There has been a lot of discussion recently about the morality of price gouging. I mean it's not really a discussion as such. Pretty much everyone is on the same page. Price gouging is highly immoral and should definitely be illegal. Even people who disagree on most other areas of morality are united in their opposition to this phenomenon. But is price gouging always immoral? Can it possibly be defended?
Well I'm about to try. I am one of the few people who is actually in favor of price gouging, and I will explain why. As mentioned, this is a very emotional issue. We imagine poor, innocent people just trying their best to be safe during something like this pandemic only to have greedy, ruthless business owners take advantage of them to make a quick buck. It seems totally disgusting and obscene. How dare these companies, or sometimes individual hoarders, take advantage of people in a time of crisis like this one - i.e. during the Coronavirus Covid19 situation.
That's how price gouging is presented. But I want to just step back and look at it from a different angle, one, that I believe, represents logic and reason, as opposed to emotion.
First, it is important to understand how our capitalist system works vis-a-vis pricing. Many people falsely believe that the price of goods and services is a very simple proposition. Perhaps prices are determined by the cost to produce something + some fixed markup to arrive at a final price. Of course, this system cannot work because who will define all the variables? Who defines how much to pay individuals involved in the production of a good for example? Do we pay everyone the same amount? How do we determine which activities in the economy take precedence? I.e. do we need 1000 tons of iron and 100 tons of bronze? Or is it 100 tons of iron and 1000 tons of bronze?
The Soviet Union attempted to set the price of all goods and services in the economy. They literally drafted up an enormous document, or series of documents, which gave the exact price for various things. I seem to remember there were something like 3 million individual items on the list, each with a particular price. What was the result of this? Well, it was a total disaster. Many products were vastly overproduced while for others there was a massive shortage. No matter how much they tweaked the list, they could not get things right. It could not be centrally planned.
Well if that's all true, how ARE prices determined in our modern-day society. Essentially they are determined the variables of supply and demand. Most people have heard of this concept. Where the two lines intersect, that is the most effective price in the market. It's as simple as that. If one prices above the equilibrium point, they will overproduce and undersell. If they price below the equilibrium point, there will shortages. The further below the equilibrium point the price actually is, the more shortage there will be.
It's really that simple. Prices aren't inherent in a particular item. There's a joke about selling ice to an eskimo. It's a joke because it would seem nearly impossible to sell ice to an eskimo when there are millions of tons of ice all around him. Yet, in some places, ice sells for a very premium price. It's the same situation for all kinds of items.
Back to the supply-demand graph. If, all of a sudden, the demand for a particular item shoots up, then according to the graph, the price should also increase. If the price does not increase, the demand will be far greater than the supply and there will be a serious shortage. Prices must adjust or this will always happen.
This is precisely what we are seeing unfolding now during this pandemic. A few companies tried to sell highly sought-after items for a higher price. People reacted very strongly and in some places, the government made it illegal to increase prices during a crisis. They labelled it price gouging. In actual fact, it was not gouging, but reacting to the market. And the very predictable reaction was that there was a massive shortage of many items. Do people think this is preferable?
That is not a rhetorical question. I wonder: if people were presented with the following situation, how would they react?
There are 1500 units of hand sanitizer available and 1000 people want them. The normal price is $3 per unit.
Would you rather the company:
A) Continue offering the product for $3 per unit and thus the first 100 customers buy an average of 15 units each, and leave 900 customers with nothing.
B) Increase the price to $10 per unit. Few people would buy more than 2 units because of the very high price, plus they would not be able to resell them for a profit on the black market. Therefore, with everyone buying 1 or 2, most or all people would receive hand sanitizer.
Most people presented with this true-life scenario would refuse to answer the question. They would simply bemoan the fact that anyone would buy more than 2 units. They would say people should share or care more about others, etc. There would be a lot of sentimentality and emotional appeals. But unfortunately that is not the reality of the situation.
They would either respond by saying that or just creating some alternate reality where production of these goods just magically increases or people are more generous or whatever the case may be. But again, they are not dealing with reality, they are dealing with ideals.
Limiting Quantities
Another response I've heard from many people is the idea that companies should simply limit the number of units each person can purchase. Many companies have used this approach. But there are several problems with this.
1) There are many things people can do to get around quantity limits. One individual can revisit the same store multiple times throughout the day. Perhaps on one visit he could go to a particular cashier and then on another visit, go to a different person. Or he could use self-checkout. Also, he could visit multiple locations, etc.
2) Another issue is that by limiting the price of a good, you can never increase the attractiveness of a particular market. For example, right now home delivery is very popular especially for things such as groceries. Companies are offering a lot of money and premiums to get people to work for them delivering groceries and to do food delivery. The demand went up and the higher price for labour is attracting more workers, which is a good thing.
In the case of essential goods, let's go back to the hand sanitizer situation. At the normal price, there is no incentive for companies to increase production or for other companies that do not normally manufacture hand sanitizers to enter the market. However, if the profit potential increased dramatically, many new companies would emerge specifically to fill the demand. This is simply what happens and there are many examples of this.
Also, if a particular good is available in a distant area, perhaps another city, province, state, or coutry. Normally there is no incentive to transport a particular good over a very long distance. However, at the higher price, people are willing to travel far to sell their goods.
The list goes on as to the advantages. What we know for certain is that without allowing prices to increase as they naturally do, no one is better off.
Prices Eventually Drop
The mechanisms I have described are only temporary. Yes, at the beginning, highly sought-after goods increase dramatically in price, which is a good thing, because it signals to the market that a lot of a particular good is needed. So, companies get on the bandwagon to produce as much as possible. A term you will frequently hear is that profits convey information. High profits indicate to others that they should enter the market, that there is a lot of opportunity there.
Because so many new entities are entering the market, the supply dramatically goes up. Then what happens? You guessed it, the price drops. That way, the price goes down and the supply goes up. Isn't this exactly what people wanted in the first place?
We have to let the market work. If we do, eventually we get enough supply and people in general are better off. The price of particular goods is already determined by the market. By artificially keeping prices too high or too low, you are creating a sub-optimal scenario. In a time of crisis, the market needs to work its magic more than ever to ensure people get what they need.
Price "gouging" is simply a pejorative term used to shame companies for simply listening to the market, which they do at all times for all other products. Somehow though when the market indicates prices should increase, they should suddenly stop listening? That makes no sense. To me, not only are price increases moral from a Catholic perspective, they are obligatory. Not listening to the market may score you brownie points from economically-uneducated Do-Gooders, but it hurts the majority of people. One should use logic and reason in this situation, not emotion. Although it may seem unseemly for a company to increase prices on essential goods during a crisis, in the long-run, everyone is better off because of it.
I encourage you to post any comments you may have below!
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