Musings about whether we should have a bit more sympathy for price gauging, despite all. Admittedly with no particular evidence to point to; keen to see whether my basic skepticism could easily be dismissed.
Scott Sumner points out that customers very much prefer ridesharing services that price gouge and have flexible pricing to taxis that have fixed prices, and very much appreciate being able to get a car on demand at all times. He makes the case that liking price gouging and liking the availability of rides during high demand are two sides of the same coin. The problem is (in addition to ‘there are lots of other differences so we have only weak evidence this is the preference’), people reliably treat those two sides very differently, and this is a common pattern – they’ll love the results, but not the method that gets those results, and pointing out the contradiction often won’t help you.
I think as economists we can be too confident about how obvious it’d be that allowing ‘price gouging’ should be the standard in all domains. Yes, price controls often hugely problematic. But could full liberty here not also be disastrous for the standard consumer? It depends on a lot of factors; maybe in many domains full liberty works just fine. Maybe not everywhere at all.
Yes, “Prices aren’t just a transfer between buyer and seller.”—but they’re also that. And in some areas, it is easily imaginable how an oligopoly or a cartel, or simply dominant local supplier(s) benefit from the possibility to supply at any price without alleviating scarcity—really instead by creating scarcity.
The sort of cynical behavior of Enron comes to mind; can such firms not more easily create havoc on markets if they have full freedom to set prices at arbitrary levels? I’d not be surprised if we have to be rather happy about power sellers [in many locations] not being allowed to arbitrarily increase prices (withhold capacity) the way they’d like. Yes, in the long term we could theoretically entry of new capacity (or storage) into the market if prices were often too high, and that could prevent capacity issues, but the world is too heterogeneous to expect smoothly functioning markets in such a scenario; maybe it’s easier to organize backup capacities in different ways. Similar for gasoline reserves; it’s a simple to organize thing. Yes politicians will make it expensive, inefficient, wrongly sized; but in many locations in the world maybe still better than having no checks and balances at all in the market just for the hope the private market might create more reserves.
And, do we really need the toilet paper sellers[1] plausibly stirring up toilet paper supply fears in the slightest crisis of anything, if they know they can full-on exploit the ensuing self-fulfilling prophecy of the toilet-paper-run, while instead everything might have played out nicely in the absence of any scarcity-propaganda?
Or put differently with a slightly far-fetched but maybe still intuiting example: We hear Putin makes/made so much money from high gas prices, theoretically it could be an entire rational for the war in the first place. Now this will not have been quite the case, but still: we do not know how many times individual micro putin events—where an exploitative someone would have had their incentive to create havoc in their individual markets to benefit from the troubles he stirred—the anti gouging laws may have prevented. Maybe few, maybe many?
These points make me wonder whether the population is once again not as stupid as we think with their intuitions, and our theory a bit too simple. Yes we all like the always-available taxis, but I’m not sure it practically works out just so smoothly with all other goods/market structures. But maybe I’m wrong, and in the end it’s so obvious price controls themselves have so bad repercussions anyway.
Musings about whether we should have a bit more sympathy for price gauging, despite all. Admittedly with no particular evidence to point to; keen to see whether my basic skepticism could easily be dismissed.
I think as economists we can be too confident about how obvious it’d be that allowing ‘price gouging’ should be the standard in all domains. Yes, price controls often hugely problematic. But could full liberty here not also be disastrous for the standard consumer? It depends on a lot of factors; maybe in many domains full liberty works just fine. Maybe not everywhere at all.
Yes, “Prices aren’t just a transfer between buyer and seller.”—but they’re also that. And in some areas, it is easily imaginable how an oligopoly or a cartel, or simply dominant local supplier(s) benefit from the possibility to supply at any price without alleviating scarcity—really instead by creating scarcity.
The sort of cynical behavior of Enron comes to mind; can such firms not more easily create havoc on markets if they have full freedom to set prices at arbitrary levels? I’d not be surprised if we have to be rather happy about power sellers [in many locations] not being allowed to arbitrarily increase prices (withhold capacity) the way they’d like. Yes, in the long term we could theoretically entry of new capacity (or storage) into the market if prices were often too high, and that could prevent capacity issues, but the world is too heterogeneous to expect smoothly functioning markets in such a scenario; maybe it’s easier to organize backup capacities in different ways. Similar for gasoline reserves; it’s a simple to organize thing. Yes politicians will make it expensive, inefficient, wrongly sized; but in many locations in the world maybe still better than having no checks and balances at all in the market just for the hope the private market might create more reserves.
And, do we really need the toilet paper sellers[1] plausibly stirring up toilet paper supply fears in the slightest crisis of anything, if they know they can full-on exploit the ensuing self-fulfilling prophecy of the toilet-paper-run, while instead everything might have played out nicely in the absence of any scarcity-propaganda?
Or put differently with a slightly far-fetched but maybe still intuiting example: We hear Putin makes/made so much money from high gas prices, theoretically it could be an entire rational for the war in the first place. Now this will not have been quite the case, but still: we do not know how many times individual micro putin events—where an exploitative someone would have had their incentive to create havoc in their individual markets to benefit from the troubles he stirred—the anti gouging laws may have prevented. Maybe few, maybe many?
These points make me wonder whether the population is once again not as stupid as we think with their intuitions, and our theory a bit too simple. Yes we all like the always-available taxis, but I’m not sure it practically works out just so smoothly with all other goods/market structures. But maybe I’m wrong, and in the end it’s so obvious price controls themselves have so bad repercussions anyway.
Placeholder. May replace with other goods that fit the story.