Ed Note: This (re)post from early 2015 by economist Michael Giberson, formerly at Texas Tech University, is reprinted below. While generic to pricing of any good or service in any emergency, it applies to Joe Biden’s recent concern about oil-price ‘gouging’ and calls from the Democrat leadership for FTC investigations into the same.
“Higher prices would discourage over-buying and help ensure that useful consumer goods get distributed to more households, not just the households best able to rush to the store. Consumer sentiment against higher prices during emergencies, by discouraging a price response and encouraging shortages, tends to put the burden of the shortages on those consumers least able to run to the stores in emergencies.”
When consumer demand shoots up and supplies are limited, either prices must increase or shortages will result. Consumer sentiment leans strongly against such price increases, and sometimes that sentiment is enshrined in anti-price gouging laws. It is this sentiment and such laws that unintentionally put a burden on less-able consumers.
As a heavy winter storm was projected to slam into Mid-Atlantic and Northeastern states earlier this week, a familiar scenario emerged: state officials urged citizens to stay safe and to report suspected price gouging. (Examples: New York, Connecticut.) Predictably, consumers rushed to stores to discover crowded aisles, long lines, and–soon enough–outages of many consumer goods.
An economist might wonder, in the face of a sharp increase in demand, why stores do not simply raise prices. A higher price would discourage excessive buying and boost the profits of stores who had adequate supplies of useful goods.
One reason stores do not raise prices are anti-price gouging laws, in effect in most of the states affected by the storm. But many consumers react aversely to price increases in the face of an emergency, so even absent price gouging laws causing shortages retailers often choose shortages over higher prices.
But what is the cost of a preference for shortages over price increases?
Discriminatory Underpricing
One study documents what a few moments of reflection might reveal: the effects of shortages are not evenly distributed. When emergencies happen (or are first forecasted) some consumers are readily able to rush to the store, while other consumers are not so lucky. The early bird gets the bread and milk and eggs, the late arrival finds little or nothing available.
Using detailed consumer purchase histories and retailer price survey data, a trio of economists examined consumer responses to the Great East Japan Earthquake of March 2011. The analysis found that spending on storable foods rose dramatically right after the earthquake. Prices didn’t rise much, so the spending increase is attributed to households stocking up on storable foods. Not all households were able to get more food, however.
Households with what the researchers called a “high opportunity costs of shopping,” for example those households with infants or with both parents working full time, were more likely to miss out on the opportunity to buy foods before they ran out. It is easy to see that elderly and mobility-impaired consumers, too, would be more likely to be shut out by any sudden rush of consumers to the store after a disaster.
Higher prices would discourage over-buying and help ensure that useful consumer goods get distributed to more households, not just the households best able to rush to the store. Consumer sentiment against higher prices during emergencies, by discouraging a price response and encouraging shortages, tends to put the burden of the shortages on those consumers least able to run to the stores in emergencies.
Experimentation, Not Unintended Consequences
Laws against price gouging worsen the consequences of the consumer sentiment against higher prices. In the absence of laws, at least some retailers might test out somewhat higher prices and thereby keep some products on the shelves for slower-responding consumers. Over time consumers might begin to see the connections between higher prices and a better distribution of useful consumer goods during emergencies. Anti-price gouging laws block experimentation and learning in the market.
While higher prices reduce some of the harms of emergency-inspired panic shopping, and perhaps spread the harms a bit more evenly across consumers, high prices may be a bigger burden for at least able-bodied poor consumers. (Disabled poor consumers might actually be better off with higher prices and some items still on the shelf when they reach the store than lower prices and few goods available.) Mitigating that particular burden may be better left to the efforts of friends, families, and charities.
As Dwight Lee pointed out in The Two Moralities of Outlawing Price Gouging, market prices are the most effective way to get useful goods to consumers during emergencies. But that does not mean charitable efforts are unneeded. We need both the intention-based “magnanimous morality” – directed charity promoting personal sacrifices to address post-disaster problems – and the “mundane morality” of the market – the unintentional cooperation arising through markets that mobilize the extended social order in addressing post-disaster problems.
It is when both moralities operate within their proper spheres of human activity, Lee wrote, that they yield the most help to victims of disaster.
Laws against price gouging should be repealed – they make bad situations worse. But the broader consumer sentiment against higher prices needs to go away too. Consumers need to understand the wisdom of Lee’s two moralities so that markets and charity work can effectively work together to help victims of disaster.
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Michael Giberson has blogged on price gouging topic at Knowledge Problem and surveyed “the problem with price gouging laws” in Regulation magazine (Spring 2011).