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Some Fun With Holiday Price Gouging…

December 31st, 2012 · 5 Comments
Econ 101 · Markets

It’s New Year’s Eve, so why don’t we take a little break from learning nothing about the plan to avoid the fiscal cliff and concentrate on what’s really important? From my mother, who I would imagine had to have known that this would end up on the Internet:

So is raising the price of champagne by $2 on New Year’s Eve over yesterday’s price supply and demand or is it price gouging? :-) Dad wants to know.

Well Mom, I’m glad you asked, and I’m particularly glad that you phrased the question in this way. First, I would like to know what retail outlet instituted this policy so that I can send them an economics gold star for efficient pricing behavior- they are essentially price discriminating based on the hypothesis that people who wait until the last minute to buy their champagne (or “sparkling wine,” since, well, let’s call a spade a spade here) are less price sensitive than those who planned ahead. This hypothesis is probably correct, if for no other reason than people who wait until the last minute don’t have time to comparison shop.

Second, it’s apparently a little-known fact that what people refer to as “price gouging” *is* in fact just supply and demand at work. Consider two supply and demand scenarios:

(In each of the graphs, P represents the price of a thing and Q represents the quantity of a thing. Also, D is for demand and S is for supply, in case that wasn’t obvious.) The point of this set of graphs is that there are two ways that the forces of supply and demand (as opposed to some nefarious evil price-increasing monster, I suppose) can cause an increase in the market price of an item. On the left is a price increase caused by a reduction in supply, which is often caused by an increase in production costs. On the right is a price increase caused by an increase in demand, which is apparently often caused by people wanting to get drunk on New Year’s Eve. From a legal perspective, letting supply and demand do its thing in the left scenario is a-ok, whereas letting supply and demand do its thing in the right scenario is price gouging. (Note that this sort of price gouging, pretty much by definition, has to be a result of supply and demand forces, since producers would have no profit motive to raise prices otherwise.)

From a legal perspective, “price gouging” is usually defined to apply specifically to crisis situations, and is, in some states, defined vaguely enough to even incorporate cost-driven price increases. My parents live in Florida, and Wikipedia is helpful enough to provide some specific information on that state:

As a criminal offense, Florida’s law is an example. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.

So I suppose whether or not the champagne situation counts as price gouging depends on whether New Year’s Eve is considered a crisis. Personally, I’m going with yes. Mom, call the authorities.

(For the record, I purposely avoided a discussion here about the fairness of price gouging, since that is pretty well-traveled territory around here. As such, I will simply ask you if you would rather pay $2 more for your champagne or have the champagne sell out before you get to the store.)

Tags: Econ 101 · Markets

5 responses so far ↓

  • 1 Seth // Dec 31, 2012 at 5:08 pm

    More so than whether or not NYE is a crisis, the real question should be whether liquor stores are “suppliers of essential goods or services.” That puts bubbly safely outside the price-gouging zone, per FL’s wiki. I’m also under the impression that NYE not only kicks demand up a notch, but probably has significant changes in the price elasticity of demand, which is why retailers will “get away” with the price increase.

    P.S. Jodi, have you taken to drawing S&D graphs with your less-dominant hand?

  • 2 econgirl // Dec 31, 2012 at 6:39 pm

    No, with an iPad stylus. Also, I am offended that you would dare refer to champagne as non-essential. =P

  • 3 Denis // Dec 31, 2012 at 7:53 pm

    Jodi, you should be offened that he would dare refer to ANY liquor as non-essential!

    Anyway, thanks for writing this in a less complicated way than anything I’ve written or attempted to explain to others. I’m glad you at least touched upon the unintended consequence of regulations in this case creating shortage situations…

  • 4 Joe // Jan 1, 2013 at 4:37 am

    I’m no expert but I feel like the increased price of champagne on NYE has little to do with supply & demand in the traditional sense. Stores simply charge more because they know they can fetch the extra dollar. The elasticity argument is valid because, yeah, people will pay more when they ‘need’ something on short notice … but is there really a shortage of bubbly such that the higher price is necessary?

    I would argue that most stores know in advance how much bubbly they will likely sell, and the entire supply chain back from point of purchase plans, produces and distributes accordingly. In short, supply has little to do with resulting price in most cases (assuming managers aren’t oblivious to the additional ‘need’ NYE incurs). The price of roses around Valentine’s Day is a comparable phenomenon — everyone knows it’s coming and plans/prices accordingly.

    It’s all about PERCEIVED demand, baby. The procrastinating partier and the the last-minute lover will have their Rosé and roses, and they’ll pay the extra 2 or 20 dollars regardless whether there’s a stockpile in the back room or not — there’s simply no time/patience to barter when social norms demand I deliver the goods NOW.

    In short I suspect this is more a problem of social economics (behavioral economics? economic sociology?) than it is basic supply and demand principles. I’ve never heard of a [modern American] grocery store increasing the price of lettuce when there are only a few heads left. They know I just don’t ‘need’ lettuce as bad as my loved one wants roses or Rosé.

    Though now I’m curious, because there have certainly been times I felt ‘this lettuce is far too expensive.’ So I bought champagne instead.

    Any hard data on champagne price fluctuation? And are there any states where opportunistic price increases are classified as ‘gouging’?

    PS: Glad to see you’re still writing Jodi ; )
    PPS: Given your line of work you might check out OmniGraphSketcher for iPad. Fantastic company, great programs, awesome support, no nickel-and-diming you for periodic updates. Well-worth the $15.
    PPPS: Happy New Year from Hawaii!!

  • 5 Lucas M. Engelhardt // Jan 2, 2013 at 9:09 am

    Joe,

    “It’s all about PERCEIVED demand, baby.”

    This doesn’t really break from traditional supply and demand – it’s just a way of saying that suppliers form expectations about demand when they make production decisions. Which is true – but doesn’t really change anything. If the suppliers are right about their expectations of high NYE demand, then higher prices are needed to equilibrate supply and demand on that day. If the suppliers are wrong about their expectations, then they end up selling out – missing the opportunity for higher profits if they had charged higher prices. But, that’s exactly what standard S&D analysis says. If prices are below equilibrium, shortages result.

    I’m not saying that there isn’t a sociological component – holidays aren’t a strictly economic phenomenon, after all – but appealing to something other than supply and demand to explain changes in prices only really “works” if we’re trying to explain why prices were out of equilibrium.

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