I hear a lot about “that asshole that bought up all the hand sanitizer and has a garage-full that he can’t sell now.” And how he (and others like him) deserve punishment. This seems wrong to me. The real villain is the retailers that didn’t increase their prices as soon as it was apparent there would be a run on hand sanitizer. (Except actually, it’s the American Public)
At some point it became incredibly obvious to everyone in the nation that certain goods were about to become EXTREMELY in demand. Everyone would want them all at once. When this happens the best thing to happen is for the price of these to rise, for several reasons.
1. People will buy less. When hand sanitizer is $1/bottle and the masses are worried they’ll run out, they will fill their shopping carts to the brim with just that. It promptly runs out. Surprise. When hand sanitizer is $10/bottle, they’ll still buy a few, but leave a whole lot more to the next person. During a shortage, we WANT everyone to buy less. The mass public seems to think a few guys with a few crates of hand sanitizers in their garage stripped the entire country bare. This is laughable after a single minute of thought. The problem is everyone alive buys 100 bottles all at once so they’ll “have enough to ride this out.” It’s just enough for their family’s own personal use, of course, so it’s ok…
2. Substitute goods become viable. Distilled liquor can be made into hand sanitizer fairly easily. But it’s not cheap to do so, both because the liquor is more expensive, and because these distilleries are small operations rather than giant bottling factories. Right now, some distilleries are making hand sanitizer for their local communities and giving it out for free. They can’t afford to do so for very long, though. If the price of hand sanitizer were allowed to rise, more distilleries would be converted, and this could be a sustainable source of sanitizer for much longer.
Likewise, as surgical masks run out, people have been posting instruction on how to make DIY fabric face masks. Thank goodness these are technically a different product than disposable surgical masks, people are actually allowed to sell them at a profit.
3. Excess stockpiles are released. I pick up my toilet paper from Costco, which means that once every four months I get a four month supply. I still had 6+ weeks left when this hit. If the price got high enough, and it was legal, I would have been willing to part with half that on ebay. I’m willing to bet shelves will be restocked before I run out, and if not, well, that was a risk I took. But seeing as that’s not how this world works, I’m just sitting on my excess toilet paper. :/
4. Resources are moved from where they are in excess to where they are short. When Hurricane Katrina hit, a guy in Kentucky bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi left without power. He offered to sell his generators for twice what he had paid for them. People wanted to pay, but he was arrested, thrown in a cage for four days, and his generators were confiscated. Are there towns in the middle of the country that are unaffected by coronavirus with extra supplies that cities in need could really use? Would the people there be willing to invest some labor and some of their money into getting those supplies where people will be happy to pay 5x more for them? Probably, but we’ll never know, because then those people would be locked in cages and their investments taken from them.
All these are just immediate effects in the first few days of a shortage crisis. And yet, none of this is allowed to happen. Retailers will not raise their prices because they are afraid of the public backlash, they can’t take the reputation hit. “That asshole” doesn’t care about his reputation, he’s not in this for the long haul. His work is to bring the prices to where they should be so that society can reap all the benefits of items 1 – 4. He’s making sure that people will buy only what they really need, rather than stocking up at the worst possible time. He’s ensuring that the places that REALLY need the sanitizer can get it! He’s bringing more expensive substitute goods into existence by allowing them to be sold sustainably. He’s encouraging others to release their stockpiles. He’s encouraging areas with excess to export into areas that need the sanitizer. What an asshole!
And because all of this takes investment money, and work, and causes the entire country to hate you, he pockets the difference between the retailer’s cowardly Stripped Shelves Prices, and the true Emergency Price. It is very inefficient, yes. It’s so inefficient, that the prices he’ll charge are probably a lot higher than what the Emergency Price would really be, if the retailers themselves had the courage to actually price the products at their correct Emergency Prices. A lot of people will end up paying a lot more than they would have otherwise, and most people will be stuck with nothing at all, because one garage can’t supply even half of one suburb, much less a whole state. But retailers are cowards, so that’s what we’re left with.
Except we wouldn’t be, if people weren’t such selfish jerks and wouldn’t riot over Emergency Pricing. It’s an Emergency, but they refuse to pay more to get supplies that are in huge demand. They’re used to getting everything cheap, and now. And what’s worse, they demand laws that make Emergency Pricing illegal, they call it “gouging” to make it sound bad, and they’ll get men with guns to take away any product sold at such prices and jail the people bringing it to market.
So you get what we have here, pictured. Which is the way they want it. Well, they get it.
Yes, there are times when “gouging” can be evil. A spike in prices of scarce goods that are in high demand in a emergency is not such a time.
12 Responses to “Emergency Prices”
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Respectfully but the correct approach is rationing. ‘Emergency Pricing’ means that the rich and generally well off have uninterrupted supply while the poor have to go without.
Rationing is another possible answer to a shortage. It has the advantage of allowing the poor(er) to continue to have access to some of the item in question, so it helps with #1, and may even be more fair. However it fails to bring more supply into the market, so failing #2-4. In an ideal world, the government (or other welfare organizations, depending on the time/location) helps provide the poor with the thing that has shot up in price, generally by buying it and providing it for free or a reduced price. This would have the effect of raising the price for everyone else even more, but presumably they can afford it, and the poor *really* need this thing, so society would be willing to bear that burden (or at least not complain too much for the duration of the crisis).
Or one could try the mixed strategy Dues suggested below.
But the point being that in times of crisis, you REALLY want incentives to get people to bring more of the good, or acceptable substitutes, into existence. Or enable them to do so where before it was cost-prohibitive. And that’s exactly what rising prices do.
embrodski, ldike with radiator guy there are laws against emergency pricing. You can’t really blame retailers for following current laws.
Samuel, The opposing view is that allowing price hikes increases supply which reduces prices in the long term and shortens the emergency. But assuming you don’t belive that, do you prefer a mixed rationing system where the first toilet paper is normal price and extras cost more?
How do emergency price hikes increase supply?
They will drive down demand, but that doesn’t actually mean the supply has increased.
For my part, I would prefer the retailers simply set limits on purchases. At my grocery store they have a sign by the eggs stating “limit 1 per customer”. This also reduces purchases per person and actually makes it somewhat possible for poor people to get necessary supplies.
Buying in bulk is basically just a cash giveaway to the people who need it the least. Poor people can’t afford to buy in bulk in many situations, and raising the price is just another way of reducing their ability to buy necessities. Which is not a great move in a crisis situation, historically this tends to escalate crisis situations very quickly.
David:
It can increase supply by making it profitable to create more of something in a way that’s less efficient than it normally might be, like the post mentioned about distilleries and hand sanitizer.
Daystar:
The post stated that distillers are making hand sanitizer and giving them out for free, it goes on to state that they cannot afford to do so for long. As such, I don’t think the post says anything about raised prices increasing supply.
Additionally, the post states that increased prices will reduce demand, thereby making the question of profitability increases dubious at best.
If they could sell the hand sanitizer for an amount that would let them replenish their materials and pay their workers, they could keep doing it as long as the price stayed high. That’s the point.
There’s a saying to the effect of “any theory based on ‘if X, people will Y’ is wrong,” which I think is relevant here. And another saying along the lines of “the market can stay irrational longer than you can stay dehydrated/hungry/outside/etc.”
Which is to say, panic buying isn’t rational to begin with, nor driven by rational thought processes. So why expect the precepts of the homo economicus model to hold when deriving conclusions about how to manage it? Maybe shops increase prices, and instead of joe average playing arbitrage some rich person is getting richer instead, and now not even joe has hand sanitiser. Or maybe the mob show up and break their windows/kneecaps and take all the stock at, ah, a discount. Or maybe the first panic buyer just throws it all on a credit card (hey, who’s gonna claim the debt if the world ends?). Or…
The supply side argument seems weak too. Capitalism is not in the habit of keeping mothballed production capacity on hand for a crisis, and the garage-hack solutions scale horrendously when supply lines are strained. How do you propose sending the toilet paper you sell on ebay? To put it in mathematical terms, a graph with n vertices connected to each other has a lot more edges than one with n+1 vertices all connected to the central point.
(though it does make a beautiful political cartoon: three occupied toilet stalls. Speech from left and right cubicles: alternating prices, increasing, exclamation marks. Caption “hey, could you pass-?”)
“Capitalism is not in the habit of keeping mothballed production capacity on hand for a crisis”
Those habits don’t exist in isolation. They’re affected by the incentives. Emergencies are low-probability events. The expected value of emergency preparation is therefore only positive if the payout in case of an emergency is high. Anti-price-gouging laws, public outrage and confiscations all reduce the payout, hence they reduce the EV of emergency preparation. Which means that on the margin, society gets less emergency preparedness than they otherwise might have.
I did not actually say it’s a bad habit per se, but there’s a much bigger problem with your approach here: this econ-101 stuff never actually happens. As I alluded to in the first paragraph, the market can stay irrational longer than you can stay solvent. If price-gouging were totally allowed, then businesses set up to store capacity until an emergency and then make bank would pretty much all run out of funding and cease to exist before the next sufficiently big emergency of a type and in a location that they’re prepared for.
This is one among many reasons that we have governments in the first place, to be a “prepared-for-multiple-emergencies-business.” That they’re not very good at it is a fair point, but not a relevant one, since the proposed alternatives tend to begin with “if X, people would…”
You seem to think that people can invest only in one thing at a time. In reality, they can diversify their investments. You can invest in emergency preparation and diversify by betting against an emergency.
“this econ-101 stuff never actually happens”
No shit, Sherlock. It’s banned by law.
Sigh. Idk whats wrong with me. My brain just supplies “lets all co-operate in the prisoners dilemma” as the answer here, not shitty capitalist responses which will just see more money flow into the hands of the stores which are already making bank as a result of the pandemic. It is really hard to like our species at all sometimes.