an important commodity, and my supply of that commodity for resale is about to dry up for an unforeseeable length of time - and my income with it - I'm going to charge whatever the market will bear, because soon enough, I'll be running out of money too, and I have to also take care of me and mine. They come before you in my order of priorities. I have probably paid much for my inventory on hand, and I'm under no obligation to give it away at anything less than what the market will bear. If you, the customer, cannot afford that price, then you'll have to find another source. Later, when a good resupply is guaranteed, I'm going to make my prices as low as I can in order to woo you, the customer, back to my business. That's free enterprise capitalism, baby.

Now, if you want to enter into a barter agreement with me, whereby you feed my family, and I put fuel in your cars, then we can maybe work something out. Otherwise, I trust in God; all others pay cash.

[TDDude]

When I am the owner of a business that sells an important commodity, and my supply of that commodity for resale is about to dry up for an unforeseeable length of time - and my income with it - I'm going to charge whatever the market will bear, because soon enough, I'll be running out of money too, and I have to also take care of me and mine. They come before you in my order of priorities. I have probably paid much for my inventory on hand, and I'm under no obligation to give it away at anything less than what the market will bear. If you, the customer, cannot afford that price, then you'll have to find another source. Later, when a good resupply is guaranteed, I'm going to make my prices as low as I can in order to woo you, the customer, back to my business. That's free enterprise capitalism, baby.

Now, if you want to enter into a barter agreement with me, whereby you feed my family, and I put fuel in your cars, then we can maybe work something out. Otherwise, I trust in God; all others pay cash.

God bless Mr. Smith and his Free Enterprise System.

However,

If you're in a small town, that attitude will come back to bite you hard. Small town folks have a long memory. If you don't believe that, you don't know my mom and all my german aunts & uncles, cousins and old classmates.

If you are in a large town, you can probably get away with it but the reality is that your business may get burned to the ground.

That's just the way it is these days. Good luck. Be fair. Think past the next three weeks.

[Ace_Inthe_O]

When I am the owner of a business that sells an important commodity, and my supply of that commodity for resale is about to dry up for an unforeseeable length of time - and my income with it - I'm going to charge whatever the market will bear, because soon enough, I'll be running out of money too, and I have to also take care of me and mine. They come before you in my order of priorities. I have probably paid much for my inventory on hand, and I'm under no obligation to give it away at anything less than what the market will bear. If you, the customer, cannot afford that price, then you'll have to find another source. Later, when a good resupply is guaranteed, I'm going to make my prices as low as I can in order to woo you, the customer, back to my business. That's free enterprise capitalism, baby.

Now, if you want to enter into a barter agreement with me, whereby you feed my family, and I put fuel in your cars, then we can maybe work something out. Otherwise, I trust in God; all others pay cash.

Well said

[mr.72]

If you're in a small town, that attitude will come back to bite you hard. ... Think past the next three weeks.

Sorry I snipped your post, just pointing out which one I was replying to.

Whether it is smart business or not does not make it price gouging.

[anygunanywhere]

If you're in a small town, that attitude will come back to bite you hard.

That is part of the free market system - understanding your customer base. Just ask the Dixie Chicks. They have to go to Canada to sell out a concert.

Anygunanywhere

[The Annoyed Man]

FWIW, I don't own a gas station. I own a website design business, and I charge very fair prices. Nobody has ever had their ability to escape a hurricane zone threatened by my business practices.

Secondly, I am not heartless. If I were a gas station owner and you are out of gas and have a wife and kids in the car, I'm not going to strand you with your kids, simply because you can't meet my posted price. We can always work something out. But my point is that, for very sound economic reasons, it is not really price gouging if I charge $6/gallon when I have only a few gallons left to sell, and then I'm going to be without the means to support my family. Don't you put your family first? If I always charged $6/gallon, even in flush times, that would be price gouging. And of course, the penalty for it would be that nobody would buy gas from me and I would go out of business. That's capitalism at work too. But whatever the case, I'm not going to make someone's kids suffer any danger because their dad doesn't have enough money in his pocket. You still want to burn down my business?

I drove out here to Texas from California in April of 2006. At the time, gas prices were in the mid $2/gal range, IIRC. When I went to gas up in Needles, near the Arizona border, this one station was selling gas for $3.69/gallon. I'll never forget it. Was the guy price gouging, or was that a new gas delivery he had which cost him a lot more? Who knows? I know this though, it costs a lot of money to drive a diesel rig pulling a load of gasoline from San Pedro on the coast to Needles on the Colorado River, and it may well be that his costs were just a whole lot higher than everywhere else. OTH, the same guy also tried to sell use two tires and an oil change we didn't need, and his approach was obnoxious. We bought from him because we had to, and he knew it. Two months later in June of that year, I came back through Needles on my way to pick up my family, and then back through Needles again 3 days later on our way back to Texas. I made darn sure that I didn't have to stop in Needles for gas. It was actually cheaper in Arizona, further from the refinery. I'll never buy gas, or anything else for that matter, from that gas station in Needles for the rest of my life (if I should ever find myself so unfortunate as to be stuck in that hole again). That's capitalism at work too.

[aardwolf]

Price gouging doesn't exist in free markets. If something costs too much, they won't buy it.

[jimlongley]

Price gouging doesn't exist in free markets. If something costs too much, they won't buy it.

Aye and therein lies the rub.

An emergency is not a free market per-se. If people are buying a commodity because it has become a necessity, and the seller raises the price above the previously established norm, whether due to lack of supply or just plain greed, and that raise prices some people out of the market who could otherwise afford the item, then it starts to become price gouging.

Yes, the vendor has to be able to sustain the business, but if he only sells to those who can afford the new price, he is limiting his market and may still sell out, and once he has sold out, with no new supplies coming in, he places himself in the same boat as his, now former, customers. If new supplies do come in, then he had no real reason to raise the price to begin with. The business owner, in either case, has now created bad will and tension among his former patrons.

I have a case in point in mind. It was December 1964, and the northeast was shut down by a huge ice storm, power was off and not likely to be back on soon. Charlie, who had been the village fire chief and ambulance (in the back seat of his Caddilac) for many years, owned a little gas station/general store that was kind of the second focus, after the fire department, of the village.

As the weather warmed after the storm, Charlie raised the price he charged for dry ice by more than double even though Pure Carbonic was continuing to deliver where they could. Charlie felt he was charging what the market would bear, but he priced some of the residents of the village out of being able to afford dry ice, and they lost food. Charlie's action resulted in enough bad feeling in the community that it only took a couple of years of the resulting lack of business for him to finally shut the place down. By that time a service station was being built down the road, so the only real thing that was missed was the cracker barrel atmosphere of the old joint.

During a later incident, the Great Northeast Blackout in November of 1965, the fire department, over Charlie's strident objections (he hadn't been Chief in a few years) purchased a load of dry ice, filled a couple of discarded refrigerators with it, and parceled it out to residents for nominal donations, and even in a couple of cases free. We generated lots of donations through our good will, enabling us to buy some new apparatus, even though the blackout lasted less than a day.

Charlie was price gouging pure and simple, taking advantage of the situation for short term personal profit, and a year later he had compettition and raising the price would have netted him nothing.

These situations I know of because I was there, I worked for Charlie and was a fireman.

Price gouging can and does exist because an emergency limits the free market to something less than free.

[mr.72]

Price gouging can and does exist because an emergency limits the free market to something less than free.

Whether it is an emergency or not does not effect the free market. In fact, it illustrates perfectly what exactly happens in a free market. Supply is rapidly reduced, demand is rapidly increased, so the only free market countermeasure is for price to rapidly increase. In some cases, supply may not be reduced but demand is probably still increased. In the case of a hurricane, certainly demand increases dramatically before the storm hits, and then recedes after the storm, at which time supply is cut short. In both cases, before and after the storm, it is a perfect illustration of plain free market economics.

What you are describing is regular free market economics. So from my perspective, you are just categorizing an uncomfortable free-market price adjustment as "price gouging". There is no meaningful distinction between the term "price gouging" and "free market" except that using the term "price gouging" has a negative connotation.

Fuel, however, has a whole different kind of market dynamic. Truth be told, fuel should be priced much higher normally, and would sustain much higher profit margins. Also fuel has a very high built-in tax rate, taking it out of regular market dynamics to some extent. If I were operating a gas station, I am severely limited on how low I can price my product because I have to pay not only for the material that I am re-selling, but also for the taxes on each unit sale. The taxes are a fixed amount and not a percentage.

In reality, gasoline has a sustainable price point in today's market of about $4 per gallon, regardless of the material price. As fuel prices increased, tracking with the price of crude oil, a recession of demand did not begin to occur until it approached $4 per gallon. So the balance point of supply, demand, and price is approximately $4 per gallon. Lowering the price of fuel below about $3.50 per gallon does not substantially increase demand. This is because there is little if any competition to automotive fuel. You are either going to buy fuel to drive your car, or you are not going to drive. However there is a finite limit to how little most of us can drive so practically speaking, there is a baseline demand that will exist and not be available to quick adjustment by the consumer. Over the long term, demand may be reduced, and if the prices are sustained over $3 per gallon you can be sure in 5-10 years demand will be reduced compared to today.

[pt145ss]

An emergency is not a free market per-se. If people are buying a commodity because it has become a necessity, and the seller raises the price above the previously established norm, whether due to lack of supply or just plain greed, and that raise prices some people out of the market who could otherwise afford the item, then it starts to become price gouging.

Supply and demand is not based in history or on some "previously established norm." Supply and demand is based on current market conditions. History is used only as a tool to help forecast probabilities of the future market conditions or show trends over time. When Mother Nature decided to bear her wrath on the good people of Galveston…the good folks made a run on the stores for commodities. Hence, the current market conditions at that time proved to be High Demand with Limited Supply/Resources…and therefore a Higher Market Value for said commodities.

[jimlongley]

You can redefine it any way you want, but it's still price gouging from my perspective.