If there is a disaster, would you like people for hundreds of miles around to drop everything and make herculean efforts to get those worst affected exactly the sort of help they need most – even when the helpers have no personal connection with the victims? Would you like factories worldwide to rush to switch production to making whatever they are short of in the disaster zone?
You would? Then let people make money by doing it. You can either rely on the small subset of people who will seriously disrupt their lives to help strangers out of pure charity, or you can also get help from the much larger pool of people who who are pushed from vague thoughts of benevolence into action by the prospect of profit. Let them sell goods of which there is a shortage at a higher price and soon there won’t be a shortage any more.
– something sorta like this was said by someone, whom I would gladly credit if I could remember who they were.
My post was prompted by this story by Edward Thicknesse in City A.M.: Coronavirus: Calls for price controls dismissed as ‘economically illiterate’.
That’s the “Beta” solution, and it’s far better than nothing. But there’s an “Alpha” solution, which is even better – and it’s fairly close to your first suggestion. In my Quotes page is an incident – a particularly nasty tornado that flattened part of Kansas. All the sellers raised their prices on essentials like bottled water and flashlight batteries – but one chain maintained their standard prices and trucked-in extra supplies. That’s dependant on the roads being open, of course – but twenty years later you could still find people in the area who would only shop at that store, and were glad to tell you why. People remember things like that.
Elmer Keith in his book, mentions a flood that trashed the harvest in an area near where he lived. His father sold a lot of hay to those farmers – but he sold it at his normal rate, because “it ain’t right to take advantage of people in that situation.”
I can’t be sure, but it sounds like the sort of thing Don Boudreaux of Café Hayek would say.
Y Knott,
That’s the “Beta” solution, and it’s far better than nothing. But there’s an “Alpha” solution, which is even better – and it’s fairly close to your first suggestion.
Oh, I quite agree. I’m no Randian, I admire altruism. The business-person who in order to help forgoes the chance to make a profit is doing a fine thing. The person who really does drop everything and rushes to aid another at great cost to himself is doing an even finer thing.
But governments that pass laws that mean that help can ONLY come from those people who are nice enough – and rich enough – to help without a monetary reward are doing a wicked thing. They are cutting off people in desperate need from a source of help.
(I don’t think you disagree with that. I’m just ranting because I feel such fury when I read of, for instance, Amazon, forbidding people to sell hand sanitiser at a higher price than usual because it is “price-gouging”. Great job, guys. You’ve made sure that the hand sanitiser won’t reach the people who could really use it right now.)
A favour, if I may impose, Natalie – if you find it, can you please post it?
I’ve read the same quote, in the past few weeks. I know I have.
However, a childhood bout of meningitis has left me with some memory problems. Things that “nag” my memory bother me, and leave me with open loops.
As to the rest, my road (very “well-to-do” – dunno where you are in Essex, Natalie, I’m in Upminster) are merrily joining together to help each other out, with everything from opening jars for Dear Old Ivy at number 5 (apparently that’s my role in life now) to shopping trips for everyone whenever someone goes out, and general sharing and regular gatherings across back gardens for drinks and chats across the fences.
Ah, but the joy of it is, you don’t need to be altruistic to keep your prices down in a crisis.
As has been said, in hurricane country, people have long memories. Store A bumps the price of generators up 100% while Store B keeps prices the same as pre-crisis? Store A makes a quick profit at the expense of future earnings. Store B gains goodwill that lasts for decades.
That’s the choice that the retailers ought to have. It’s not altruism – it’s marketing.
Just to put a bit of shade on your pure-market analysis – you haven’t kept it out of the hands of the people who really need it. You’ve kept it out of the hands of those who can most afford it. There is a difference. In my Store B example above, so long as those most in need line up first, they have a shot.
I need to be quite careful about anything I say in the open, but yes. We’re going through exactly this thought process. We’re still open, we’re classed as an “essential service”. We could do sales and promos, and have taken the decision not to. We certainly haven’t raised our prices, but at the same time, we haven’t lowered them either – that could be classed as profiteering from a crisis.
It’s a really delicate balance. I could do a sale on XX product – that isn’t essential, arguably, but which I know I could make a quick buck from, since people are looking for it, being stuck at home with nothing to do. And I have excess stock of it. It’s really difficult to get the balance right, I can only hope that I’ve called it correctly in the given circumstances. Time will tell.
There are lists going around of businesses that are using this as an excuse to profiteer, and I (on a personal level) am keeping track of them, as I’m perfectly prepared to change my shopping habits to avoid such businesses in the future. Hopefully, we’re on the right side of history so far.
I think that the libertarian argument for freedom of pricing is this: if, in a freed market, suppliers see that prices for hand sanitiser and soap are going up, then they know to produce more, since it’s obviously in demand. This will then reduce the price back down (quickly) to affordable levels – price will approach cost, with such high levels of demand – labour theory of value! (F U to the Marxists who misinterpret that)
Unless they’re not allowed to produce soap and hand sanitiser because of, say, oh, patents? In which case, the market is distorted by government decree 😛 😛
In addition, being able to sell more can result in extra profit all on its own, depending on the kind of store. There is a concept I like to call ‘shelf rent’ – I don’t know what the proper term for it is. You take all the per-day fixed overheads for a shop – the stuff you would still have to pay even if you never sold anything, like rent and electricity and so on – and you divide it by the length of shelf you’ve got. Then when you put goods on the shelf, where they sit for so many days, you have to add the shelf rent to their price for each day. Thus, the goods might cost £1 to buy from the wholesalers, but the overheads cost £0.50 per foot-day, and it takes 5 days on average to sell all the goods you put on that bit of shelf. So you have to charge £3.50 to break even, even though the goods are only £1. Ah, but if there’s a rush, and you can sell out a shelf-full every day, then the price you have to charge is suddenly £1.50. If you keep on charging £3.50, that’s loads of profit!
No, the theory of needing to raise prices is for when there simply isn’t enough being manufactured or delivered. You might have a wide range of suppliers who *can* produce the goods, but they each have different costs, so some can make it for £1, and some more for £1.20, and lots of people can do it for £5 because they don’t have the expertise, or the machinery, or whatever, to do it cheaply but could bodge something up. Normally, if there are enough people want to buy it at £1 for the first manufacturer to deliver, the shop never bothers to ask any of the others. If there’s more demand, then you can raise the price, get more made, and maybe charge £1.20. The first factory is very happy, and the second can start to trade. But if demand really ramps up, then charging £5 allows you to get a ton more manufacturers making it who would simply not be capable of supplying it at the lower price.
If the supply is plentiful enough (or the demand spike is short enough that stock on hand can meet it) then there’s no necessity to raise prices, and competition still applies to keep prices low. The only time the price needs to go up is if there simply isn’t enough capacity from the usual sources, and you have to go to sources who cannot do it so cheaply.
The alternatives then are either shop A bumps the prices up 100%, is able to get 10x as many generators in by doing so, and is able to serve 10x as many customers; or shop B that keeps the prices the same, but runs out 10x more quickly and then has to shut, because they’ve got nothing left to sell. If any shop was to raise prices that another shop could undercut, the second shop would get all the custom, exactly the same as in normal times.
Another scenario, of course, is that there is far more demand than supply, and no extra supply is forthcoming at any price. (This is the sort of situation most commonly seen with music concerts, where there are lots more fans than seats. Bands do quite often try hard to keep the price low, so their loyal fans can afford the tickets. The result, of course, is that people buy extra tickets and then sell them to ticket touts, who sell them to richer or more devoted fans.) The shop might then auction off what it’s got to the highest bidder. Or it might not be the shop that takes the profit, but the warehouses, or the manufacturers. You can’t assume that it is the shop that’s taking the profit – there are lots of other people in the supply chain. So if the manufacturer charges more (the customers have never heard of them, so are not able to boycott them in future), and the shop is left with the choice of charging more or being outbid and having none, what’s the right thing to do?
It’s complicated, and not generally obvious to the customers what is going on or who might ultimately be at fault. Yes, charity at a time of crisis might well reap dividends later, but it might also be a question of necessity for a shop to be able to put any goods on the shelf at all. Do you *want* more hand sanitizer, or not?
It’s called “Direct Product Profitability” – DPP for short.
It’s not something that most retailers think about on a daily basis, since it’s hard to work out and adds a layer of complexity that can be counter-productive. Instead, it gets looked at at regular but infrequent intervals – say, every three or six months – and then we say to the Buyer of Big Slow Moving Product X that she has to make 20% margin minimum, and to Buyer of Small Fast Moving Product Y that he has to make 10% – and within that 10% or 20% are all the other costs that are separate from the easily visible cost of “how much the supplier is charging me”.
1) I’ve a half-recalled notion – perhaps bobby b will be able to confirm or correct me – that the US supreme court has in the past ruled that prices are sometimes an also-protected form of free speech. This would make a genuinely price-gouging price simply an act of free speech that happened to say something objectionable. I’m not sure what the exact price equivalent would be of those very rare situations when we allow free speech to be limited, but I suppose “clear and present danger” could be at least considered in a price situation.
2) As Nullius remarks, a typical effect of sudden increased demand is to force suppliers to turn to sources that are (initially and/or innately) more costly. I would argue that if a previously well-functioning market was in a stable state then that is the natural effect – that a same-cost restocking effect that would allow claims of price gouging to be factual is the less likely situation. There is also the point worth noting that it is the restocking value that will be paid to replace the goods sold, not the prior value that was paid for the goods now being sold, that a business (that plans to stay in business) has to sell for.
3) History has many examples of governments and mobs failing to understand the laws of supply and demand. I commented on an old example here. (By chance, that comment was in the thread of a post about a BBC China-flattering article that has its relevance to today.)
4) A surprising example of educating the young in wisdom is in Disney’s ‘Frozen’ of all places. The film is rather decent to the shopkeeper who explains to princess Anna that her sister’s magical winter-in-July is causing a supply and demand problem between his summer and winter departments. The young viewer (as part of getting the comedy of it) is positively encouraged to see both sides of the shokeeper’s indignant “Vot did you call me?!!” after overhearing Kristoff telling the princess to wait up “while I deal with this thief”. If anyone here feels an irresistible urge to guard their tiny tots against lefty price-gouging rhetoric, they could try discussing that scene with them. 🙂
Cool! Thanks Neon!
And as another note, I really detest a far wider category of buyer – the Shabe. We’ve all seen them, we’ve all likely done it ourselves, I know I have. SHABE = “Shop Here And Buy Elsewhere”.
I have relatives in retail, one of whom worked the camera counter in a small department store out in the sticks. She was very knowledgeable about the store’s products and a photographer herself, and somebody would come to the counter looking for a camera, talk her ear off about a certain camera, get an exhaustive twenty-minute demo and then say “Thanks – I’ll think about it” and walk off. It was only too obvious that he was bound for his car to drive to the nearest big city and buy it there for twenty bucks cheaper. Amazon is the ultimate mecca of the Shabe.
Well, back when I taught scuba (sub-aqua), I told my students “scatter some money around the local dive shops. Yeah you can go to Florida and buy your tanks for half what they cost here, but you’ll look a bit of a fool when you get back and the local dive shop has folded for lack of business, and there’s nowhere to get your tanks filled.” And we buy whatever we can locally; there ain’t much anymore.
No worries. Worth noting that DPP usually gets applied to currently ranged products, and is often used when you’re having to do a range review or such like.
There’s a related term – “Cost Of Service” (CTS) – which you might come across if you start googling. Typically (and append the words “in my experience, at least” to everything I’m saying here) CTS is a supply chain thing, applied before you range a new product.
It stops me going “Boss, look! Shiny new widget that I’m getting for £2 from Acme Manufacturing and I can sell for £3! YAY ME! £1 profit per unit!” without supply chain going “You muppet, it’s going to cost £1.50 just to get it from our warehouse onto a shelf.”
…why? Not saying it’s not sensible – it is, obviously – but it’s not always possible to forecast the future cost price of a given product. But it’s not necessary, in many instances, from a cash-flow perspective, since (again, append “in my experience”) suppliers don’t tend to get paid before handing over their deliveries, but some time after (90 days after delivery is not unusual in larger retailers) – by which time you’ve hopefully sold the product 3 times over.
Indeed it is not. If they know their restock price, they will sell for it. If they guestimate their restock price will go up, they may sell for a guestimated rise in price. If they mistake an inflationary episode for an increase in demand for their product, they may happily sell for the current price – until they realise their supply costs are inflating too. Over time, the restock value is what “a business (that plans to stay in business) has to sell for” – or it might be more precise to say, has to cover. Not all businesses stay in business. All the (few) businesses I’ve ever known in detail have had the occasional “Oh my God” episode where it suddenly dawns that the numbers are out-of-whack and the immediate future contains some hasty rationalisations, layoffs and/or price changes.
I guess what I am saying here is that in one sense you are right and they ‘can’t’ do this but in another sense I am right and they ‘must’ do this. Free enterprise is making decisions on imperfect information where the cost of error lands on the decider.
So much easier to be the government and just hit the peasants for more taxes to cover unforeseen events. 🙂
I suspect I’m reading you more “literally” than you actually mean – or maybe that I’m thinking in micro- terms and you’re talking macro- terms 😉
If you’re saying that overall, a business (let’s stick with retail?) should sell, in aggregate, their product for more (at the very least “the same amount”) than they expect the re-stock cost to be, then yes.
On an individual product level, widget number 1245 doesn’t need to be sold for more than the potential re-stock value, if widgets 712 through to 884 are making up the difference.
I don’t know how widespread the knowledge about payment terms (as in, you pay well after you take delivery and hopefully you pay for the product after you’ve sold it) is, but it’s important.
Firstly, it means that you’re operating on “cash-positive” terms, and means money is in your bank, not the suppliers (with concurrent but secondary bonuses around interest).
But it also helps to deal with fluctuations in cost-price, since it gives you more time to react – you can adjust pricing on product before you have to take the cost-price hit.
Anecdote time: I was the buyer for PC peripherals for a sizeable catalogue-based UK retailer in 2011, when this happened – a flood in Thailand, which left hard drive manufacturers kinda struggling…I heard stories of scuba divers being sent in to rescue stocks (don’t know how true that is)
Prices went, understandably, through the roof. But because I didn’t have pay for 90 (or 60, I don’t remember exactly, but lets say 90) days after delivery, this gave me some breathing room. I could build up the value of “my” bank account – we called it my “open-to-buy” – ie. my stock budget (the value of the total stock I was allowed to hold) by raising prices slowly and calmly. It gives you an extra 90 days of “price signals” to work with – without having to sit on a stock mountain.
I’m conscious that that’s not the best explanation, and probably has holes in it, but I’d need a Supply Chain Manager and someone from Finance on hand to explain it fully!!!
The end result of the flood, NiV, was that we ended up dealing with the “other” supplier, the one who was typically more expensive under normal circumstances, but was now cheaper due to the dramatic event in hand. And hard drives were more expensive for a while, until said supplier was able to leverage economies of scale and everything settled back down again. I moved away from that area shortly after, thank the gods, so I’m not sure where it ended up. I suspect that the supply base broadened.