Should Amazon and eBay allow price gouging?

This one has been a big story (NYT):

Matt Colvin stayed home near Chattanooga, preparing for pallets of even more wipes and sanitizer he had ordered, and starting to list them on Amazon. Mr. Colvin said he had posted 300 bottles of hand sanitizer and immediately sold them all for between $8 and $70 each, multiples higher than what he had bought them for. To him, “it was crazy money.” To many others, it was profiteering from a pandemic.

The next day, Amazon pulled his items and thousands of other listings for sanitizer, wipes and face masks.

Colvin ended up giving them away to charity (NYT).  More analytically, here are three factors that matter when we consider whether a market-clearing price is better:

1. The traditional maximization of consumer + producer surplus that results from market-clearing prices.

2. People getting pissed off when they see the inequities and supposed inequities of price gouging.  That is a real economic loss too, though you have to wonder how much they actually would pay to make the gouging go away (and they might consider such a payment a “price gouge” too!).

3. There are significant social externalities to consumption during a pandemic.  So do the market-clearing prices or the rationing algorithms do a better job getting the relevant protective commodities to the most likely super-spreaders?  You might think poorer individuals are the most likely super-spreaders, but low prices and queue don’t seem to place the scarce commodities in their hands anyway.  Marginal allocation will be by privilege (e.g., do you have friends in China who can send you masks? etc.) if not by income.  So I do not see that this factor is going to favor rationing algorithms.

On net, the market-clearing prices are likely to be the better solutions.  I also am reluctant to eschew better solutions simply because some people do not like them from a distance, consider Sen on Paretian liberalism.

One interesting feature of this problem is that it points to a potential disadvantage from conglomerates such as Amazon.  Masks for instance are a tiny part of Amazon’s revenue.  Yet price-gouging on masks can hurt Amazon’s public image a lot.  So a fearful Amazon is unlikely to allow the welfare-improving price gouging to continue.  The company is too much an agent and too easy a target on social media.  That keeps them away from welfare-maximizing, politically incorrect decisions.

Alternatively, imagine you bought masks at a shop that sold nothing else — The Mask Store.  Perhaps their reputation rests on having masks always available, but in any case they are not afraid that bad PR will destroy their profits in other lines of business, as there are no other lines of business.  So The Mask Shop is more likely to allow prices to reach their market-clearing level.


You get what you pay for, but not necessarily what you think you are paying for. Econ. 102.
So let folks pay whatever they are willing to pay, Ignorance isn't free.

@Renzo Alves - right you are, one reason I oppose compulsory licensing and mandatory maximum licensing fees for patents, common around the world, even in peacetime. I don't mind the government expropriating patented technology during war time conditions, and paying money for it, but during peacetime it should be illegal. But it's not, yet another reason why "inventing sucks" and another reason why we are facing a pandemic today (innovation does not pay, just look at your gate-keeping, rent-seeking self, dear reader).

Bonus trivia: I actually know from friends of friends some people working on the Covid-19 vaccine. If and when I get legal inside information that I can trade on (such as likelihood of success, think about what that news would do to the stock market), I will do so, and you can be assured I won't tell you, even though I won't be breaking any laws if I do (read Matt Levine's Bloomberg column, 'everything is inside information', I can see the SEC making the arguably weak case that though my inside information is legal, telling MR readers to buy is market manipulation since I'm so widely read and influential), because let's face it, who needs the SEC inquiry, even when you're 100% clean? Another example of how over-regulated the USA is. And IMO inside information trading is a victim-less crime that should be legal.

I really couldn't agree more.

great information you got here keep up the great work!

Amazon and Colvin are separate actors. Amazon is perfectly free to decide that the major reputational damage is not worth the minor incremental share in Colvin's profit.

Colvin is perfectly free to drive around and sell them for any price he wants -- just like how he bought them.

Colvin was not free to do as he pleased. He was under investigation by authorities for price gouging. Amazon is similarly compelled not to break state laws by facilitating crime.

The point that the troll pretends not to understand is that Colvin is free to sell without Amazon's help.

Disclaimer for the theatrically stupid: Yes, he has to obey the law. He can't sell them at gunpoint. He can't drive his car through a daycare. He can't defy gravity. Etc.

No, Colvin is not “free to drive them around and sell them for any price he wants.” State governments are investigating him and scaring away others who would dare sell near a market-clearing price. From the article:

The Tennessee Attorney General’s office sent Colvin a cease and desist letter and opened an investigation, and "[t]he attorney general’s offices in California, Washington and New York are all investigating price gouging related to the coronavirus...An official at the Washington attorney general’s office said the agency believed it could apply the state’s consumer-protection law to sue platforms or sellers, even if they aren’t in Washington, as long as they were trying to sell to Washington residents."

From a follow up article: “ ‘We will not tolerate price gouging in this time of exceptional need, and we will take aggressive action to stop it,’ Attorney General Herbert H. Slatery III of Tennessee said in a news release.”

" let folks pay whatever they are willing to pay, Ignorance isn't free"

The military buyer, the fire department, looking to protect the soldiers or EMTs will not pay the cost, just the taxpayers.

Ie, nobody will pay the cost of high profit price gouging.

1/ The traditional defense of gouging is that there is a genuine economic good being delivered by the gouging - e.g., logistical delivery. One is shipping goods from a region with plenty to a region without, say; the service provided is the logistics, without which the good would simply not be available in the region.

Here there is no such defense - it is buying from one retailer to relist on another retailer. It's pure pecuniary externality imposing a transfer; there is no social welfare gain in the traditional analysis (no interpersonal utility comparisons, gentlemen!)

2/ The "preferred" allocative algorithm seems to be the command one - e.g., a charity that consciously allocates it by perceived need. But of course any approach that has a single equilibrating price (be it measured in dollars or time spent queuing) does not map well onto willingness to pay or "wealth-adjusted" W2P. Only perfect price discrimination can deliver that.

3/ One oddity is that I have seen some leftists celebrating Colvin - because he is "the little guy" getting something out of the pandemic, whilst Amazon is irredeemably evil. The future of populism might be a weird place.

If he was buying them from rural retail outlets in Tennessee and selling them to more urban areas where they're more necessary and in greater demand, isn't he providing a logistical service?

Technically all physical transactions are logistical services -- objects are being moved -- but when 5% of the price would suffice to break even on transportation costs, and the remaining 95% are profit, then it is still reasonable to say that the main effect of the operation is to increase prices, not provide a service.

Also, not all services promote social welfare -- as an extreme example, selling an Infinity Stone to the highest bidder on a market that only Thanos and a homeless guy have access to.

He was selling them through Amazon, not trucking them to urban areas.

Also, people living in rural Tennessee need hand sanitizer also, and he was buying out the stores' inventory. Do you really think Walmart, et al, are vastly oversupplying these rural outlets? I doubt it. They have a somewhat better handle on needed inventory in various places than Colvin does.

"If he was buying them from rural retail outlets in Tennessee and selling them to more urban areas where they're more necessary and in greater demand, isn't he providing a logistical service?"

He started with cleaning out all the stock he could find in Chattanooga. Chattanooga is not a "rural" area.

"Driving around Chattanooga, Tenn., they hit a Dollar Tree, then a Walmart, a Staples and a Home Depot. At each store, they cleaned out the shelves."

I disagree with #1. There is a genuine good being provided: making the products available at a market clearing price.

The mechanism seems a bit unusual, but it is really just comparative advantage. Traditional retailers have more to lose from the appearance of price gouging than random individuals. It's more efficient for random individuals to be the "fall guy" in situations like this.

A similar situation is concert tickets. Charging high prices directly would alienate customers, so intermediaries like Ticketmaster do the dirty work and take the reputation hit.

In these cases not only is it that intermediaries are disliked for being successful, they are only successful because they are disliked!

And much prefer the term speculation to profiteering from a regrettable situation.

Actually the term is cornering. Shame that an econ blog didn't mention those trying to corner the market and set prices. These old dotards must be really feeling the quarantine.

Wrong. That's a colloquialism for monopoly. No moron with a storage locker and an amazon account was ever going to monopolize hand sanitizer distribution. The correct term is, in fact, speculation.

A few of these morons could and did corner the local sanitizer and toilet paper markets. Why are conservatards so willfully ignorant of economics? Cornering a market is not the same as a monopoly.

First, price gouging creates a situation analogous to a bank run. The only threat to the supply of toilet paper and other essentials at the moment is the self-fulfilling prophesy caused by everyone worrying about the supply and therefore stocking up. The common sense solution is to have generous but common sense restrictions on how many essentials someone can buy at once. The disruptions to supply chains so far are modest and so there is little justification for massive price increases. If or when supply chains start to fail, market clearing prices are the way to go but backed by government subsidies and perhaps direct government involvement in logistics by mobilizing FEMA and even the military.

Second, there is an added level of immorality to price gouging under present circumstances because a large number of people find themselves with little or no income through no fault of their own.

@Ricardo - actually the opposite is true. On your first point, price gouging guarantees you'll always have a supply of toilet paper (if you have money) so no need to stockpile. On your second point, there's no 'immorality' in making money, just look at all the lower income lottery winners who struck it rich.

Bonus trivia: if the Fed carries through their promise to double base money reserves to $9T, we'll be using dollars for toilet paper!?

The problem isn't making money per se. The problem is monopolizing stocks of essentials, temporarily depriving people who really need them of the ability to purchase at normal retail price and then reselling to them at a much higher price.

If the original seller had raised the price, the "monopolist" wouldn't have been able to buy up the supply to resell at a higher price...

So where should the price go up?

And limits do nothing but ensure an inadequate distribution of goods. If a factory limits stores to 1000 packs of toilet paper each that sounds reasonable until you consider that the store in Jersey City has demand for 10000 rolls while the store in Des Moines has demand for 100. You end up with the store in Des Moines having 900 more than they need.

At that point, why would it be wrong for someone to buy the excess supply in Des Moines and offer to ship to the highest bidders in Jersey City?

It's pretty simple. I never said wholesalers should be limited in how much they can purchase from factories or that retailers should be limited in how much they can purchase from wholesalers. Instead, simply limit consumers from buying more than one 24-pack of toilet paper in a visit, for instance. That's easy to enforce and imminently reasonable. And we don't even need a law for it, U.K. retailers are voluntarily doing things like this.

Joe Sixpack who doesn't have a registered business or a fleet of vehicles is unlikely to put much of a dent in any supply chain problems between Jersey City and Des Moines. Let the professionals handle it -- as someone pointed out, American logistics is off-the-charts efficient at this point. And if there is some serious disruption in the supply chain due to a massive outbreak or financial crisis, ask FEMA or the military for temporary help.

But, really, it will almost certainly not come to that -- all of our infrastructure is in tact and all we need is for people to start behaving responsibly and quit panic buying.

“simply limit consumers from buying more than one 24-pack of toilet paper in a visit.”

Optimizing allocation (low value to high value uses) helps people across space.
Simulating production helps people across time.

Letting prices rise does both. Rationing by quantity does neither.

Also, stores won’t coordinate to enforce rationing anyway, so consumers could still shop around/at different times/with different people to hoard.

eBay and Amazon both take a percentage of the sale price, so after the dust settles, lawyers can impose civil damages of $10,000, and in some states $25,000 and if it is an elderly person in some states $250,000 per transaction, so eBay & Amazon could have some very busy legal departments in the future. Most of the lowbrow schlocks who hoarded items only to resell them at over a 1000% profit will likely have squandered their money, but eBay & Amazon? Deep pockets! If a judge issues a writ of execution on the property of a losing litigant the sheriff shows up and enforces the writ. A moving van tow, trucks, and a lien against the house usually accompany such writs. Having their wages garnished and if the person is on welfare just keep their welfare checks and EBT cards until the fines are paid. A few examples like that, showing the legal consequences would slow it down a lot. The website Backpage was raided and shutdown in a matter of minutes for human trafficking, so Craigslist would be fair game, Amazon, eBay, or anyone else acting as an intermediary in illegal activity. It's called an injunction. The FTC and OIG show up in black SUVs with court papers, banker's file boxes, hand trucks, and of course, guns, lots of guns. Poof! You are closed! Later on the private practice lawyers will start to circle like buzzards filing civil suits at $5000, $10,000, $25,000 even $250,000 per transaction so one bottle of $4 hand sanitizer sold to an old lady for $50 is worth $250,000 in the right jurisdiction. Once one case wins, it's class action time, and a class of litigants could bring in $1,000,000,000 just for one law firm. What do I need to enforce that? The victim's credit card & PayPal statements and that's enough. Di victim A buy a $4 bottle of Germicidal hand sanitizer for $50 + $28 shipping? Yes, DONE! $10,000 from eBay and $10,000 from the seller, plus legal fees. If the class has 10,000 people in it, $20,000,000! 100K people $200,000,000! It's in the criminal codes in some states, commercial codes in others, and some places it is in municipal codes, or county legal codes. Did you sell a roll of toilet paper to a man in Texas for $15? Yes. Was the man 86 years old? Yes. Congratulations! We are suing you for $250,000! No money, no problem! We have an easy payment plan! Show some guy's stuff being auctioned off on the news and it won't look like such an easy way to make money.

"because a large number of people find themselves with little or no income through no fault of their own."

This is why I suggested to Tyler that the $1000 check sent to every person(? or just adults?) should be simultaneous with a 100% tax on goods that people are hoarding. Make the price of toilet paper double. People will back off once they see there is a stable supply.

The worst possible situation is to stop stores from gouging but allowing it on the black market, and stopping it on the black market is extremely difficult, by definition.

Uber seems to have won the PR battle on surge pricing. Initially, some people complained for the usual anti-price gouging emotional reasons. But, now, people seem to accept it. Price-gouging has no absolute definition: it just refers to prices that are higher than "normal". But, if one routinely employs surge pricing, then surge pricing becomes "normal". Another example: airfares fluctuate all the time, so no price is considered gouging. There is no "normal" price.

Price gouging has a legal definition in 34 states that have laws against it.

"Price-gouging is often defined in terms of the three criteria listed below:

Period of emergency: The majority of laws apply only to price shifts during a declared state of emergency or disaster.
Necessary items: Most laws apply exclusively to items essential to survival, such as food, water, and housing.
Price ceilings: Laws limit the maximum price that can be charged for given goods."

With the law as a guideline, surge pricing for a non-essential like car service would be acceptable most of the time. Hand saniziter could very strongly be argued as an essential during a pandemic.

@Hugh Graysom- you're right Hugh. And a funny personal anecdote: during the Rodney King riots I was in LA, I stockpiled food (by chance, I hate shopping and always stockpile stuff), and when I sold my neighbor some food for a modest markup, either the neighbor's roommate who was jealous of me (and my good looks), or the neighbor themselves (dog bites hand that feeds it) called the LAPD, who gave me a short but polite lecture against price gouging, which I respectfully listened to and nothing else came of it. During that same time, they also had water rationing restrictions due to drought which I routinely flouted out of ideology, but that's a story for another day. Hey I'm a nice guy in real life!

Price gouging incentivizes disinformation and benefits from improper resource allocation. The more resources locked up by scared people, or being held in hopes of a better resale price later, means that people who need it now won't be able to access it.

All those people touting hand sanitizer as the best way to protect yourself, when simple soap is actually more effective, as the virus has a fat-like cell structure, and regular soap is actually more effective at dissolving that.

It's almost as if capitalism is a type of DOCTRINE, that is reinforced by SHOCKS to the system.

@davie - you obviously don't understand price discovery or capitalism, but as to your point about soap and fats, you should be aware that detergents are even better at attracting fat than soaps are (at least 10% better) so you should be washing your hands with dishwasher detergent for maximum benefit.

Bonus trivia: if we ever have a nuclear war (which actually are quite survivable, nuclear gets bad rap) the best way to rid yourselves of radioactive particle is washing with soap / detergent and water, seriously. US military teaches this.

I obviously don't understand something, and yet you don't time to explain it?
Not even a link or two?
And you try to throw in an even more pedantic fact instead?
Meanwhile you missed my subtle allusion to the an actual thesis on Capitalism that we're seeing play out in front of us?
Do I have to phrase everything as a question?

When demand > supply and prices cannot adjust, people start forming queues. Of course this just means the rich will simply pay people willing to stand in line for them.

I also wonder how many of these sales at "inflated" prices were to other arbitrageurs hoping to sell for an even higher price?

One thing that should have been made clear in the present crisis, but which seems to have escaped notice, is just how crucial flexible prices are to disseminate information and coordinate activity at mass (super-Dunbar) scale. We don't have markets for reserving COVID-19 treatment capacity (hospital beds, ICU slots, ventilator usage, etc.) and, sure enough, the most pressing problem we face is that our treatment systems may become overburdened by sudden surges in patient demand.

When price controls interfere with markets for non-essential goods, say an iPhone, some people just end up without iPhones. Not good, but not life threatening either. In the case of a pandemic, however, lack of price signals deprives us of our most effective mass coordination tool when we need it most: to allocate tests to highest-value use; to internalize costs and benefits of social distancing; and to signal the need to prospectively ramp up production of masks, tests, and scalable/temporary hospital capacity. Instead, we end up relying on jawboning and daily press briefings for coordination, which we now see is a poor substitute. The result is either tragic deaths and overloading of hospitals (Italy) , shutting down the entire economy for a few months, or some combination of both. When lives are on the line, the stakes are too high to go without our most effective tool --- our only effective tool actually --- for mass communication, information sharing, and coordination: price signals.

"When price controls interfere with markets for non-essential goods, say an iPhone, some people just end up without iPhones. Not good, but not life threatening either."

I am pretty sure that in the real world, with no price controls, some people just end up without iPhones, i.e. people who can't afford them (besides those who don't care about them, obviously). Not good, but not life threatening either. Maybe we should not treat human lives like we treat iPhones.

@BC - excellent points but I'll point out, as Satin's Lawyer, that during wartime conditions like WWII, both the USA, the USSR and Germany found a 'top down' command and control system to be effective at producing goods essential to war. However, as economist Robert Higgs has pointed out (boy I'm good, I remembered his name, confirmed by Google) such 'top-down' commands took a toll on the economy (civilian welfare suffered). But it worked. However, it requires some expertise in allocating resources. Stalin initially had his factories too close to the German border and lost many (he later moved them, wisely, to east of the Ural mountains) and Germany wasted a lot of resources trying to perfect synthetic rubber and fuels, but in general a 'wise visible hand' will beat (or match) the 'invisible hand' say many economists.

Rationing is a perfectly acceptable way to run in crisis condition, e.g. it is preferable for rich and poor alike to tighten their belts in a famine than simply having the poor die so the rich do not suffer inconvenience, but it takes a while to establish the rationing procedures. A company like Amazon is actually better positioned to institute rationing than any government bureaucracy, e.g. to assign sanitizer in priority to the over-70, pregnant, diabetic and so on, with a two-bottle per customer limit. In fact they already have the technical ability to impose per-customer limits on specific SKUs.

In the case of a pandemic, however, lack of price signals deprives us of our most effective mass coordination tool when we need it most: to allocate tests to highest-value use; to internalize costs and benefits of social distancing; and to signal the need to prospectively ramp up production of masks, tests, and scalable/temporary hospital capacity.

You make the same mistake as Tyler. You assume that the highest-value use is the one that someone is willing to pay the most for. In a pandemic, and any other emergency situations, that just isn't true. These are not concert seats or restaurant meals.

to signal the need to prospectively ramp up production of masks, tests, and scalable/temporary hospital capacity.

You mean without price-gouging no one would be aware of these needs? I think they would be.

First, prices are not all that good at conveying information under conditions of Knightian uncertainty and when emotions are running high.

Second, FedEx, Toyota and the U.S. military are capable of coordination on a truly mind-numbing scale through planning and management. Yes, these institutions rely on markets and outsource activities but a huge amount of activity in planned, coordinated and executed internally.

Third, it doesn't make any sense to say that markets can "allocate tests to highest-value use; to internalize costs and benefits of social distancing." As South Korea has shown, the highest social benefit of testing is to rigorously test everyone who has symptoms or was exposed, then do contact tracing and test their associates, etc. The irony is that countries that were very invasive in investigating and quarantining people early on can now afford to allow much more freedom of movement. Infectious diseases are about the clearest case of a negative externality one can find.

“The irony is that countries that were very invasive in investigating and quarantining people early on can now afford to allow much more freedom of movement.”
Agreed, though we could distinguish between tests and masks vs soap and sanitizer.

I agree w Balaji Srinivasan’s preference ordering:

1) smart centralized governments like Singapore seem to be best

2) dumb centralized governments like the FDA/CDC/HHS/DC mess seem to be worst

3) a decentralized response is far better than nothing

4) pragmatism over fixed ideology

As a commenter has already pointed out, buying up all supplies and then selling them for a premium is a no-value-add activity; in essence, it is creating a mini-monopoly and profiting from the rent.

The clear advantage of Amazon's ban is that of signaling: it is to nip this type of monopolistic behavior in the bud. It creates a very clear signaling effect to others that this type of no-value-add behavior should not be attempted.

The main "social externality" is the people who don't understand economics and think they are entitled to get whatever they want at a low price.

Yeah, Amazon, Ebay, and other trillion dollar companies don't really understand economics. That's the mind-blowing insight we expect out of armchair economists here on MR.

I assume you are speaking as a person in a profession that has acted collectively to set lifetime tenure standards so as to protect the public interests, and I applaud your support of the principal that people should be able to get any product or price they want, including academic services.

principle, unless you are a principal. Spell checkers are responsible for bad grammar, not the writers, so I maintain.

This isn’t a case of people getting “ whatever they want at a low price.” We’re not talking about the latest Nike sneaker. There are many substitutes for that and it’s not going to help you stay healthy. Price gouging is an issue for items that people need NOW to stay safe and healthy. Buying all of the supply of hand sanitizers in a community means that no one can use it - it’s sitting in a truck or warehouse until “the market can clear”. This takes time. Also the supply chain is not set up for a huge surge in demand. It takes time for manufacturers to ramp up production and move product through the supply chain. During this delay, people are unable to use the hand sanitizers, increasing the likelihood that some of them will catch the virus, which then cascades. You can’t justify this on “market efficiency” grounds. We’re not talking about selling these items for prices lower than normal.

Then there’s the moral issue. People know what products they can purchase at local retailers and at what price. They plan for that. They don’t normally hoard hand sanitizer in fear of price spikes or stock-outs. So there’s an unwritten set of expectations between the retailer and the community. The price gouger is like a vandal, destroying those expectations.

And of course there’s the issue of selling health care based on who can afford it rather than who needs it.

Economists need to inject real world scenarios and morality into their price-gouge theories.

Overall a bad idea.


Jeff Bezos disagrees. When you are the world's richest man running one of the world's largest business you don't want it to be known as a price gouger or a predatory business.

Unless you're okay with some anti-trust enforcement drummed up by angry voters and a hostile administration that has an axe to grind with your name on it.

Half of Amazon sales are 3rd party sellers

I'm not 100% sure, but ebay doesn't sell anything. ebay just puts some ads and is in charge of payments. All products are sold by people not related to ebay, right?

If Amazon or ebay do something about 3rd party sellers playing with prices, they just bring their business somewhere else, craiglist, facebook marketplace?

Different anonymous here. There are different kinds of third-party sellers. Some are small distributors, between factory and consumer. Others try that weird game of buying at retail and selling again at retail.

Maybe in the long run it's harmless if one idiot(*) buys a 99 cent hand sanitizer and sells it online to another idiot for $20. But in the short term, if the shelves are clear, sensible people miss out on that 99 cent purchase.

* - you know most of them are going to end up sitting on a storage unit full of cheap hand sanitizer

First anonymous here. Someone posted links quoting price gouging laws. In addition to a bad rep, Jeff Bezos is wise to avoid jail time too. Those 3rd party sellers are betting that law enforcement won't care and in the age of the smartphones recording everything I'd rather follow the law but that's just me.

The usual rules don't apply during a public emergency. When times are normal, go ahead buy up as much toilet paper as you want, but in a time like this you need to make sure that nobody is without the essentials.

Oh please. This only works if no one is a criminal or if criminals are insensitive to rewards.

Take a real world example. Normally hospitals have N-95s in large quantities under minimal security (often a single code access door to which virtually everyone knows the code). Stealing them is hardly worth the effort. Absent hoarding and monopoly rents derived therefrom, very few people would be enticed to steal them in quantity.

But we let the price gougers into the game. Even if the actual markup is much less than 10x, some people will see the most sticker shocking prices and assume the high end gouge price is normative. Now the incentive to steal rises dramatically.

And this exactly what we are seeing. Hospitals are locking down bulk supplies because there are too many patients and even employees who will steal at the now inflated prices.

And of course it does not end there. Hospitals buying from the gougers will drive prices higher and increase the incentive for theft. Worse, during the thefts there will be leakage (e.g. masks contaminated during the theft).

The off ramps are all insanely costly of their own right. Skimp on provider PPE and you get nosocomial disease spread. Losing providers degrades our ability to treat people and losing even a single physician to even the quickest illness and recovery is going to be measured in thousands of dollars if not lives lost.

Or you can lock away masks and possibly hire security. Again this is a huge cost. I have only so many man-hours in the day and having to coordinate continuous movement of PPE from secure storage to the floor burns a certain number of them. That is time people are not treating patients.

But won't high prices induce more supply? Maybe under normal circumstance, but we are in the middle of an epidemic. We are already building out capacity and even a 10-fold increase in the price of PPE is unlikely to result in all that much new production before it is no longer useful.

So what would the cost of full rationing be? Amazon places customer limits on sales. They pay a programmer $1000 to write some code to log when you placed the order and directs the seller's output down a FIFO pipe. Maybe some rich people pay more on the secondary market. Maybe they hire 50 college students to each log an order for them. Who cares?

Queues provide much less incentive to steal because liquidating your stolen goods to many marks is vastly harder than finding a price gouger and making one transaction.

We do not face a choice between an inefficient market doling out the same resources as an efficient one. We face a choice between doling out a maximal number N-95s and doling out less of it while also diverting money from healthcare to the profits of the gougers.

How about we don't encourage the destruction of equipment vital for saving lives merely because it results in assuaging to psyches of rich people a little more?

Practical experience from Czech republic.

The government:
1) instituted price controls
2) has forbidden exports of face masks
3) has forbidden shops to deliver anything, everything has to go through central government program

The results:
1) no N-95's for 2 weeks
2) they just found half a million of them waiting to be quetly exported

Yes, people do steal these things. Real-world: socialism kills people. We just got into it, and this combination of things the government did is probably going to kill people.

Price-gouging is bad. We tried to stop it. It's worse. MUCH WORSE.

Andy, The person who stole the masks would have still exported them to Germany or another market. Less chance of detection.Theft has a zero cost of production.

That person did NOT steal the mask. He bought them on a market before the cap was introduced. If the price cap has not been introduced, he would have happily sold it back in Czech republic at a handsome profit.

Ultimately it's about priorities - what's higher? Hate of price-gaugers or need for respirators?

Buying and selling is theft to Bill. He’s a lawyer, you know.

The only honest way to make income is by filing frivolous lawsuits, chasing ambulances, protecting habitual sexual assaulters with forced arbitration, and making divorces financially ruinous for all parties involved.

This is Bill’s contribution to our society during a pandemic.

You know on site called "Marginal"Revolution, there is precious little marginal thinking.

On one end of the continuum you have the monopolist who use all means enforce their monopoly and charge a profit maximizing price (and deliver less of the goods than would occur absent monopoly). On the other end you have so many restrictions that supply is diverted and no production ceases.

Shockingly, like so many other things in life, we have other points along the way to consider. Maybe we give wholesalers carte blanche and limit resale prices to wholesaler prices +20%. Maybe we let the price creep up by so many percent a day. There are many, many ways to reward suppliers and even to entice folks with stockpiles from before the crisis to sell.

But at the end of the day, if we can use eminent domain to seize the family farm to build a highway, we can use some government power to limit the ill effects from petty quasi-monopolists creating negative externalities.

Of all the ditches to die on, banning gouging (as is already the law) on Amazon and Ebay seems pretty silly.

Whatever the policy is, we should announce it upfront and credibly commit, if only to stop people from anticipating further price increases leading to more sequestration of valuable goods.

There was no monopolist with the respriators here. Plenty of companies, some of them producing, most importing from China who had contacts and had no problem ordering it. When the state started organizing, they stopped doing that.

Now there is a monopolist: the state.

The state did announce the policy and credibly committed. The same way as socialist states did annouce that and credibly committed to it. The scarcities didn't magically go away. When you credibly commit to a bad policy, you get horrible results.

This is ECON101 in practice. Literally. When you read the interviews with the doctors and the companies that used to deliver these things, it looks like verbatim compied from price-ceiling chapters from textbooks and from Hayek's knowledge problem texts.

Externalities? That's just noise. If we are not super lucky, people will start dying here because somebody cried 'externality' and 'monopoly', when there was practically none.

Arguing that one extreme of a policy continuum is wrong while ignoring all possible tradeoff points to assert that the other is better is pretty silly.

Basic econ tells us that theft follows the perceived gain and the perceived cost of the crime. Creating highly visible price signals, particularly ones not grounded in actual market clearing prices, does result in a rise in criminal supply.

Again, I hold that tradeoffs exist in economics. Do you disagree?

Could you explain to me where did you find out that these price signals where _not_ grounded in actual market clearing price? I would like to hear a very good argument as it seems to me you just made it up.

Yes, people started to steal disinfctants gels here. Again: this is just noise. The problem is you cannot order them often for any price. Please, can we get some _more_ price gauging? (btw, soap is enough)

As of tradoffs: I don't see how anyone could seriously speak about tradeoffs between a few tens of thousands masks stolen vs. losing supply in millions. Doesn't make sense to me. Does it make sense to you?

Criminal sees high prices on ebay. He steals masks to sell on ebay at the price he saw. He ends up with a bunch of stolen masks that he cannot sell. It is too much effort find buyers so he cuts the price back to the market clearing one (at best), but thanks to improper handling he has contaminated a quarter of his masks.

This has already happened here.

Tradeoffs are easy. If mask pilferage runs at a rate of 100 per criminal per day, maybe 100 criminals in the US any given day, and the epidemic lasts 100 days we lose 1,000,000 masks. Given that we have literally thousands of medical facilities that need masks that may well be an underestimate by orders of magnitude if the perceived returns.

Banning people from posting obscene prices that only panic buyers touch is about controlling perceptions. The suppliers will still get paid th market clearing price but we will have less pilferage and contamination to worry about.

It seems to me that everything we need is that the ebay/amazon/etc. sites change their sort order to include at least some items with normal price on the search page. Problem solved.

Not my area of expertise, but I would not that we are not just looking at the primary effects of efficient market clearance but also the effects that spurious price signals have criminal or panic behavior.

For instance, if Amazon includes products going at market rate, people may still conclude that that the signals from the gougers (who are not selling market clearing volumes) are leading indicators and then commence panic buying.

I just am not seeing the harm from saying that people who are significantly out of line with the apparent market clearing rate have to hump their wares the hard way. It imposes a small burden on people who are unlikely to be doing any sort of efficient resource allocation at the expense of limiting causes of known deviations from efficient market requirements.

Andy, Provide me with the link to the story so I can confirm that the masks were not stolen or taken from a hospital, or that the person did not have advance knowledge of the government policy change. Post below or copy the story to a link to confirm.

The company was supposed to sell those things to the medical firms, but tried price-gauge. Probably that was the moment when the price-cap came and they decided to try to smuggle it abroad.

Thank you for the information and clarification.

When you say they were "supposed to sell those things to the medical firms" what did you mean? Did they breach a contract? Did they have an obligation to provide those things to the medical firms? An understanding? Was the firm sole source to the medical firms?

I assume most countries today are embargoing the export of medical devices, equipment and supplies from their borders.

Is it appropriate to consider that the restriction imposed by the Czech government is in reaction to this activity and is really not an issue of price gouging.

From the news it looks they just had a stockpile of it ready for sale and were trying to get a good price. No contract breached. No, there was no monopoly.

> Is it appropriate to consider that the restriction imposed by the Czech government is in reaction to this activity and is really not an issue of price gouging.

The government issued a price-cap; because they expected companies to export it, they issued a ban for exports with that. This has led to some companies (this is an example) to try to smuggle that instead. Econ101.

The government also issued that the government agencies are the only allowed buyer of these things. This led to the hospitals (they are _not_ government agencies over here) to cancel their orders. This has led the suppliers to stop looking for deliveries from abroad. The ministry of health didn't have any experience handling the situation and wasn't able to secure anything for 2 weeks. Hayek - local knowledge problem.

What exactly do you disagree with?


Thank you for answering the questions, but you didn't answer one:

Are countries around you preventing the sales of those goods into your country by embargoing their sales.

1.Will you confirm to me that other governments adjoining your country are prohibiting exports from their country. If you cannot find that, I will. I've read that countries have been blocking exports.

2. If that is the case, is it appropriate, in your mind, that your government would prohibit exports.

1) germany started that a while ago, I think austria did that too (not that sure about that)
2) they instituted the price-controls and export ban at the same time and as far as I know we were the first in this region to do that

It is well-known that if you price-cap something and it is more expensive abroad, people will try to sell that abroad.

So it's logical to ban exports. People will try to smuggle it; so it's logical to ban selling to the public. So it seems the government actually did what seems quite logical.

What point are you trying to make?

You made it for me.

So what is the point?

Reading it back I think I wasn't perfectly clear: as far as I know, Czech republic was the first in central europe to ban export. It instituted price controls + export ban at the same time.

Using game theory they probably thought if they didn't;t act first they would be without supplies.

But, thanks for carrying on a reasonable conversation.

Bill, I do see a very strong reason to enact an export ban when you impose price cap. Do you agree it wouldn't be reasonable to impose a price cap without export ban? (just to be sure I'm not misunderstood - the export ban applies only to the respirators in this case)

I don't see a reason to ban exports when the neighbor bans their exports. I mean it's not like there is a ton of the respirators going both ways and if you ban it from one country, the other half continues flowing. What would be the reason to mimic the neighbors?

Re: " I don't see a reason to ban exports when the neighbor bans their exports."

You're kidding me.

No, I really don't. Can you explain?

This is a good comment.

I want to leave you with this thought:

Many states have price gouging statutes.

They are all over the place. Some of the strictest are in very conservative states which experience hurricanes and tornadoes, by the way.

Say you are the Chief Marketing Officer or General Counsel of a major national retailer.

You could try to individualize your pricing and pricing policies to fit each state, and, if you wanted, you could do one thing in one state, a different thing in another (for the same hurricane or tornado) and you could put the pedal to the metal in some states where there is no law (and, by the way, you might also have a website)


You could have a uniform national policy on how you price during these types of events so you don't make the news.

Which do you choose.

Populist economics is like a robber having a gun pointed at your head demanding your valuables. It may be safer to give him your valuables, but it is still armed robbery. That the robbery is committed at the behest of the majority of citizens does not alter the character of the act.

Price gouging is against the law in 34 states. Amazon and Ebay are doing their part to comply. I wouldn't be too hard on them.

Amazon and eBay should not allow price gouging, but not for reasons of fairness.

Instead, efficiency.

American commercial logistics are incredibly efficient. They transship from factory or port in multimode transport squeezing every last drop of fuel and labor cost.

And then these idiots buy something delivered with that hyper-efficiency to a dollar store, and re-ship it as an individually wrapped item through FedEx.

WTF man. Just wait a day or two, and for most things, American commercial logistics will refill your local shelf.

(The utility of Amazon and eBay are that they stock things not readily available or easily found on local shelves.)

I am focusing on the resellers of course. I am much more comfortable with the traditional distribution system raising prices under new supply and demand conditions. But there I think they'd be smart to time average. 3M isn't going to make friends trying for a one-week killing.

I love this comment because economist always, always focus on price.

This is just humorous. Maybe they do that because product attributes do not sit on a spreadsheet.

Let me give you two examples.

1. The price of electric generators just after a tornado and hurricane. Home Depot finds itself out of stock of the low price generator, and replenishes stock with a different, high priced model, that doesn't sell during normal times, but sells out during catastrophes. They make a very good margin on that high priced generator, by the way.

2. Another non-price or product attribute change that you are probably noticing: Amazon Prime delivery is taking longer than 2 days. They could raise price (and they have a feature where you can get expedited delivery at a higher price). The feature (Amazon Prime delivery) has not legally really changed because they said, we guarantee two days from the date of shipment, not the date of order. Should Amazon put on a surcharge instead. No. They would have lost the customer's goodwill, unless they were a one dimensional economist because everything is measured in price and not changing product attributes.

This post is also another example of where economics tries to fit itself into a one size fits all model syndrome--failing to distinguish between an epidemic, where lives can be lost, and some bauble which you could do just as well without.

You can see this in how we act collectively and how we have protected ourselves from economists.

The Defense Production Act gives the President the authority to cause businesses to produce products. It also has a price setting mechanism and price control mechanism.

The Act is not something we just invoke on holidays or for the fun of it. But, economists would say:

Economic Principles Should Apply

In All Circumstance

Because We Will,

I Repeat Will,

Be Better Off,


Matt Zwolinski had a post on this over at BHL:
His papers on this topic are also great.

I am concerned about coronavirus.

I am a high net worth individual, and I am in the market to purchase a RNA extraction kit and ventilator just in case I need it.

Just kidding.

But, this brings out the point again:

Economists measure things in $$$$Dollars.

They do not measure things in

Lives Lost

Economists measure lives lost in hundreds and hundreds of published papers every year. You have absolutely no clue as to what you’re speaking about.

Stick to chasing ambulances. Isn’t that your role in a crisis like this? Soon enough you can file a frivolous lawsuit against Sure and drive up the cost of care for everyone.

Once again you fail to address the issue Your comment is like that of a teenager on a blogger forum. If you are prepared to discuss this rationally and propose your argument go ahead.

But, in the interim, and keeping your comments in mind,

I am for free mental healthcare for all those who need it.

Act like an adult and not a teenager or some kid two years out of high school who just took only one econ course.

I’m a professional commodities trader and I’ve wanted to write my own blog post on this topic but I’ve been waiting for MR to get the conversation started. Without a doubt, the fastest way to get masks and hand sanitizer to the most people in the fastest way possible is to raise the price to a high level immediately.

There are two independent price phenomena we want to see in order for this to happen. The first what is known as a high flat (or absolute) price and the second is known as an inverted (or backwardated) price structure.

1) Flat Price
A high flat price is what most people think about when they think of gouging and some commenters like BC have hit the nail on the head in terms of what that’s going to accomplish. First and foremost, we want a high flat price to send a strong signal not just to current producers, but also to prospective producers, to drop everything else and focus on producing the goods in question. We want the profit margin on masks and hand sanitizer to be so high that current production lines will run at max capacity and entrepreneurs will also be strongly incentivized to enter the market with new production lines as fast as possible. This is what commenter david gets wrong—it’s not just about logistics. There are logistical concerns about the distribution of current supply but high prices are critical to bring out new production, raising total supply in the first place.

2) Inverse (or Backwardation)
I’m a bit surprised this idea didn’t get a nod in the original post. In futures markets, price structures exist clearly as either inverse (backwardation) or carry (contango) or no structure. Inverse and backwardation refer to a structure in which prices farther in the future are lower than prices closer to today. Carry and contango refer to a structure in which prices in the future are higher than prices closer to today. Such price structures are less explicit in markets without associated futures contracts, but they exist nonetheless. It is obvious to me that the face mask and hand sanitizer markets are currently inverted (backwardated), and thank goodness they are. To see that they are, note that more “normal” prices for hand sanitizer and face masks exist on Amazon for estimated delivery dates sometime in April or May. Any supplies available for immediate shipping in March are invariably higher priced. The importance of inverse or backwardation in helping markets deal with scarcity cannot be overstated. In well-functioning markets with plenty of price transparency, such a structure explicitly sends a signal not to hoard, because it reveals that the value of the good will decline with time. With a sufficiently steep inverse, the market tells would-be hoarders that the best time to offload their inventory is today, not tomorrow or next week, and therefore inventories are drawn down. In colloquial terms, this is called “hand-to-mouth” inventory management.

I see these various price phenomena in commodity markets all the time. When and where prices are allowed to fluctuate freely, supply and demand disruptions are managed smoothly without much fanfare. Most consumers today have no idea when a major corn crop is hit by drought or when an important natural gas pipeline explodes, and the reason is that we allow prices to rise rapidly and form inverted curves when that happens. Producers and traders take care of the rest, and the issue is typically resolved so quickly that consumers hardly notice.

This time, the consumers have noticed, but that doesn’t mean they know how to resolve the problem. Getting the retail consumer involved in the decisions of producers and traders is a huge mistake. It is incumbent upon those of us who have some real training in economics or markets to educate the masses before they cry out for new laws that make it illegal to profit in times of need. What we do now will affect the next crisis in ways most people simply do not understand and may result in thousands or millions of unnecessary deaths. Countless disasters throughout history attest to this. Take, for example, the famine in Henan in 1942. Millions starved because it was illegal to sell crops at price-gouging levels after a poor harvest. Farmers were made to sell their crops at low prices set by the government. The inventory was then managed and distributed by bureaucrats. Local inventory wasn’t enough to meet local demand, but outside traders never got the signal to fill the supply gap because the artificially low prices left them no margin to import. Tragedy ensued.

I encourage Tyler and Alex to use their full weight as public intellectuals to fight the dangerous narrative that high prices are undesirable. Get interviewed. Keep blogging about it. Present counter-arguments and examples, not just in economist’s jargon but also in layman’s terms. A few states have already started talking about strengthening laws against price gouging. If we let that happen, we’ll all deserve the consequences.

I was under the impression that the price gouging laws were sufficiently high that they did not interfere with normal business.

A $20 bottle of 99 cent hand sanitizer is not normal business. Nor is $20 necessary for new factories to run long shifts.

The real danger, I think, is that “normal” is in the eye of the beholder. Also in abnormal times, why should business stay normal anyway? I hope you’re right. Maybe all these laws have no teeth. But if they do start to grow teeth, we’ll all end up bitten.

Also the point about what factories need to run longer shifts is not only speculative, it may not be relevant when existing capacity is running as many shifts as possible. We’re in new territory here where we may need more factories, not just more shifts on existing factories. We may need entrepreneurs to come out of the woodwork to make these things.

I’ve actually been running the numbers to see what it would take for me to open up a lab to help fill the gap in sanitizer in the NYC area. Fixed costs are high and the curve is inverted, so I need a huge premium in the spot market in order to give me the incentive to produce a product that will decline in value rapidly; I need to recoup my costs before prices fall. So far I can’t actually make the numbers work. Regulatory hurdles will make it difficult for me to get up and running in short order, but the price alone may actually be insufficient in the first place. While the $20 bottles are making headlines, actual evidence in the market suggests clearing prices are not so high. What one fool paid on Amazon does not a clearing price determine. My local bodega is selling 2oz bottles of Purell for $5 and there’s plenty in stock. If that price were really below the clearing rate, the shelves would be empty. Five dollars for 2oz is maybe 5x normal, but it’s not nearly as bad as the headlines seem and it’s not enough to divert my capital to a new endeavor making the stuff. I figure I can make sanitizer for about $0.62/oz (variable cost) in a small lab, but after rent, regulatory hassles, and distribution costs, I’m not that enthralled with the idea of competing with Purell’s $2.50/oz retail price. I might go the face mask route but haven’t finished working out the numbers.

All in all, it would be bad enough if we changed our laws because of so-called price-gouging, but it would be even worse if we changed our laws because of PERCEIVED so-called price-gouging!

There was a story about a small distillery switching to sanitizer production, because their existing licenses allowed them to buy and mix and sell high alcohol solutions.

(Glancing at Google, a few distilleries have made the switch. That's a demonstration of American production capacity right there. And a mix of both public and profit motive.)

I suspect that there are "close" production lines for a lot of these things. Tesla and GM say they can make ventilators.

It is great to see capitalism at work. I have a hard time understanding how anyone could perceive the expansion of production capacity in times of rising prices as in any way justifying laws AGAINST increasing prices, so I hope your not making that point.

It seems the argument is:
1. Shelves are empty at normal prices
2. Evil seller is selling above normal prices
3. There is plenty of capacity to produce cheaper than evil seller is selling

In the short term you can’t really say both 1 and 3 are true at the same. Maybe 3 will be true at some point soon at which point 1 will be false and 2 will be moot.

I have two points.

One is that I think anti-gouging laws are set at safely high boundaries. The other is that emergency response is not only profit driven.

I am sure that some of these distilleries which give away their hand sanitizer are rich man-owned, and good on those rich men.

So if the anti-price gouging laws are set at some safely high boundary, do they ever do anything? And if they never do anything, what is the point? If they do do something, why is a government employee like state attorney making the call about what constitutes “safely high”? Just seems like this is one of those virtue signaling laws that every feels better about having on the books but they either never do anything or they exacerbate a disaster.

On point two, relying on charity is obviously not the answer to this crisis. It’s also not clear that one or two charitable distilleries are moving the needle at all. On the other hand, it’s mere speculation that they are motivated by charity. I’m intimately familiar with the ethanol market and traditional demand outlets are being crushed right now. This distillery could be reacting rationally to a drastic cut in demand for its usual final products. It may have excess capacity now which it is turning to novel uses.

Perceived price matters.

Again, criminals respond to the incentives they perceive, not the ones that are actually extant in the market. The worst of all worlds is for criminals to believe there is significant reward for little effort, steal the stuff, and then find that it is too much hassle to unload so they just spoil it. Frankly, I view some basic anti-gouging measures (like Amazon or Ebay refusing to list goods priced at significant multiples of wholesale rate) to be little different than the circuit breakers built into the stock market. They provide a social good with minimal impact on actual incentives for actual producers.

What if it’s having the opposite impact? As I’ve said elsewhere, the perceived price may be $20/bottle but actual large-scale clearing prices may be more like $5/bottle. If eBay were open to showing true auction prices, it would solve any perception vs reality problem.

Doesnt the government basically regulated the commodites markets with critical reserves, various insurance agencies, and agricultural policies meant to smooth the market fluctuations?

Henan suffered a famine from this little thing called World War 2.

The the war blow up all the food around the world? No. Lack of food was isolated to certain markets. It’s no coincidence that the markets where the worst famines took place were also the places where prices were not free to fluctuate. Plenty of people in the world had plenty of food in 1942, and if average prices had been a little higher, their consumption could have been pared back enough that the hungry in Henan could have had a few more scraps. Millions of lives could have been saved. The existence of the price caps in Henan actually suggests that grain was EXPORTED from the region at the time. War was no excuse for stupid policies then, just as a virus is no excuse for stupid policies today.

"I encourage Tyler and Alex to use their full weight as public intellectuals to fight the dangerous narrative that high prices are undesirable."

Good luck with that. Populism is large and in charge. The average person sees their pay check shrinking and the prices of everything going up. They aren't exactly going to be rolling out the red carpet for high prices. Treat the public like your grandparents. They may be curmudgeonly but they have a common sense perspective that deserves some understanding.

All hope is not lost and there’s no need to retreat from a good fight.

Sufficiently “common sense” descriptions of the virtues of flexible pricing can still appeal to people who are sound-minded but merely caught up in the emotionally wrought discussions of the day.

Battles need warriors. Tyler and Alex are well-placed to lead this charge.

Do you think a person who engages in commodities is considering high fixed costs of entry by a firm when the demand may be gone, and the price declined, before the first day of production.

If you trade in corn, and there are corn storage facilities out there, the only cost is storage and transport.

If you build a plant, as he claims would happen, the cost is a white elephant a year later.

That being said, existing producers of mask can convert from one mask type to another: an industrial mask firm that produces n95 masks and industrial masks may convert to produce more n95 masks, assuming the same technology at the plant. But, there is a cost for that, too. You may have contracts with customers for industrial masks, and you raise their price to restrict their purchases of that mask or you put them on hold.

But, this almost silly comparison of commodity markets with construction of new plants which require architects, equipment, inspections, etc.

You'll be dead before it gets off the ground.

Bill, I totally get you and wrote a comment (replying to anonymous above) addressing just that at the same time you posted.

That means, if you agree with me,
I give you a

Charles, You may not want to hear this, but the way the real world works is that if you are building a plant, under these circumstances, you would likely want to line up a customer first. And, that most likely would be the United State Government, which would guarantee to purchase the output, say, to restock the government stockpile...but, you could imagine another scenario, where the government would go to an existing producer and guarantee to purchase a fixed amount of output AFTER the crisis so the firm would order new equipment, etc. which would likely arrive after the crisis. Also, as the firm started the plant on line, it could reduce stocking of masks to serve just in time customers.

But, did you notice what I did: I made this irrational person, the Government, be the purchaser. Why, because without that customer, the firm would not have expanded beyond normal or expected demand.

To be sure, Bill, commodity traders in general and I in particular think deeply about the way the real world works on a constant basis. You’re absolutely right that lining up an off-take agreement ahead of production would make the venture much less risky. Such agreements are commonplace in the commodities industry although typically they leave price largely undetermined by fixing only a “basis” price (premium or discount) relative to an established futures contract. Producers and consumers are free to hedge the futures individually as they see fit. For small-scale producers of a branded product, however, it would be less common to secure an outlet before starting production. Typically one needs to produce samples at small scale just to get into the door of even small retailers. This is why I am unlikely to invest in starting a small sanitizer lab unless prices rise much further. I require sufficient margin to cushion against the fact that I cannot guarantee or hedge forward sales.

My dad worked hard, and spent a lot of his energies building an effective stock portfolio.

But do you know what I'm really inspired by?

The guy really knew when to drop "it's only money."

Speaking of money, the saga of American corporate stock buybacks is looking pretty dark at the moment. I would be interested in MR's thoughts.

My first thought is that it argues against market efficiency. Billions and billions set on fire. $43 billion at Boeing alone.

What are the economists expecting to happen— high frequency traders of hand sanitizer enabling instant purchases and deliveries of critical products during medical emergencies? Do they think that Matt Colvin is increasing liquidity?

What if somewhat bought up all the ventilators?
I suppose people gasping for breath and dying would be an effective market signal and be a net positive in the long run, even if the dead wouldn’t get to benefit from it.

+1. When I go get groceries, I don't want to fire up Etrade to put in a fill-or-kill order for eggs and milk.

If the guy who bought the ventilators didn't sell at market clearing prices he would be stuck with ventilators that no one wanted when other newly manufactured ones became available.

I wrote it yesterday and I’ll write it again. If this guy wants to create a local monopoly on pandemic supplies he is free to do so. He is also free to be visited by other members of the community who do not share his notion of being a monopolist. He wasn’t bringing supplies to a hurricane zone. He wasn’t starting a supply company in response to rising prices. He was creating a shortage. He only changed his mind after some phone calls and a visit from a concerned citizen. He responded to the incentives available that his own personal safety wasn’t worth the money he was trying to make. You don’t get to hide from judgement behind economic theory.

Yes, there is a difference between getting paid to provide extra service, and creating your own shortage. Kind of like how Soros made his billions. It's legal, but still a dick move.

Why do the laws of supply and demand not include gouging?
Isn't the market clearing price the same as the price gouging price?

The government should enforce anti-price-gouging: producers and factories with especially sought-after goods are required to raise prices 2/3X. Part of the raised price will be taxed into a redistribution fund for poor/affected, the other part the factories have to keep.

Everybody will hate this policy, so you know it's sound.

This idea seems to be like the price floors that were used for agriculture, which did at least ensure that food was produced. A few modifications (having government ensure the price by paying for the difference relative to the market price, just directly buying surplus, or reducing taxes on farmers) have been used. You may end up with a butter mountain and other distortions, but such inefficiencies do ensure that the product is available.

Taxing away part of the raised price, as you mentioned, is probably a bad idea for things like masks, because that reduces a) the number of people wearing masks during a pandemic and b) the amount of masks created.

Government doesn't have to be the only pass-thru mechanism.

Dynamic pricing could occur by retailers/distributors of these products, not producers (faster this way since contracts are usually in place between producer/distributor).

Distributors like Kroger, Wal-mart, Amazon could then increase price to consumers (since no contract exists) but also record sales and donate the delta between list price and dynamic price to relevant groups (e.g. medical funds to cover uninsured who were impacted by coronavirus). This is also a more flexible arrangement because it would work during hurricane season when Home Depot/Lowes/Ace Hardware are selling generators and some number of those go to unscrupulous re-sellers.

Gov could still play a role by ensuring any gouging/dynamic pricing doesn't disproportionately impact the poor via using WIC (or similar programs) as a discount so that a person of low means could purchase at list price while the better off would purchase at the higher price. Obviously still need controls to prevent abuse.

At a 30,000 ft level this provides two societal goods 1) slow irrational demand as fewer people would be willing & able to pay the higher price for multiple units and 2) re-direct "obscene profits" towards beneficial causes.

Again nobody will like this because government and private sector both have skin in the game on it.

I meant to say 'factories and retailers', so agree.

What I see as the main reason for government mandate is to deflect the brand-name damage the producers/retailers face. Costco and their suppliers should be charging $5.50/6 bucks respectively, but don't dare be (irrationally) labelled the gouger which has long-term hard-to-quantify damage. And to be sure, there is some windfall to happening to have a stock of some of this stuff (is any excess stock stored by retailers really for pandemics?)

But it's not like Trump would willingly bare that same reputational harm himself given it could be construed as windfall to big biz, though a progressive might pull if off, so again this would get killed by the voting public.

I think this whole parable points to the reason why free markets also create social goods--well beyond the fact that free markets allow the flow of goods more efficiently and allocates them more effectively, and that it reflects a philosophical principle of individual economic freedom.

It illustrates that transactions do not happen in a vacuum, with each transaction isolated from the other, and where customers have zero memory of the prior transaction when negotiating the next.

It illustrates the value of "good will."

Note that Amazon fundamentally does not want price gouging or fake products or the like on their platform because it destroys free will. Because transactions do not happen in a vacuum; we remember our experiences from one time to the next. And it only takes a handful of experiences to destroy that trust--especially on the on-line world, where we can't see the product but only a picture of it.

It is this trust and building of good will, not simple profit seeking, which caused British merchants and American retailers to be on the forefront of social change--because it is profitable to build good will among a larger audience, so they feel good buying your products. And while some may see this as predatory, at the extremes good will building and making a profit become inextricably linked together.

People tend to forget Adam Smith's "Wealth of Nations" was a sequel to his earlier work "Theory of Moral Sentiments", where Adam Smith argues morality comes from our "sentimentality" about each other. And "Wealth" more or less starts by examining our work lives (which, in his time, dominated most of our waking moments) and seeing the consequences of his earlier work on our economic interactions.

So at a more fundamental level, markets tend towards "distributed morality"--that is, individual actors in our markets tend towards kindness and compassion and a strong sense of how we're perceived by our others. "Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love."

And price gouging may make economic sense in the short term under certain circumstances--but it's not lovely behavior.

+1 Maintaining or acquiring goodwill is a capital asset when norms or expectation guide peoples behavior.

I think it is interesting price gouging draws attention but product availability does not draw as much attention or outrage but they are often the same thing.

From a behavioral economics perspective, price is salient.

You would notice if the price of milk went up by a $1 but would not notice as much if the gallon containers were gone and only the traditionally higher priced half gallons, which had previously been on sale, were now selling at list price.

Notice that in the above example, price was salient and not the availability of the gallon jug or how I directed you to the high priced half gallons. You don't go to the grocer or online complaining about the unavailability of the gallon of milk in the store. You would if the gallon price went up a $1 and ignored that you paid 50 cents more for each of the half gallons.

should say ....but you ignored that.... rather than "and" to make it the last line

From the Friedmanite perspective, speculators are either clever or stupid. If clever, they will buy when supplies are relatively ample and sell when they are relatively scarce, thus redistributing supply to when it will be valued most, damping the price cycle, and making a profit for their foresight. If stupid, they will amplify the price cycle and lose money.

Are the current hoarders stupid in the above sense, and will they therefore lose money?

If they are stupid, will rationing force their demand back to a more ‘normal’ level and thereby eliminate an artificial, avoidable shortage?

Is the public hostile to the hoarders because it thinks they are stupidly creating an artificial and unnecessary shortage, and grocery markets would work smoothly again if they were just stopped?

Here, BTW, is an interesting suggestion on how to stop hoarding.

I find it funny that economists as well as MR commenters complain about bullshit patents, Nimbyism and the FDA and the restricted supply their actions cause then applaud this AHole for creating shortages in medical supplies. And before any of you attempt to get too clever, there isn’t any difference between people using institutions like governments to reduce supply and you doing it yourself. At least this guy in Tennessee had the opportunity to be confronted over his behavior and make changes.

What it all boils down to is this:

If no one believes they *need* something, you are free to buy as much of that something as you want and free to resell it for as much as you want to whomever you want. No one cares.

However, if we all decide we *need* whatever you have, the rules change and we are free to threaten you with (or actually use) physical violence to take it from you.

Funny how that works.

Under Obama the masses lined up in early morning hours for the Apple IPhone. Under Trump the masses lined up in the early morning hours for hand sanitizers and toilet paper.

One last thing. For those of you who don’t know why Trump is President and Bernie Sanders is one of the last candidates standing, your answers can be found in the comment section here. There are costs to your ideology. Supporting the guy in Tennessee isn’t going to make the world a better place.

I see no value to Colvin's activities whatsoever.

The so-called "maximization of consumer + producer surplus that results from market-clearing prices" is nonsense in this case, because the implicit assumption is that social utility is measured in purely financial terms. That's patently false here. There is no reason to think that getting these supplies to those who can pay the most for them increases utility in terms of reducing spread more than any other allocation. Indeed, to the extent that it enables hoarding, by pricing some buyers out of the market, Colvin's approach reduces utility, no matter how big the relevant areas on those divinely revealed graphs.

Some of the grocery store chains near me have been limiting soap and sanitizer purchases to 2 bottles per customer. That seemed like a reasonable way to protect the stores' reputation and help more people get what they need. Not sure if prices were propped up at all; certainly weren't on sale. And they did it voluntarily, as far as I can tell.

Other than that, I don't really have a problem with prices rising in response to scarcity (unless the business itself caused the pandemic to increase demand... unlikely). Discourages hoarding and encourages production (production ramp may be too slow in the short run, but we may be isolating for like 18 months, so maybe not).

I am a supporter of free markets but how is "producer surplus" maximized when e.g. walmart sells hand sanitizer for $1.00 and some random joe buys it all up to sell for $20? He's a pure middleman who adds no value.

I would not mind if walmart immediately raise prices, but, so long as we are going to have a some social convention against "gouging", shouldn't we be consistent-everywhere with it?

If an E-bay seller lists for sale one of these high demand items via an auction - as opposed to a fixed "Buy-it-Now" price - and then competing bidders bid the price up to many times the normal price, is that still price gouging? Could it be argued that it's not the seller's fault that bidders voluntarily kept on outbidding one another?

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