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ZorbaTHut  2yr ago (text post)   5683 thread views

Small-Scale Question Sunday for September 18, 2022

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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What is "price gouging"?

I hear it a lot lately, specifically as something that grocery stores are doing with food prices.

My instinct is that if retailers raises prices, even if only because they think customers will pay more, and then customers do pay more, then that is the new market price. As such, there can't really be "gouging" by definition, no matter what price retailers set.

As others said, in general price gouging is using supply shock or other emergency to increase prices dramatically. Especially if the supply shock is manufactured. One example in history is that of ultrarich Roman patrician Lucius Licinius Crassus, who got monopoly with his slave fire brigade and if building was on fire he offered the owner to buy it for low price and only if the owner sold did the firefighters extinguish the fire. This was the main source of his immense wealth. Of course Rome being what it was, Crassus's monopoly was enforced with underhanded tactics. Another example from modern times would be taking unconscious person to expensive hospital.

In my old extremely "free market" phase I was against any price gouging legislature with classic "better to have something for high price than nothing in crisis" , however now I think that threat of price controls may prevent creating artificial supply shock or monopolization of the market if one thinks of it as repeated game. Also monopolization of the market actually may result in monopolists selling less goods and keeping some in his storage, in order to maximize profit thus creating deadweight loss. Setting price controls for such a situation can actually result in monopolist still being profitable simultaneously with larger supply and consumer surplus. Incentivizing monopolization is even more destructive if you have more monopolies especially in essential intermediary goods such as electricity or basic infrastructure, which can lead to serious economic problem of Double Marginalization.

I don't understand how 'price gouging' could apply to grocery store food prices in the context of inflation, at all. If all prices are increasing, so food prices increase, how is that "price gouging"? And - if it's increasing much faster than inflation, how does inflation give them an opportunity to do so when they couldn't before

You use the motivation of inflation to raise prices across the board regardless of whether the price of an individual product increased or not.

Customers are largely locked in so they pay what they must as the oligopolistic market moves in uncoordinated unison.

I think, the real debate is about how much of a cap is justified.

From a narrow, short-term efficiency perspective, raising price above the marginal cost of production is suboptimal (and therefore "bad") only if you want to maximize total welfare (which most people probably don't). Market price is merely an aggregation (like average) of prices at which transactions actually occur. But some people implicitly imbue it with a sacred meaning of being unconditionally "efficient" and "welfare maximizing" - just by virtue of resulting from any market interactions whatsoever. From a narrow view, that's incorrect, as markets often fail to arrive at a short-term efficient price, if they try at all.

In the narrow view it's also irrelevant that consumers reveal their preference by choosing monopoly suppliers. True, in this exact moment monopoly supplier is their optimal choice. But when a robber offers you to choose between your life and money, you would also optimally choose your life. Robber imposes on you the choice (market structure), by force (market power), which pushes you toward inefficient allocation.

From a broader, more reasonable but complicated macro perspective, there must be a profit margin big enough for investment, risk premium and so on. If all producers would maximize welfare in the short term, they wouldn't grow and therefore underperform in the long run.

rom a narrow, short-term efficiency perspective, raising price above the marginal cost of production is suboptimal (and therefore "bad") only if you want to maximize total welfare (which most people probably don't).

this isn't right, because 'cost of production' in the theoretical sense includes all costs of the "good" of "the thing you buy at the store, including store service". The cost of transportation, logistics to actually have the stuff there, paying people to be at the store, etc has significantly increased in cases where people criticize price gouging (disasters, for instance), so the price needs to increase for the market to provide all the goods people demand at some price. So - if suddenly everyone wants to buy 100lb of rice, the store probably doesn't have enough rice to give all of them because they predict demand and stock enough to satisfy it, so immediately the price can go up so those who want it most get it, and then the price can stay up a bit to provide an incentive for the store to quickly satisfy the need (say, delivering a thousand bags of rice now instead of during the scheduled delivery a month from now). Or if there's just been a tornado, providing rice or other supplies is just harder than usual, and higher prices mean that within normal market mechanisms it is provided, and people have incentives to provide it in ways that require more resources.

Somewhat contrived example.

Could you elaborate on what exactly isn't right in that sentence? I don't see how your example contradicts what I said. When the marginal cost or demand increases, producer would adjust its price up, naturally. But when producer compensated all his expenses and still raises price -- it benefits producer at a cost of consumers (this raise is not a Pareto improvement).

My criticism is that in basically all IRL cases called 'price gouging', what economics tries to capture in marginal cost or demand has increased in some way, and people are just claiming it isn't.

What is "price gouging"?

You could try looking at the definitions that legislatures have chosen to implement. For example, here's New Jersey (Statutes title 56 §§ 8-107, 108, and 109):

The Legislature finds and declares that during emergencies and major disasters, including, but not limited to, earthquakes, fires, floods or civil disturbances, some merchants have taken unfair advantage of consumers by greatly increasing prices for certain merchandise. While the pricing of merchandise is generally best left to the marketplace under ordinary conditions, when a declared state of emergency results in abnormal disruptions of the market, the public interest requires that excessive and unjustified price increases in the sale of certain merchandise be prohibited. It is the intention of the Legislature to prohibit excessive and unjustified price increases in the sale of certain merchandise during declared states of emergency in New Jersey.

"Excessive price increase" means a price that is excessive as compared to the price at which the consumer good or service was sold or offered for sale by the seller in the usual course of business immediately prior to the state of emergency. A price shall be deemed excessive if:

(1) The price exceeds by more than 10 percent the price at which the good or service was sold or offered for sale by the seller in the usual course of business immediately prior to the state of emergency, unless the price charged by the seller is attributable to additional costs imposed by the seller's supplier or other costs of providing the good or service during the state of emergency;

(2) In those situations where the increase in price is attributable to additional costs imposed by the seller's supplier or additional costs of providing the good or service during the state of emergency, the price represents an increase of more than 10 percent in the amount of markup from cost, compared to the markup customarily applied by the seller in the usual course of business immediately prior to the state of emergency.

"State of emergency" means a natural or man-made disaster or emergency for which a state of emergency has been declared by the President of the United States or the Governor, or for which a state of emergency has been declared by a municipal emergency management coordinator.

It shall be an unlawful practice for any person to sell or offer to sell within 30 days after the declaration of a state of emergency, or for such other period of time as the Governor may specify in the declaration of a state of emergency, in the area for which the state of emergency has been declared, any merchandise which is consumed or used as a direct result of an emergency or which is consumed or used to preserve, protect, or sustain the life, health, safety or comfort of persons or their property for a price that constitutes an excessive price increase. The Governor may by executive order extend the period during which this prohibition remains in force.

Interesting. So the obvious workaround would be for existing retailers to close during declared emergencies and reopen as (or sell their stock to) a new company "Emergency-Mart!" that has never previously sold that merchandise, who can then freely sell it at the higher price customers are willing to pay.

Does that happen in New Jersey?

They usually go after independent sellers running an unorganized "emergency store" the hardest.

It shall be an unlawful practice for any person to sell or offer to sell within 30 days after the declaration of a state of emergency, or for such other period of time as the Governor may specify in the declaration of a state of emergency, in the area for which the state of emergency has been declared, any merchandise which is consumed or used as a direct result of an emergency or which is consumed or used to preserve, protect, or sustain the life, health, safety or comfort of persons or their property for a price that constitutes an excessive price increase.

The most basic rules of economics go completely out the window after an emergency, because it doesn't feel fair to people, even if it would result in more emergency supplies being available.

The problem with price-gouging in emergencies is that the combination of "people desperate", "local authorities off-balance", and "apparently-hostile behaviour" very frequently results in the consumer shooting the would-be price-gouger and taking the goods for free.

There are economic costs of price-fixing, certainly, but it has the social benefit of appearing honourable and staying within norms, thus discouraging ballistic discount. In terms of reasons to be coercive about it rather than let the market sort it out, part of it is the price-gougers not thinking that far ahead since emergencies are rare, and part of it is the externalities to society i.e. having people get mugged is bad for social cohesion and economic throughput above and beyond the detriment to the mugged person.

"Your prices are too high! They're charging half as much across the street!"

"So why don't you buy from across the street?"

"They're out of stock."

"Ah; then when I run out of stock, I promise to start charging a third as much!"

It's generally agreed that the guy out of stock, with an effective price of infinity, is a good guy, while the guy "price gouging" is a bad guy, and the only sense I can make of that is to interpret it under the Copenhagen Interpretation of Ethics. How else could it make sense that, if I drive a truck full of generators into a hurricane zone to resell at a markup, they might just be confiscated when I'm arrested for being so awful, while if I sit on my butt refusing to sell generators to blackout victims at any price somehow I'm still a good guy? I fear human ethics only evolved to deal with around a Dunbar number's worth of tribe mates, a situation where basically everybody's family, everybody you give and receive with has an obligation to sacrifice for you if you fall under hard times and vice-versa, and rationing can be done by explicitly considering every single individual's need for a particular good ... which means our ethics don't work out so well in cases where there are orders of magnitude more people to potentially trade with, trying to enforce charity or insurance based on implicit cultural understandings without contracts or at least government programs can backfire horribly, and our only scaleable rationing mechanism is pricing.

Something can be immediately beneficial, but produce incentives that make people worse off.

The argument "what else would induce me to drive into a hurricane zone to seel the generators" implies that we should accept some level of price increase, but it may not be true that the level of price increase you actually get is equal to the level that you must accept in order to encourage the sales.

I think price gouging refers to suddenly raising prices in the wake of a supply shock, or to otherwise take advantage of customers who can’t go elsewhere, and it’s bad because it’s essentially a localized monopoly. For example, excessively pricing prison phone calls is price gouging, and it’s basically using county level corruption to establish a small-scale monopoly. Or suddenly raising the price on necessities in the wake of a natural disaster(eg bottled water after a hurricane).

Yeah, but this is only if you pretend that the larger market has ceased to exist.

In a world where price gouging is 'allowed' and suppliers know they can sell a particularly useful or important good for 2x the normal price after a natural disaster, then they'll be much more likely to start sending additional supplies of that good into the disaster zone, without any additional prompting. This will increase the supply of available goods so that there are fewer shortages and should equalize the price to some more agreeable level.

So allowing price increases in the short term ensures ample supply of important goods in the longer term, which is rather important in the wake of a disaster/supply shock.

And this makes imminent sense because moving goods into an emergency/disaster zone tends to carry additional risks and difficulty so higher prices would make sense in this instance. If you aren't allowed to increase the price, then why would you send your goods into the disaster area vs. sending them anywhere else where you can get the same price?

Perhaps the most ridiculous thing is when price gouging laws are 'augmented' with other restrictions, usually caps on how many of [item] can be purchased at one time, so basically, they make the natural method of limiting overuse of scarce goods illegal, and replace it with an unnatural and arbitrary method.

Perhaps the ultimate in unseen benefits would be legal price gouging would encourage someone to keep stockpiles of useful goods in or near possible disaster areas on the expectation that they can profit by selling at a premium if disaster actually strikes.

Otherwise, there's very little incentive to stockpile and thus you're all but ensuring that a shortage occurs.

"Bad" gouging is about raising prices beyond compensation for (1) risk and delivery costs, and (2) demand increase. Legality of price gouging increases incentive for profit seekers, yes. But if they are profit seekers, why not cooperate and arrange high cartel prices for this short period of time?

only if you pretend that the larger market has ceased to exist

Why pretend that market never fail? Especially during disruption and uncertainty of a disaster, when there might be not so many arbitragers rushing to close all price differentials.

natural method of limiting overuse of scarce goods

Could you provide a brief example of this method?

why not cooperate and arrange high cartel prices for this short period of time?

You could, but it's still a strong signal that will draw outsiders to the local market in order to capture the profits. And what coordination method do you use to ensure compliance amongst your cartel? All it takes is one defector to undercut the rest.

Why pretend that market never fail?

Don't have to. Just have to assume their failures are less frequent and less egregious than government failures, and are certainly corrected faster, since some government failures just never get solved.

You can convince me there's a specific market failure in certain conditions. You probably can't convince me that a governmental solution will actually work out better!

Could you provide a brief example of this method?

Have you noticed how Gas prices went up abruptly earlier this year?

A Steelman of Anti-Gouging-ism

Market-based allocation, in emergencies, denies the poorest access to $RESOURCE1 in any quantity, no matter how dire their need; meanwhile, the wealthiest have no requirement to consume less $RESOURCE1, as even 100x inflated prices are, to them, couch change.

Under direct allocation, however, the emergency has the same effect on everyone: they can get essential quantities of $RESOURCE1, but cannot consume as much as they might desire.

If it is possible, but expensive, to maintain reserve capacity of $RESOURCE1, such that, even in an emergency, supply will be sufficient to meet even non-essential demand, then the outcomes for a rich person are as follows:

  • Market-based allocation/build stockpile: plentiful $RESOURCE1 in emergency for self and others, higher expenses in other times.

  • Market-based allocation/no stockpile: plentiful $RESOURCE1 in emergency for self but none for others, lower expenses in other times.

  • Result: Rich person has no incentive to maintain reserve capacity.

  • Direct allocation/build stockpile: plentiful $RESOURCE1 in emergency for self and others, higher expenses in other times.

  • Direct allocation/no stockpile: limited $RESOURCE1 in emergency for self and others, lower expenses in other times.

  • Result: rich person has more incentive to maintain reserve capacity, as they can only continue their normal consumption habits in emergencies to the same degree as their impecunious neighbours.

Thus, prohibition of price-gouging falls under the umbrella of "ways to align the incentives of the powerful with the public good".

Even given the progressive 'love the poor give them everything', this is an argument for state intervention to buy the good at the market price and give it to poor people, not an argument to ban selling it at a higher-than-usual market price. If poor people can't buy it at $5000, a lot probably can't at $500 either, but some being able to at $5000 is better than nothing (and, if it's $5k, that - sort of, if you assume basic economics generalizes everywhere - means that there aren't means to bring the good to everyone who wants it, at least who can pay $500, so giving it to those who can pay $5k vs giving it to ... nobody, is the issue)

This is a good response, but my instinct is still that market forces should still be in effect. If prison phone prices are too high, few prisoners will make calls and the provider should be incentivized to lower prices to maximize total profits. Likewise with bottled water.

There's nothing wrong with that position, but other people's instinct says otherwise. That's really all there is to it: price gouging doesn't feel fair to people regardless of what economists may say on the topic.

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