Wednesday 23 March 2011

In further defense of price gouging

Michael Giberson at Knowledge Problem points to his Regulation piece against anti-gouging legislation.

It's a nice piece and lists many of the absurdities of anti-gouging legislation. But I worry that anti-gouging legislation isn't the substantial binding constraint. As best I'm aware, there's no anti-gouging legislation here. But it still doesn't happen. The binding constraint isn't the legislation - it's the underlying public sentiment that gives rise to the legislation. Even absent the legislation most retailers won't hike prices because the long term reputation costs are too high. Giberson writes:
Instead, price gouging laws appear more akin to laws banning the sale of horse meat for human consumption, “Blue laws” that prevent the sale of certain items on Sunday, or laws that once prohibited interracial marriage. The laws put the force of government behind efforts to prevent people from entering into agreements or transactions that lawmakers find objectionable. One more puzzle: unlike Blue laws and interracial marriage bans, laws against price gouging are not fading away as society becomes more accepting of personal differences. Instead, price gouging laws emerged relatively recently, are spreading geographically, have become more expansive in scope, and are becoming more frequently invoked.
Michael cites a few cases where retailers did hike prices. But those were all petrol retailers who bought product at spot prices in international markets. There, the constraint will be binding. I have a hard time thinking of other major retailers who choose to increase prices rather than run out of specific products during short emergencies. Snow shovels don't jump in price at Home Depot in advance of blizzards. What the legislation mostly prevents is small one-off guys from engaging in useful and profitable geographic arbitrage.


  1. "Commercial prudence" is often the binding constraint - see the Sarah Maxwell book "The Price is Wrong" which discusses the practical pricing strategy issues raised. There are some interesting economics issues here since consumer reactions may make the consumers worse off (if local suppliers simply run out rather than resupply at higher costs that the supplier can't pass along to consumers).

    From what I've seen, U.S. states or cities have pursued the following kinds of cases under price gouging laws:
    * Gasoline retailing, and much less frequently gasoline wholesaling.
    * Hotel rooms.
    * Electric generators (by hardware stores or other retailers, not just by the one-off guys).
    * Roofing, other home repair services.
    * Tree trimming, tree removal services.
    * General merchandise at convenience stores.

  2. I'll have to get the book, thanks. Totally agree on consumer reactions making consumers worse off.