Social media are making price gouging too difficult these days

by on September 5, 2017 at 4:36 pm in Economics, Web/Tech | Permalink

That is the topic of my latest Bloomberg column.  Here is one bit:

Let’s say bottled water was selling at $42.96 a case at the local Best Buy, as shown in this photo. A customer can take out his or her smartphone, snap a photo and post it on social media. The photo may go viral, and many people, including the legal authorities, will be mad at the company.

The reluctance to raise prices is especially strong for nationally branded stores. A local merchant may not care much if people in Iowa are upset at his prices, but major companies will fear damage to their national reputations. The short-term return from selling the water at a higher price is dwarfed by the risk to their business prospects. More and more of the value of business capital is intangible capital, more than 84 percent of the S&P 500 by some estimates. That’s why Best Buy so quickly apologized for its store selling the water at such a high price, blaming the incident on an overzealous local manager.

Consider an alternative: Instead of raising prices to very high levels, let’s say that the local big-box store sells out quickly during an emergency and has empty shelves for water. If those photos circulate, they will be interpreted as signs of general tragedy and want, rather than selfish corporate behavior. It’s too subtle an image to snap the price tag at pre-storm levels, contrast it with the empty shelves, and lecture your Facebook friends about the workings of market-clearing supply and demand and the virtues of flexibly adjusting prices.

Beware the culture of the image!  As I’ve said before, we should levy a micro-tax on photos on Twitter.

Here is Don Boudreaux on price gouging.  Here is David Henderson on price gouging.  I agree with them both.

1 prior_test3 September 5, 2017 at 4:44 pm

Reputation has a market value. Amazing the sorts of things that economists notice which people who actually make a living selling goods and services have known for as long as goods and services have been sold.

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2 msgkings September 5, 2017 at 5:03 pm

No dumdum, the post is about how social media makes reputation management more difficult for national brands, not that reputation matters. Man are you stupid.

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3 The Other Jim September 5, 2017 at 9:02 pm

Social media is popular. Amazing the sort of things that trolls on economics blogs notice which people who are actually sentient have known for as long as social media has existed.

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4 prior_test3 September 6, 2017 at 6:10 am

‘No dumdum, the post is about how social media makes reputation management more difficult for national brands’

You mean social media like network news broadcasts? Perhaps you are too young to remember all the reporting about price gouging during the oil shortages of the 70s? The reporting on the increase in beef prices during that same era?

Leading to Nixon’s price controls, or the windfall oil profits tax regime?

Jumping on the social media band wagon for explanations exclusively is like someone commenting on how so many people are walking around listening to music on cell phones devices in 2017, and forgetting how the Walkman/Discman era looked, or that before the iPhone there was the MP3 player.

And just how did so many people manage to organize a global boycott of apartheid era South Africa without social media?

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5 JFA September 6, 2017 at 7:34 am

The point is still that it is harder to manage reputation in the age of Twitter. Citing examples of a thing happening before social media does not mean social media would not have had an effect on that thing. E.g. a global boycott of SA would have been easier to organize (and easier to monitor) with social media.

With social media (as opposed to traditional media (e.g. nightly news)), there can be more focus on one issue. Nightly news does have to cut away from price gouging coverage to cover sports.

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6 Anon7 September 5, 2017 at 4:48 pm

Show people pictures of Venezuela and the joys of 21st century Bolivarian socialism instead.

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7 Harun September 5, 2017 at 7:36 pm

C’mon. That’s just due to some kulaks and wreckers.

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8 rayward September 5, 2017 at 4:59 pm

But make no mistake, a race to the bottom in the retail price of a good is a race to the bottom. How many independent local retailers will survive the race to the bottom? Not many. How many hard-working Americans experienced success and raised their families fortunes, and their place in class, in retail? Who are the most loyal and vocal members of the local Chamber of Commerce? Small business will not survive the race to the bottom. Be careful what you ask for, because you just might get it.

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9 Ricardo September 5, 2017 at 5:22 pm

I’ll take my chances. Correlation between a country’s GDP and the average number of employees per company in that country is positive.

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10 Albigensian September 6, 2017 at 10:36 am

Competition has been relentlessly driving inefficient merchants out of business at least since Montgomery Ward published his first catalog. Shall we re-instate chain-store laws and bring back the corner grocery, even though its prices were double those in a supermarket and the quality and age of its foodstuffs often questionable?

Of course, this post is about “price-gouging” during disasters and not generally about price competition. And, rationally, it’s hard to argue that bottled water that one can actually buy for $42.96 per case is an infinitely better value than bottled water priced ast $3.98/case that can’t actually be purchased because there is none left at that price.

Yet (as behavioral economists never tire of reminding us) we are far from purely rational beings. Thus, just as many will refuse a deal that feels “unfair” even when they know they’d be better off taking it than leaving it, people will resent what they perceive as “price-gouging” during disasters. And they’ll do so even if they’ve convinced themselves that “available at a high price” is better than “unavailable at any price.”

Where this sort of instant comparison really hurts the big chains is when everyday prices at stores in different locations are compared. Thus, a WalMart in a poor neighborhood may charge more than one in a rich suburb. And, while this may make perfect sense when one takes the cost of doing business at these locations into account, it is sure to provoke resentment. Even though that poor neighborhood is almost surely better off having that WalMart than it would be if residents had to pay far more to buy from smaller, less efficient local merchants instead.

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11 kevin September 6, 2017 at 12:02 pm

Considering “relentlessly driving inefficient merchants out of business” has led to the overuse of antibiotics in food and thus anti-biotic resistance superbugs, thousands of deaths already, and likely millions more I think espousing the “quality.. of [our current] foodstuffs” is dubious at best.

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12 Bob September 5, 2017 at 5:03 pm

More and more of the value of business capital is intangible capital, more than 84 percent of the S&P 500 by some estimates.

How much of this is due to monetary expansion bidding up asset prices, with tangible assets being more elastic?

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13 ladderff September 5, 2017 at 9:16 pm

Shhhh nothing to see here….

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14 ChrisA September 6, 2017 at 1:45 am

Annualised real return on S&P500 over last 20 years is 2.745%. I don’t think that we are in a bubble.

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15 Anonymous September 5, 2017 at 5:08 pm

It doesn’t matter.

In situations so dire that water can command $42 a case, no retail method of allocation will get water to everyone. Certainly not to folks who can’t find their wallet in a flooded bedroom.

You have reached a situation that demands large scale disaster aid. Whether that aid is government or charity hardly matters either. Who can get a fleet of trucks to distribution points faster? Let there be a race.

(19 generator guy might have been doing good at some margin, but again, 19 generators were not a solution.)

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16 Thomas September 5, 2017 at 9:35 pm

@$50 PER case of water I might load up a truck, trailer a boat, and take a few days off work to make a quick profit. At the “fair price”, no thanks. Dying of thirst but the aesthetic pleases the leftist.

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17 Larry Siegel September 5, 2017 at 10:04 pm

I know, right? I’ve heard generators are needed. I have one, but I live in Chicago. It would take me quite a bit of effort and money to drive mine to Houston. Should I or shouldn’t I? If the market does not send a powerful price signal, I think I’d better hold onto it for the next big winter storm, which is what i bought it for.

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18 Anonymous September 5, 2017 at 10:37 pm

That would be great. Would you drive straight through? MPG? Any hotel nights? lol. To sell one consumer generator. Assuming roads aren’t clogged with people carrying a couple cases of water.

Market efficiency in action.

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19 Parg September 6, 2017 at 1:11 am

You should be ashamed of yourself. “19 people dying doesn’t matter, way more people die than that every single day… why even bother saving 19 lives when it would cost us nothing?”

20 Thomas September 6, 2017 at 1:25 am

Do you know that these supply line is a continuous function? Each marginal increase in price yields a marginal increase in quantity supplied. Freshman econ.

21 Anonymous September 6, 2017 at 10:09 am

You should be ashamed.

Volunteers who save lives selflessly in the first 6 hours are the heroes.

Not posers who say they “would” profit in the following 72.

22 Thomas September 6, 2017 at 6:42 pm

“You should be ashamed.

Volunteers who save lives selflessly in the first 6 hours are the heroes.

Not posers who say they “would” profit in the following 72.”

Exactly my point. For you, you aesthetic appreciation is more important than real outcomes for peoples’ lives; imperfect suppliers of goods aren’t good enough for you.

23 byomtov September 7, 2017 at 2:31 pm

Thomas,

Do you know that these supply line is a continuous function? Each marginal increase in price yields a marginal increase in quantity supplied. Freshman econ.

Do you know supply curves have a time dimension, as well as price and quantity? In the very short run, what is sometimes called the immediate run, they may be continuous, but so what? If they turn sharply upward, as they will in an emergency like this, elasticity will be low, and the quantity increase will be very small.

Theory is useless to describe what happens unless we have a way of knowing the actual values of theoretical variables.

24 kevin September 6, 2017 at 1:13 pm

Its a nice economic theory, but I realistically can’t see anyone doing this. Especially when an alternative is literally saving lives, which is what people with boats in the position to arbitrage the price of water were actually doing. Revealed preferences shows that people directly confronted with the ability to save a life will give up hundreds or even thousands of dollars of material benefit. (The common example given is coming a cross a child drowning while wearing an expensive suit–do you jump in to save him, even if it means ruining your suit?)

Back on topic, supply isn’t able to move much in the short run–despite the fact that you can come up with some marginal cases which may move it ever so slightly. Is it fair for sellers to take advantage of the sudden increased demand that jettisons where supply and demand cross at market rate? I think it is to an extent, as it more efficiently distributes the limited supply left, but I have no problem discussing/analyzing caps to these mark-ups. Personally, seeing 10 or 20 dollar cases of water wouldn’t upset me.

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25 Thomas September 5, 2017 at 9:36 pm

“Let there be a race”

Hey, good idea. Let’s have a prize, too. First place $50 per case, second place $49.50 per case… we could call it supply and demand.

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26 Anonymous September 5, 2017 at 10:09 pm

This sounds like a libertarian YA novel. Everything falls magically in place.

In a way it demonstrably is not in Houston right now.

https://twitter.com/StephCrass/status/905151323649306628

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27 Parg September 6, 2017 at 1:13 am

???????????

One picture of a store shelf in a place with anti-gouging laws is your proof that all the economists are wrong and living in YA fantasy-worlds and you know better? Just stop.

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28 Anonymous September 6, 2017 at 10:07 am

Feel free to post the opposite, a retailer rapidly scaling to saturate post disaster demand.

29 Thomas September 6, 2017 at 1:27 am

People don’t want to go out of their way to supply water to Houston because people like you will organize groups of leftists to attack them.

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30 Anonymous September 6, 2017 at 10:14 am

You are an idiot.

I recognize market potential, I also recognize limitations in disaster scenarios.

We have relied on military style logistics, massive delivery, in disasters because that is what works.

A million jobbers trying to make a buck out of the trunk of a Honda Civic never has, never will. YA fantasy.

31 Thomas September 6, 2017 at 6:43 pm

“A million jobbers trying to make a buck out of the trunk of a Honda Civic never has, never will. YA fantasy.”

->

“Marginal improvements aren’t good enough to even be considered.”

32 Jeff R September 6, 2017 at 9:46 am

Don’t feel too bad for ’em. You can see a bunch of cases of unsold Natty Light cases there, too. What more does a Houstonian need in these troubled times?

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33 Anonymous September 6, 2017 at 10:15 am

Yeah, light beer not being so far from water, it shows times are not truly desperate.

34 EverExtruder September 5, 2017 at 5:09 pm

This exists in the online retail sphere. A good example was Cheaperthandirt during the 2013 gun craze. Due to explosive demand they defaulted to ridiculous pricing for in-demand items like high-capacity magazines, some firearms and ammunition. The gun community was infuriated (despite there being a legitimate shortage of some items) and their reputation has never recovered. They’re considered the least popular online retailer of shooting supplies in many circles for that and only that. People by and large don’t care about supply and demand in everyday life, they just take personal offense if they feel someone is trying to screw them regardless of that impression being based on real world economic realities.

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35 Hoosier September 5, 2017 at 5:12 pm

How about Best Buy take a loss, and sell the water at cost or less? They’d get great publicity and be doing a public good. And the monetary loss would be in the very short term only.

Many companies already make large donations to charity. Instead of giving $1 million to relief efforts, they could spend it on delivering all that extra water to their stores from across the country. Why wouldn’t this work?

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36 Ryan September 5, 2017 at 5:22 pm

Because then the first guy through the door buys forty cases.

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37 Moss September 5, 2017 at 5:56 pm

…I always thought Supply & Demand determined prices, with or without social media (?)

I’ve never seen Best Buy selling water (or shoes) — where did they get the water to sell in that situation (?) … why bother for the relatively tiny profit involved — just give it away for positive publicity/advertising value (one case limit per customer).

(And Pigovian Taxes are dumb & unjust)

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38 Potato September 5, 2017 at 6:08 pm

Pigovian taxes are dumb and unjust. That’s quite the claim. I’m sure you have a fantastic rebuttal. We’re all ears.

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39 BC September 6, 2017 at 6:50 am

@Ryan is correct. Decisions are made on the margin — see title of blog. It’s better to donate a fixed sum like $1M while raising the marginal price of water than to do the opposite. With a high price of water, some of that $1M will get spent on other things besides water, thus alleviating the shortage. The high price can also incent more supply too, but people who say that no price will be high enough to bring more supply due to the logistical difficulties forget about the incentive to conserve on the demand side. With a low price of water, people will hoard it, hence the empty shelves. When shelves are empty, people that really need the water will not be able to buy it.

If the anti-gougers were correct, then shelves wouldn’t be empty. The empty shelves are the definitive evidence that the anti-anti-gougers — those against anti-gouging laws — are correct

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40 Ricardo September 5, 2017 at 5:24 pm

No, because then the story would be: “Best Buy sold out immediately, they didn’t care enough about people to stock sufficient quantities, they bait-and-switched us into coming into their stores when they knew they didn’t have enough inventory, it was all a publicity stunt, all they care about is profit, etc.”

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41 Anonymous September 5, 2017 at 5:35 pm

I think people understand that retail has less “stock in back” than ever before. Especially electronics stores and bottled water!

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42 Joe Torben September 6, 2017 at 4:27 am

I think you are wrong. No, strike that. I know you are wrong.

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43 Anonymous September 6, 2017 at 10:06 am

Next time you are at Best Buy observe the external building envelope, then walk in and observe the visible retail floor space.

For my local BB they are pretty much identical.

44 Anon7 September 5, 2017 at 5:42 pm

+1. Loss leaders only work when most customers aren’t desperate.

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45 Albigensian September 6, 2017 at 10:50 am

The effect of this would most likely be that the cheap water would be hoarded, or that it would be re-sold at a high price.

n the first case the effect is that fewer people who need water are able to obtain it; in the second, there’s little if any practical difference.

So, perhaps there’d be good publicity if they were to do this. But where, exactly, does the “public good” come from?

There is no more famous quote in economics than Adam Smith noting that “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Or as Billie Holiday put it, ‘God bless the child who’s got his own.” Meaning, simply, that if someone can profit by supplying you with what you need you’re far more likely to actually get it.

The nature of charity is that although it may be uplifting to perform it, there will never be enough of it. the nature of markets is that they will almost always meet demand- at the market-clearing price. But it’s never a either-or, as the two can and do co-exist.

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46 Anonymous September 5, 2017 at 5:13 pm

BTW, the best observation from this disaster was that we need “Uber but for (volunteer) rescues.”

An “Uber for rescues” that required you find your credit card and accept a bit would be more dystopian-than-not for me, ymmv.

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47 Anonymous September 5, 2017 at 5:14 pm

“accept a bid”

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48 Brent September 5, 2017 at 7:29 pm
49 Dan Lavatan-Jeltz September 5, 2017 at 5:35 pm

I wouldn’t worry about it. Once skynet goes online, it is going to scan those twitter posts and know who to wipe out for the good of the universe.

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50 Al September 5, 2017 at 9:42 pm

This is why I continue to work. To do my part.

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51 Clyde Schechter September 5, 2017 at 5:41 pm

Does anyone have any data on what actually happens?

Do the stores that keep their prices gain market share from those that didn’t, at least temporarily thereafter? Do the stores that raised their prices actually manage to keep their shelves stocked long enough and well enough to meet the need? Do supplies actually move from other areas to the place of acute need? Do they do so in sufficient time to meet the need?
And since we’re talking about water, a life necessity over a very short time span, the most important question is: is there enough potable water to go around for everyone, and does everyone manage to get enough?

I’m not an economist, so maybe the answers to these questions are well known and I’m just not aware of it. But, frankly I’m not impressed with theoretical arguments about how markets are supposed to work. Even if I buy into those theories for ordinary circumstances and ordinary commodities here we have something rather extraordinary: an acute shortage of a commodity that is necessary for survival itself (and can be foregone for only a short period of time) and is normally readily available at a price that everyone can afford. Demand, I would imagine, is very inelastic, and moving water supplies from one place to another is neither easily nor quickly accomplished. So pardon my skepticism. Show me the data, please.

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52 byomtov September 5, 2017 at 5:55 pm

Excellent comment.

Only in libertarian fantasyland is it desirable to charge newly impoverished people, who have few alternatives, $42/case for water.

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53 Potato September 5, 2017 at 6:14 pm

Bold hypothesis: demand curves exist but not supply curves. You should submit that as a dissertation.

Idea for a title: Supply curves only exist in libertarian fantasy land, or, Says law does not exist because supply does not exist, a novel approach.

Or maybe Prices: not a source of information and incentives, but rather a tool of imperialist capitalist pigs; free Mumia.

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54 byomtov September 5, 2017 at 7:40 pm

Funny, I was thinking of,

1. Why data matters,
or,
2. Why the graph on page three doesn’t fully describe all economic phenomena,

On the other hand, I might try a few simple essays first, like

1. Say’s Law and why it’s wrong,
or
2. Why supply curves in fact do not exist in some markets,
or
3. The fallacy of assuming that conditions for competitive markets are always met, even approximately.

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55 Thomas September 5, 2017 at 9:42 pm

I would personally transport bottled water at the right price; you are wrong. People respond to incentives, even you, comrade.

56 Anonymous September 5, 2017 at 10:18 pm

Such a weird fantasy. You “would” .. but markets are not quite pulling it off.

There are huge water shortages right now. This is not “look at what entrepreneurs did in a few days.”

This is “look at the ongoing crisis.”

57 Parg September 6, 2017 at 1:18 am

Why do you think that supports you? The whole point is that there are anti-gouging laws and there would be huge backlash if you did this. That’s why no one is doing it. Why do you think you are more qualified than people that study this and do research on it??? I’m completely baffled. Did you stay at a Holiday Inn Express last night or something?

58 Anonymous September 6, 2017 at 10:04 am

I am baffled. Thousands of companies have legal ability to deliver products in the 72 hours after a major disaster.

Why are you playing “they could if?”

They could now.

59 Al September 5, 2017 at 9:42 pm

+1 excellent.

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60 kevin September 6, 2017 at 1:25 pm

The answer is supply curves do not exist in the short term–it is a stock at a specific point in time. Demand changes in an instant–when a hurricane becomes news. It takes time to move water to where it is demanded, much more time if theres a disaster and streets are unacceptable. Thomas and other commenters might be willing to personally take water to where it jumps to 50$ a case, but that takes time and does nothing for the people who need it now. (I’d also guess they are not pricing in the risk that they logistically won’t be able to get there, or that the price will come down by the time they get there)

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61 Careless September 5, 2017 at 9:17 pm

Better than charging them $0 for no water while they go without

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62 Thomas September 5, 2017 at 9:40 pm

Only in communist Dreamland do prices not incentivize Behavior. It is completely impossible that stores would stock up a few extra pallets of bottled water in hurricane season if they knew it would be acceptable to make a huge profit in the event of a storm. Totally impossible.

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63 Chip September 5, 2017 at 10:50 pm

So X prizes a form of price gouging? Why would someone need $10 million to create a product that helps mankind?

Prices define value. High prices attract suppliers. And it seems to work better than moralizing.

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64 Anon7 September 5, 2017 at 5:55 pm

“does everyone manage to get enough?”

Not necessarily, but no one is arguing that they do. The issue is whether “price gouging” makes more of the scarce commodity available on the margin than otherwise (e.g., keeping inventory is expensive and being able to charge a higher price during peak demand allows inventory to be higher) and the corollary, namely, whether suppressing “price gouging” makes less of the scarce commodity available on the margin and thereby increases suffering but allows people to engage in sanctimonious moral preening.

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65 Anonymous September 5, 2017 at 6:47 pm

Budweiser very admirably converted a canning line to can water for disaster services, but I think the only way to deliver such things fast is to find charities ready to distribute.

There is no way to efficiency drop appropriate quantities at Budweiser retailers (when you can even find them above water and operating).

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66 Harun September 5, 2017 at 7:40 pm

Taiwan had a major earthquake 921, and thousands died.

And yet the 7-11 retail network kept everyone in bottled water.

I think you underestimate the supply chain.

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67 Thomas September 5, 2017 at 9:45 pm

Leftists don’t want markets to work, period.

68 Anonymous September 5, 2017 at 10:05 pm

Where is your supply chain in this picture?

https://twitter.com/EzzyCastro/status/903726369644929024

Thomas, fantascists don’t care about facts on the ground.

69 Parg September 6, 2017 at 1:20 am

????? What do you think that picture shows?? A line of cars “proves” that markets not only don’t work, they are fantasies?

70 Thomas September 6, 2017 at 1:30 am

You made my point for me, Anon. If markets worked in this example, people like you would drop the disingenuous argument about efficiency, which you don’t care about, and argue about aesthetics, which is the core of your value system.

71 Anonymous September 6, 2017 at 10:02 am

It is very simple. That picture illustrates that large scale disaster recovery is hard.

Fantasies aside.

72 Harun September 6, 2017 at 11:05 am

I lived for a week in a tent due to Taiwan’s earthquake.

Again, thousands died.

I had zero problems with food or water from 7-11.

Maybe flooding is different because access is physically removed? Or maybe that photo and those issues are localized.

73 Harun September 6, 2017 at 11:06 am

so, please so “facts on the ground” which consist of you showing a photo on twitter with a caption.

I was physically present for the earthquake in the affected region.

74 Anonymous September 6, 2017 at 11:25 am

There are exemplary companies. Budweiser does the right thing. Wal-Mart has a good rep. Waffle House is so serious that they are a disaster metric.

But again, if business just universally “could” they would. It would not be a few standouts.

And you would be linking to show how “swimmingly” (harsh pun) it was going in the Gulf right now. It would not be “they could if.”

The teaching moments, like 19 generators or a last pallet of water, may be technically correct, but my point is that they can never be complete solutions. Massive disasters need massive logistical response.

75 Bill September 5, 2017 at 5:44 pm

Behavioral econ in action…people regard a price increase because of circumstance over which they have no control as unfair, even though the economic rational man would say that’s just the market working.

Coke had a vending machine whose prices rose during hot weather. That was soon nixed because people regarded it as unfair, although, if you choose to go to a high end resort, you will pay the same high price for the Coke. The difference is that you chose to go to the resort, while in the the former case you did not choose to have the temperature increase.

I think there is a Harvard Business School case study on this.

Rational econ v. behavioral econ. Fairness is ignored by econ man, but dwelt on by human man.

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76 Careless September 5, 2017 at 9:20 pm

The expensive resort coke machine will charge a dollar or whatever whether it’s in Miami in summer or Aspen in winter.

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77 Haakon Birkeland September 5, 2017 at 5:58 pm

A micro-tax on publishing comments, photos, and any kind of information to the internet would fix many problems, from “fake news” propagation to issues with managerial accounting for information-based firms.

And imagine what would happen to the quality of comments on this blog!

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78 Thiago Ribeiro September 5, 2017 at 11:27 pm

I doubt it would stimulate more commentaries about Prophet Bandarra.

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79 celestus September 5, 2017 at 5:59 pm

If Best Buy had sold each bottle for $1.99 it clearly wouldn’t be price gouging. So why is it an outrage that they’re selling 24 bottles for $43?

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80 Harun September 5, 2017 at 7:41 pm

Because people can share it on FB and feel like they’re doing something. Virtue signalling and altruistic punishment.

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81 Aaron Stapleton September 6, 2017 at 12:05 pm

Thumbs up.

The price comes out to $1.79/bottle. I assume that they carry small quantities in the back to stock small coolers near the register, which likely sell for $1.79/bottle. So selling a single for $1.79 every day is fine, but a pack for $1.79 each is outrageous.

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82 Andre September 5, 2017 at 6:08 pm

Shouldn’t some enterprising water provider be happy to know that he can drive down to Houston and sell his water for 42 dollars a case? If the point of price gouging is to get more supply into the market shouldn’t we want the high prices advertised as far and wide as possible?

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83 Donald Pretari September 5, 2017 at 6:27 pm

” A local merchant may not care much if people in Iowa are upset at his prices, but major companies will fear damage to their national reputations.”

I remember in 2009 when people argued that major financial businesses would never risk their reputations conducting the kind of nefarious practices they were accused of. Wrong. A person I know checked into a major hotel chain only to find the room’s toilet not viable. He complained and complained and got no response. He then threatened to call the CEO of the hotel chain. Did that work? Of course not. “Hey CEO, we’ve got a guy on the phone here from Stockton complaining about a toilet.” “Tell him I’ll come out and plunge it myself, Mr. Lackey.”

“…that’s why Best Buy so quickly apologized for its store selling the water at such a high price, blaming the incident on an overzealous local manager.”

That’s called damage control when caught. Can you keep your eyes focused on the moving apology and excuse?

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84 Harun September 5, 2017 at 7:42 pm

See Wells Fargo…who did weather the financial storm pretty well.

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85 Potato September 6, 2017 at 5:54 pm

What are the nefarious practices? Been waiting for 8 years, please do tell.

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86 Viking September 5, 2017 at 6:33 pm

The more important point is, what is the correlation between surplus capacity and long term living standards?

Since I was a young adult 25 years ago, I have thought “Just In Time” was a sub optimal mode of operation, as the loss of a sale could easily outweigh the cost of inventory, especially in today’s low interest rate environment.

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87 Harun September 5, 2017 at 7:43 pm

Inventory creeps up on you. Seriously. Its the devil.

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88 JWatts September 7, 2017 at 3:58 pm

“Inventory creeps up on you. Seriously. Its the devil.”

True, but “Just In Time” can result in production down time, if it was “Almost In Time”. The fact is that most plants say the words “Just in Time” like sales guys use the phrase “We be giving it 110%!”

“Just in Time” in reality is a lean supply inventory initiative, not a Zero supply inventory as the name would imply.

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89 JWatts September 7, 2017 at 4:06 pm

Actually, that’s not even accurate. In actual implementation at car plants, “Just In Time” is more of a move to push the capital inventory costs over to the supplier.

For example the policy of having Zero inventory space for vehicle seats, effectively means the Supplier has to load them in the correct order and store them in shipping trucks. The inventory has gone down, but that’s a minor effect. The major effect is that the car assembly plant has transferred labor costs in sorting and handling to the supplier and reduced the required amount of Assembly plant floor storage space. Both of those savings probably dwarf the cost of actual inventory savings.

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90 Al September 5, 2017 at 9:32 pm

I look forward to your new company. It is an innovative idea. Knock them out tiger!

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91 Potato September 6, 2017 at 6:00 pm

+1, got a laugh out of that. Someone needs to retake their engineering and inventory management classes. Hint: there’s a rule for optimization, it’s fun and the simple one requires high school calculus.

Cash in inventory is non interest bearing. Cash in bonds is interest bearing. Working capital invested in unnecessary raw material or inventory is cash sunk in an asset that could be used for other things.

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92 JWatts September 7, 2017 at 4:07 pm

Extra raw material and inventory is also subject to spoilage and shrinkage. Both of those factors are far larger than the interest from bonds.

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93 asdf September 5, 2017 at 6:59 pm

Why not sell it by the bottle, doubling the price per bottle bought by the same customer?

Everyone who shows up can have a minimal supply at pre-crisis price, and the store can say, justifiably, that this maximizes distribution while minimizing hoarding.

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94 Jay September 6, 2017 at 1:38 pm

“same customer” is extremely difficult to measure and not exploit.

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95 Slocum September 5, 2017 at 7:01 pm

Why the hell didn’t they just offer ‘Free case of water with purchase of large flat-screen TV’?

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96 The Other Jim September 5, 2017 at 9:03 pm

Bonanza offer for looters, right there.

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97 Slocum September 6, 2017 at 7:10 am

An even better solution that’s not actually a joke. They should have broken the cases apart and sold the bottles only individually. At that point, the per-bottle prices would have been about what gas stations charge at normal times, and it would have helped prevent hoarding behavior as well.

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98 ... September 5, 2017 at 7:13 pm

You forgot to mention the classic EconTalk episode on price-gouging!

http://www.econtalk.org/archives/2007/01/munger_on_price_1.html

These early Mike Munger episodes convinced a young high-school me that maybe socialism wasn’t so obviously a great idea, and that I had some things to learn.

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99 derek September 5, 2017 at 9:06 pm

https://www.linkedin.com/pulse/inside-story-what-took-keep-texas-grocery-chain-running-chip-cutter

Ultimately a disaster is a market opportunity. People need things, so get them in stock at a price they can afford in quantities that are required. In the article it describes what happens when an area becomes accessible after a flood; people are desperate for water and for basic food items and toilet paper. And mops and buckets. So they stock them in quantity.

What they did here is build up an intangible asset of extraordinary value. The supply chains were used for what they were designed for; get products to a ready market.

One of my customers had trouble getting product to their stores without a flood as an excuse. Their systems were inflexible making the problems unsolvable quickly. They still haven’t recovered what they lost. Seeing a chain of this size make adjustments of this magnitude quickly, and seeing their suppliers adjust along with them is encouraging.

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100 Crikey September 5, 2017 at 11:40 pm

One kilogram of calcium hydroxide can apparently disinfect over 10 tonnes of water.

One kilogram of kerosene can boil over 40 liters of water.

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101 Parg September 6, 2017 at 1:22 am

That won’t get rid of the chemicals though

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102 Crikey September 6, 2017 at 2:02 am

I would think the chance of a one gallon random sample of disinfected Houston flood water having toxic substances in it worse for a person’s health than smoking one cigarette would be very small. So if people need drinking water it’s a risk worth taking. Boiling and exposing water to sunlight can break down or boil off some toxins.

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103 prior_test3 September 6, 2017 at 4:48 am

It is the random sample part that is the flaw – you don’t get to pick the flood waters around you, after all.

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104 tony Cohen September 6, 2017 at 2:03 am

Possible solution: not ideal, but possible.

If I were a business actually most concerned with preventing hoarding to the first people at my shop, I would elevate prices (to prevent hoarding) will simultaneously stating that the additional cost will be going to a charity to aid recovery and not the retailer’s pocket.

This isn’t ideal, but a possible work around?

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105 Axa September 6, 2017 at 4:36 am

Consumer expectations.

This is the Best Buy where people make a line at the door 24-36 hours before Black Friday. They don’t increase prices even though there’s a mob waiting.

Also the same Best Buy that sells gaming consoles at the same price no matter the stock is finished in one hour.

This is the Best Buy consumers know and expect. Supply, demand or incentives are irrelevant to the kind of people that makes lines before Black Friday.

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106 Butler T. Reynolds September 6, 2017 at 7:35 am

Wails about Price Gouging and laws enacted to prevent it sum up nicely why there should be a separation of education and state.

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107 Brent September 6, 2017 at 1:38 pm

Which do you believe to be the stronger force of supply:
1) The customer relationships between Texas’s largest supply chains that deliver water; or
2) The number of people who will temporarily enter the market to bring water into Houston at $40 a case.

https://www.ksat.com/news/heb-sends-trucks-supplies-to-help-aid-victims-of-hurricane-harvey

I’ll bet on the former, with the combined forces of twitter and the story of Jacob v Esau making #2 unlikely, ever.

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108 JonFraz September 6, 2017 at 1:49 pm

Price gouging happens (or happened) due to buyer ignorance of competing prices, since it’s physically difficult to survey a large number of vendors in person. Along comes social media which makes such a mass survey much easier– and Tyler pronounces what should be a boon to a properly functioning market as a “problem” because businesses can no longer get away with things that public ignorance used to allow.
File under “wow. Just wow”.

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109 dan1111 September 7, 2017 at 6:34 am

No.

The price gouging being discussed here is raising prices because of a real, short term surge in the value of a product, either because of a supply shortage or increase in demand (or both). Harvey has greatly increased the demand for drinking water, while also restricting supply into the area. Therefore the price of water that the market will bear in the area is genuinely much higher than normal. The question is whether it is wrong for businesses to exploit that opportunity by actually raising prices.

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110 MyName September 7, 2017 at 10:09 pm

It’s weird that economics can still have a legitimate debate about something that seems like it should be a simple enough thing to work out one way or another. I don’t have a definitive answer either, but my feeling is that allowing/encouraging price gouging seems to reward those with lots of excess cash on hand, while keeping the price the same (and risking shortages) rewards those with more time to wait in line or search multiple locations for goods.

In both cases, the market will still clear due to the short term demand spike and in both cases, the firms creating and distributing the goods will be motivated to send more goods to that location simply because of the high demand. As long as the original price was profitable to begin with, there will be alot of money made by someone to meet that demand spike. And no one would fault merchants who raise the prices somewhat to meet the extra costs. I don’t see how a 10x price increase is justified for many of these goods.

Politically speaking, the people with that excess cash to are probably already able to better prepare for the emergency regardless of whether we allow price gouging or not, while the people without excess cash are probably better off if they don’t have to spend it on emergency goods, even if it means they have to wait in line or search multiple locations (or even go without). So it makes sense that laws against price gouging would be in place, just as they had wartime rationing of some goods in the past. Even if allowing price increases would encourage some entrepreneurs to risk a naval blockade (for example), it’s still not going to be a good solution for the majority of the people who still need access to these goods and don’t have large amounts of cash lying around. They need a factory creating trainloads of a product, not a few extra guys selling things from a truck. And laws are written to support what works for the majority.

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