Professor says price gouging is simple supply and demand at work
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.”
- Hurricane Irma: A case of water sells for $99.99 on Amazon as residents fear price gouging – USA Today
- 7-Eleven provides free water in Florida after accused of price-gouging – The Hill
- Almost 7,000 complaints of price gouging ahead of Hurricane Irma: Florida attorney general – CNBC
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?
Jasmine GlasheenContent Marketing Manager, Surefront
Jasmine GlasheenContent Marketing Manager, Surefront
Jasmine GlasheenContent Marketing Manager, Surefront
Jasmine GlasheenContent Marketing Manager, Surefront
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24 Comments on "Professor says price gouging is simple supply and demand at work"
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Senior Vice President, Dechert-Hampe (retired)
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.
President, Max Goldberg & Associates
There is no justifying price gouging during an emergency. Period.
Vice President of Marketing, OrderDynamics
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.
Senior Vice President, Dechert-Hampe (retired)
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.
Principal, Anne Howe Associates
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!
Managing Partner, Advanced Simulations
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.
Managing Director, GlobalData
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.
Professor of Marketing, The Wharton School of the Univ. of Pennsylvania
President, The Ian Percy Corporation
Your first sentence says it all, Peter.
President, Graff Retail
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.
Principal, Cathy Hotka & Associates
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.
Chief Executive Officer, The TSi Company
Managing Director, RAM Communications
President, The Ian Percy Corporation
SVP Energy Services and New Ventures, HomeServe
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.
President, b2b Solutions, LLC
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.
Senior Retail Writer
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.
Content Marketing Manager, Surefront
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.
Managing Partner, Deeb MacDonald & Associates, L.L.C.
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!
Global Retail & CPG Sales Strategist, IBM
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.
President/CEO, The Retail Doctor
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.
Chief Amazement Officer, Shepard Presentations, LLC
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.
President, Affluent Insights & The Home Trust International
Life and death trumps supply and demand.
CEO and Founder, Cahoot
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.