Just a Couple More Things on Price Gouging and Then I’ll Shut Up (For Now)…

Look, I get it, negative supply shocks suck. They’re not as good as everyone getting what they want at low prices. Sometimes economists are too flippant about high prices as a rationing mechanism. We’ve been over this. I do feel a little like I’m screaming into the void though, especially when I see, um, interesting takes come from places that should know better:

Why Businesses Should Lower Prices During Natural Disasters

Why Businesses Should Lower Prices During Natural Disasters

It helps your customers, which helps your brand.

Source: hbr.org/2017/09/why-businesses-should-lower-prices-during-natural-disasters

I’m sorry, come again? Fine, I’ll reserve judgment until I finish reading the article…



Ok done. What the article is saying without being terribly explicit about it is that companies should engage in completely untargeted disaster charity in the form of low prices since it will make customers so happy that they’ll be super loyal afterwards. Maybe it’s just me, but I’m not going to be terribly loyal to a company that made their stuff cheaper so that it sold out before I could get what I needed. To be fair, the article’s recommendation seems to be that companies both lower prices and satisfy whatever level of demand exists at that price, which at best would be very expensive and at worst logistically infeasible.

While I do get that public relations is a thing and that customers aren’t robots, two things still bug me. First, the article asserts that lowering prices and satisfying demand at the lower price would be a low-cost tactic to generate goodwill, but, unless you’re running a zero marginal cost business, it’s really not. (For example, it’s far cheaper to offer free phone service than free plane flights.) Second, it’s far from clear that the rewards in terms of customer loyalty are strong enough to warrant such an investment- in fact, using Jetblue as an example is particularly bad since it’s pretty well known that part of why airline service is so bad is that many customers focus on price to the exclusion of all other considerations. So sure, maybe it would be a nice thing to do, but don’t pretend like it’s long-term profitable without even trying to estimate the costs or benefits.

Moving on…look, I tried to warn you that below equilibrium prices lead to sub-optimal allocation of goods, but you didn’t listen, and now we have this:

Sneaky car dealer takes free Hurricane Irma garage spaces, city says

Sneaky car dealer takes free Hurricane Irma garage spaces, city says

Hollywood opened its garages so people in flood-prone areas could park for free in a dry spot. Many of the spots were quickly filled with cars with price tags and no license plates.

Source: www.miamiherald.com/news/weather/hurricane/article172272092.html

I really hope this snaps some people out of their fantasy world where low prices get goods to the nice, deserving but perhaps not high income people. I guess it also highlights the need for some sort of non-price allocation rule if you’re not going to allocate via price- straight-up rationing is generally not great, but in this case perhaps require a license plate or local address? Geez. (Sidenote: This is where my parents live and let’s just say they are not surprised by this outcome.) Come to think of it, this is even an example of the lowering of prices that the HBR article recommends, but I’m not convinced that the City of Hollywood got a whole lot of positive PR in return for its largesse.

Last but not least, apparently the small slice of the world that is the economics profession is heartless. *headdesk* I don’t think I particularly like being referred to as if I’m a quirky zoo animal or something. Unless it’s a panda, hen I’ll allow it. (Also, the article actually says that the voucher idea I presented as a joke earlier is actually a thing. GUYS, I WAS JUST KIDDING, IT’S MOSTLY ABSURD. Mostly.)

Price Gouging Is the Worst Form of Allocation, Except for All the Others…

It’s hurricane season, so you know what that means- a plethora of articles econsplaining that actually price gouging is awesome and people’s silly little non-econ brains just don’t get it. Ok fine, they’re not ALL that bad…some of them are more “ok fine it’s not great but can you think of anything better and what we actually do is worse.”

I took a stab at it, and I tried to veer into why people hate the concept of price gouging:

Why Do People Hate “Price Gouging” So Much? Economists, Take Note…

Why Do People Hate “Price Gouging” So Much? Economists, Take Note…

Every time a natural disaster or other crisis situation hits, we see two things: one, people outraged that the things they want to buy have…

Source: medium.com/@jodiecongirl/why-do-people-hate-price-gouging-so-much-economists-take-note-fe4f873ed106

In terms of feedback I’ve gotten, two things surprised me a little:

1. Some people, even economist people, tried to argue that income in itself doesn’t change willingness to pay. *looks at randomly chosen textbook* So I see here that income is a determinant of demand, and, for normal goods at least, increases in income (ceteris paribus even!) lead to increases in demand, i.e. a shift to the right of the demand curve. Looking at this diagram, I’d have to do some serious mental gymnastics to argue that this increase in demand can’t be equivalently stated as an increase in willingness to pay (i.e. a vertical shift).

2. Some people tried to argue that there’s no better system, which fine, I do kind of agree with, but upon further reflection I HAVE AN IDEA. Here goes- we give each person the same number of tokens when they’re born, and the total price of an item will be the sum of the money price and the token price. Now we disallow price gouging with the money price but we let the token part of the price adjust- you want that generator in short supply? Pay MSRP, but token up. Boom. Ok, maybe this is why economists don’t always make great policymakers, but you know you’re intrigued.

Until the country gets behind my genius token scheme, I guess we’re kind of stuck with what we have in terms of crappy but socially acceptable rationing mechanisms. Luckily, people are sometimes better than economic models given them credit for:

(Sidenote: If this people are better than economists think thing interests you, I have a whole talk about it here.)