For personal consumption: if prices are ceilinged to be low, “might be out later” becomes “might be out sooner,” which makes getting to the store quickly more imperative, and not just for the hoarding-inclined but also the marginally-hoarding-inclined and maybe even the people who just heard something on the news.
For resale: Indeed, there is a weaker incentive to hoard at low present prices if near-future prices are capped. But costs are also part of that equation, and you can weaken the incentive power of high near-future prices by bringing those prices into the present and squeezing any potential margin that way. I’ll buy $1000 of TP today to sell for $2000 within 7 days, but would I pay $1500 for the same amount of TP today? First, if I expect $2000 to be the price, my margin is lower. Second, my expectations of continued price increases are dampened (I know I’m on the clock here because this price impulse won’t last forever), so maybe it won’t even get to $2000. Third, now I have more uncertainty about my time window. This is a ton more risk for me and maybe I’ll just put it in an index fund (lol).
Notice that in the price ceiling situation you can reduce the resale incentive but increase the personal consumption motivation whereas if you let prices rise, you reduce both the resale incentive and the personal consumption motivation. You also get the benefit, if it isn’t a closed economy, that a price hike in the local market will encourage trade from other markets (think LA running out of hand sanitizer, importing it from TN would normally be nuts, but now people can get their hands on it because some “meanies” decided to buy it up where people really didn’t care that much initially).
I sort of agree with you on the optimal solution, and there was this same sentiment in 2008 with oil futures (and there, it’s hard to distinguish speculation from supply/demand and hedging dynamics). But also remember that speculation serves the function of bringing future prices into the present. It serves to even more quickly tamp out a brewing shortage.
I do actually think it’s crazy to think the third-order demand shock of speculation is larger than the second-order demand shock of herding (gasoline in plastic bags!?) or first-order supply shock of a pipeline going out. If the problem is buyers buying (speculators are buyers—they don’t induce a shortage through their selling back into the market), then regulating sellers makes little sense to solve that—rationing is the way to go and businesses can make their own call on that (and big retailers do indeed implement quantity limits because they are hesitant to raise prices and experience the media fallout).
speculators are buyers—they don’t induce a shortage through their selling back into the market
Speculators aren’t selling back into the market now, and if their speculation doesn’t pan out, they might discard the product due to transaction costs rather than sell it back into the market later.
If you assume speculation is the biggie here (I’m skeptical) or if it is the only thing you care about, then that is correct. If there is a supply shock or a herding demand shock, then there will be faster stockouts.
What’s the goal, reducing speculation or helping allocate product to its most valued uses? I’ll take the latter every time, and letting price work as a signal is a useful means for that. I can also see a role for rationing.
Those goals don’t contradict. Reducing speculation is a method of helping allocate products to their most valued uses. “Bought by speculator, kept in a warehouse, and discarded months later” is not a valued use for a product, after all.
Furthermore, it sounds as if you’re defining “valued” as “willingness to spend on”. Defined this way, I have no desire to allocate products according to their valued uses. Poor people exist, after all. (I see a motte and bailey here where the motte is “spending money indicates what is a valued use, according to my definition” and the bailey is “spending money indicates a valued use, as most people would understand that phrase”.)
WTP is a pretty standard measure of valuation, but I understand the reticence to rely on that. Distributional concerns are legit, after all. If the goals didn’t contradict, I’d be much more reliant on efficiency/welfare arguments, and it would be quite messy and assumptive.
Anyway, they do contradict. This is because “bought by speculator, kept in a warehouse, and discarded months later” makes up so little of the sales volume, and that’s even if you include “bought by speculator, kept in warehouse, and successfully sold back in the market for a profit months later,” too. One knows this is the case precisely because speculation of this sort does not occur secularly—it occurs in response to catalysts like negative supply shocks and/or positive demand shocks, which make up way more of the price and quantity shifts. Basically, we’re back to bikeshedding—speculators aren’t the problem here, the “real” (in the economic sense) dislocation is.
One knows this is the case precisely because speculation of this sort does not occur secularly—it occurs in response to catalysts like negative supply shocks and/or positive demand shocks
If you’re suggesting that there actually was a greater total need for toilet paper at the start of the pandemic in the sense that the majority of the excess demand was not made up of speculators and panic buyers, I’d like to see some evidence for this.
I’ve been keeping speculation separate from panic buying in my mind, perhaps that has confused us, but I thought it was clear earlier. Panic buying is part of the demand shock. It’s not “smart” but it isn’t a “fake need” either. There are varying of uncertainty here, and eventually it does slip into stupidity (“I think I’ll run out next week, I might have enough til then, better get some in case” … “I have enough for months but I better grab more!”), and yet again mandating low prices does not defeat this tendency because it operates just like any other demand. If you want them to think twice, charge them more. Or ration. But mandating low prices is counter-productive.
Well sure, there you go, paternalism is easy to justify when people are seen to be so irrational that their perceived needs can be dismissed and replaced with your personal preferences.
That’s a good point about encouraging rationing through price ceilings, as -finally- a reason why they might push in the right direction. As we saw already, price ceilings are not a necessary condition for the rapid implementation of rationing by business. I doubt any induction would be incrementally strong enough or implemented early enough to either matter or justify abandoning any potential preference ordering ability of pricing. But that’s an empirical question, one that I cannot confidently dismiss out of hand.
Been a pleasure discussing with you. And while I personally don’t particularly hope to see new natural experiments on anti-gouging in the future, if we do, I sincerely hope we end up seeing solid analyses of the effects.
Well sure, there you go, paternalism is easy to justify when people are seen to be so irrational that their perceived needs can be dismissed and replaced with your personal preferences.
… in a real-world example of people being irrational over perceived needs.
For personal consumption: if prices are ceilinged to be low, “might be out later” becomes “might be out sooner,” which makes getting to the store quickly more imperative, and not just for the hoarding-inclined but also the marginally-hoarding-inclined and maybe even the people who just heard something on the news.
For resale: Indeed, there is a weaker incentive to hoard at low present prices if near-future prices are capped. But costs are also part of that equation, and you can weaken the incentive power of high near-future prices by bringing those prices into the present and squeezing any potential margin that way. I’ll buy $1000 of TP today to sell for $2000 within 7 days, but would I pay $1500 for the same amount of TP today? First, if I expect $2000 to be the price, my margin is lower. Second, my expectations of continued price increases are dampened (I know I’m on the clock here because this price impulse won’t last forever), so maybe it won’t even get to $2000. Third, now I have more uncertainty about my time window. This is a ton more risk for me and maybe I’ll just put it in an index fund (lol).
Notice that in the price ceiling situation you can reduce the resale incentive but increase the personal consumption motivation whereas if you let prices rise, you reduce both the resale incentive and the personal consumption motivation. You also get the benefit, if it isn’t a closed economy, that a price hike in the local market will encourage trade from other markets (think LA running out of hand sanitizer, importing it from TN would normally be nuts, but now people can get their hands on it because some “meanies” decided to buy it up where people really didn’t care that much initially).
I sort of agree with you on the optimal solution, and there was this same sentiment in 2008 with oil futures (and there, it’s hard to distinguish speculation from supply/demand and hedging dynamics). But also remember that speculation serves the function of bringing future prices into the present. It serves to even more quickly tamp out a brewing shortage.
I do actually think it’s crazy to think the third-order demand shock of speculation is larger than the second-order demand shock of herding (gasoline in plastic bags!?) or first-order supply shock of a pipeline going out. If the problem is buyers buying (speculators are buyers—they don’t induce a shortage through their selling back into the market), then regulating sellers makes little sense to solve that—rationing is the way to go and businesses can make their own call on that (and big retailers do indeed implement quantity limits because they are hesitant to raise prices and experience the media fallout).
Speculators aren’t selling back into the market now, and if their speculation doesn’t pan out, they might discard the product due to transaction costs rather than sell it back into the market later.
Like I said, it’s their buying that is the problem. Higher prices or rationing are the key. Mandating low prices doesn’t solve it.
If you mandate low prices, they won’t be buying since they won’t have an incentive to speculate.
If you assume speculation is the biggie here (I’m skeptical) or if it is the only thing you care about, then that is correct. If there is a supply shock or a herding demand shock, then there will be faster stockouts.
What’s the goal, reducing speculation or helping allocate product to its most valued uses? I’ll take the latter every time, and letting price work as a signal is a useful means for that. I can also see a role for rationing.
Those goals don’t contradict. Reducing speculation is a method of helping allocate products to their most valued uses. “Bought by speculator, kept in a warehouse, and discarded months later” is not a valued use for a product, after all.
Furthermore, it sounds as if you’re defining “valued” as “willingness to spend on”. Defined this way, I have no desire to allocate products according to their valued uses. Poor people exist, after all. (I see a motte and bailey here where the motte is “spending money indicates what is a valued use, according to my definition” and the bailey is “spending money indicates a valued use, as most people would understand that phrase”.)
WTP is a pretty standard measure of valuation, but I understand the reticence to rely on that. Distributional concerns are legit, after all. If the goals didn’t contradict, I’d be much more reliant on efficiency/welfare arguments, and it would be quite messy and assumptive.
Anyway, they do contradict. This is because “bought by speculator, kept in a warehouse, and discarded months later” makes up so little of the sales volume, and that’s even if you include “bought by speculator, kept in warehouse, and successfully sold back in the market for a profit months later,” too. One knows this is the case precisely because speculation of this sort does not occur secularly—it occurs in response to catalysts like negative supply shocks and/or positive demand shocks, which make up way more of the price and quantity shifts. Basically, we’re back to bikeshedding—speculators aren’t the problem here, the “real” (in the economic sense) dislocation is.
If you’re suggesting that there actually was a greater total need for toilet paper at the start of the pandemic in the sense that the majority of the excess demand was not made up of speculators and panic buyers, I’d like to see some evidence for this.
I’ve been keeping speculation separate from panic buying in my mind, perhaps that has confused us, but I thought it was clear earlier. Panic buying is part of the demand shock. It’s not “smart” but it isn’t a “fake need” either. There are varying of uncertainty here, and eventually it does slip into stupidity (“I think I’ll run out next week, I might have enough til then, better get some in case” … “I have enough for months but I better grab more!”), and yet again mandating low prices does not defeat this tendency because it operates just like any other demand. If you want them to think twice, charge them more. Or ration. But mandating low prices is counter-productive.
Panic buying is a fake need when the supply shock has minimal direct effects.
If you mandate low prices, stores will often implement purchase limits—that is, the store will ration the product themselves.
Well sure, there you go, paternalism is easy to justify when people are seen to be so irrational that their perceived needs can be dismissed and replaced with your personal preferences.
That’s a good point about encouraging rationing through price ceilings, as -finally- a reason why they might push in the right direction. As we saw already, price ceilings are not a necessary condition for the rapid implementation of rationing by business. I doubt any induction would be incrementally strong enough or implemented early enough to either matter or justify abandoning any potential preference ordering ability of pricing. But that’s an empirical question, one that I cannot confidently dismiss out of hand.
Been a pleasure discussing with you. And while I personally don’t particularly hope to see new natural experiments on anti-gouging in the future, if we do, I sincerely hope we end up seeing solid analyses of the effects.
… in a real-world example of people being irrational over perceived needs.