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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.

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?