There's Some Good in Gouging
(http://www.nextcity.com/go/KarenSelick/GM980124.html)
(c) 1998 Karen Selick
(Reprinted by permission of the author's blanket terms below)
There's Some Good in Gouging
A shorter version of this article first appeared in the Globe and
Mail on January 24, 1998. This longer version appeared in the
April, 1998 issue of The Freeman. You may download a copy of
this article for private use, provided you leave this copyright
warning attached. However, the distribution of multiple copies,
electronically or in hard copy, or the use of this article for
any commercial purpose, is a violation of my copyright. For
permission to reproduce this article, contact me.
There's Some Good in Gouging
The great ice storm of January, 1998 left millions of residents
of Quebec and eastern Ontario without electrical power, some for
several weeks. The storm itself was unprecedented, but it
brought with it a phenomenon that's all too familiar in emergency
situations: complaints of price "gouging" by merchants.
Candles, formerly $1 a box, were marked up as high as $4, reports
say. Prices temporarily skyrocketed for batteries, firewood,
propane, gasoline, bottled water and a host of other items.
"No one should be permitted to profit from the misery of others,"
people raged. Canada's Industry Minister John Manley even
suggested that oil companies should be giving away gasoline to
customers instead of charging more for it. The Quebec
Consumers' Association threatened to publish a "Roster of Shame"
naming businesses that had been reported as gougers.
The truth is, the sudden, exorbitant price increases that occur
in times of crisis serve a useful purpose. Instead of vilifying
the so-called gougers for their greed, we should accept them as
important and necessary players in the price system—the system
which keeps the economy of a distressed region operating as
smoothly and impartially as possible under the circumstances.
Take candles, for example. Ordinarily, most people have little
use for them. During a power failure, everybody suddenly needs
them. Storekeepers are as much taken by surprise as consumers.
They have only enough candles in stock to satisfy their normal
low demand. Faced with a sudden surge in demand, they have two
choices: continue to sell candles at their normal price, or
raise the price.
If they continue selling at the normal price, they will quickly
sell out. There will be no candles left for those shoppers who
are slower than their neighbours in reaching the decision to buy
candles. It won't matter how desperately the latecomers need
candles--there won't be any available.
Suppose instead that merchants decide to quadruple the price of
candles. Would-be purchasers will be shocked at the new
stickers. Among those shoppers will be some who already have a
supply of candles or some other alternative, such as kerosene
lamps, and were merely intending to stock up just for good
measure.
"Four dollars for a box of candles?" they'll say. "Phooey on
that! I'll just use what I've got first and buy candles later
when prices have returned to normal."
Others will say, "I was planning to buy three boxes, but at that
ridiculous price I'll just take one."
The result? More candles will be left for latecomers to buy.
Those who didn't already have a supply, and therefore needed them
quite desperately, will be able to find some, even though the
price may be steep. As well, all shoppers (both those who decide
to buy and those who decide not to) will have been alerted to the
fact that candles are in short supply—something they might not
have realized if they had been able to purchase them at the
normal price. They will become more sparing in their use of
candles, knowing how expensive and difficult they'll be to
replace during the immediate crisis. Spontaneous candle
conservation will occur. The severity of the candle shortage
will be alleviated.
Besides encouraging conservation, price increases play another
beneficial role: they induce a rapid increase in supply.
Storekeepers who suddenly find themselves able to make a huge
profit on candles will do their utmost to get in a new supply.
People outside the stricken region who hear about huge profits
to be made on candles will rush to the area with a stock of
candles.
This will further assist in alleviating the severity of the
shortage. As truckloads of candles flow into the area,
competition among vendors will soon reduce the price down to its
former level—just as it did before the crisis began.
Price increases are simply one method of rationing scarce goods
among competing users. It's not perfect, but the alternatives
are even worse. Suppose the government had quickly passed a law
making it illegal to sell candles at more than $1 per box.
Knowing that they will immediately sell out at that price,
storekeepers would be able to pick and choose which customers
they wish to favour. This would present an opportunity to curry
favour with local politicians, bureaucrats or other people of
influence. A system that allocates goods by "pull" is surely no
more fair than one which allocates goods by price. In normal
times, we call this corruption.
Or suppose ration coupons had been issued for candles, so that
everyone became entitled to buy an equal but restricted number at
$1 per box. This system would allocate candles to people who
don't really need them (those with an emergency supply or other
alternatives) and deny an adequate supply to people who need them
most urgently (those with absolutely none). A black market in
ration coupons would soon develop. Those who need more candles
than their ration coupons permit would end up paying inflated
prices for them anyhow—because they would first have to buy
black-market ration coupons, then the candles. The only
difference is that the windfall profit would go to those who sell
their unneeded ration coupons, rather than to storekeepers.
There is nothing to commend such an outcome as more fair than
simply allowing candle prices to rise. And there is a major
disadvantage to this rationing scheme: it eliminates the
incentive for vendors and outsiders to rush in with increased
supplies.
Is it unfair that some people get to use old $1 candles while
others end up using new $4 candles? Not really. Everyone knows
that candles (or candle alternatives) are a useful thing to have
on hand in case of an emergency. Those who maintained a supply
were actually tying up a small portion of their capital, perhaps
for years, to give themselves this extra security. They made the
decision to forego the purchase of some other commodity, or
interest on their capital, in order to keep a supply of emergency
goods on hand. Compared with those who didn't stockpile any
candles, they had already made a financial sacrifice. While this
outlay may be negligible in the case of candles, it could be
significant in the case of generators. Those who chose instead
to be unprepared merely took their financial lumps later, in a
more obvious and painful way.
Of course, there will always be some people who will complain
bitterly about price increases no matter what arguments you
present them with. Canadian newspapers were filled with stories
about and letters from ice storm victims who pledged they would
boycott merchants who had tried to gouge them. Consumer anger is
as predictable as the so-called gouging itself, and is a factor
that wise business people have to keep in mind when deciding what
to do during a crisis. Many customers find it easier to accept
being told that the store has sold out of an item than to accept
a price increase. A shortage can be blamed on other consumers,
while a price increase is clearly the "fault" of the merchant.
If merchants alienate regular customers by appearing to take
advantage of their temporary misfortune, they might well lose
more profits in the long run than what they will make in the
short run. This is why some businesses choose not to increase
prices, preferring instead to simply sell out.
On the other hand, stores that increase prices and thereby manage
to keep scarce items in stock might actually gain new customers
as shoppers stray from their normal haunts seeking a place that
hasn't sold out. Like most other business decisions, it's a
judgment call.
What's important to remember is that just as customers are under
no obligation to patronize a particular store, businesses are
under no obligation to fulfill the needs of any particular
customer. Each party exists to serve his own ends, not as the
means to the ends of others. When a transaction takes place, it
is only because each side attaches greater value to what he gets
than to what he gives up. Customers certainly seem to understand
that they have full ownership and control of their money and can
choose not to part with it, but they often seem to forget that
business people have equally valid rights of ownership in their
candles and should be equally entitled to decide when to part
with them.
Roleigh Martin ourworld.compuserve.com
( easy to remember alias is: webalias.com )
(A Web Site that focuses on Y2k threat to Utilities, Banks & more!)
Subscribe to my email list--visit this page at my web site: myegroup.htm |
