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.)