The fundamental problem that businesses solve is that marginal cost is different from average cost (usually lower, in this case higher). One standard way to address it is price discrimination—find a way to get more willing customers to pay more, by bundling, by slight variation in quality for larger variation in price, or by other things that matter more to customers than to costs.
The obvious business advice for such a manufacturer would be to introduce a new line of premium ventilators, which are mostly the same, but have copper touch surfaces or something. Do this long before any hint of specific emergency—this is normal business practice. Price them at $100K normally, and you probably won’t sell many. Start ramping these up when you predict a surge, and these will be the ones you sell when you’re out of stock of the cheaper ones.
Oh, don’t forget discount policies—you should normally have a list price of $90K, and discount that to various levels based on negotiated delivery and volume commitment. You don’t have to offer discounts for last-minute purchases that weren’t contracted 6 months ago.
(all of these fall under the heading of “allow price gouging”. That’s the right answer for production-side incentives. It’s the WRONG answer for speculators who amplify the shortage by taking away from normal supply, rather than providing new supply. And it’s deucedly hard to tell the difference from outside, so governments tend to just outlaw the whole idea.
Is there a way to do this if you’re not already a manufacturer? With, say, N95 masks—could we buy up a bunch of regular ones when there’s no shortage, do something that costs a little money and adds a tiny bit of value (maybe print cute pictures on them for doctors who wear them around little kids) and then mark them up 900%? I mean, I don’t have money to buy them with, but if stockpiling really makes economic sense then I’d think we could get investors to front it.
How do price gouging laws apply to discounted products? If we almost always offer an 80% discount, can we stop offering that during an emergency?
ETA: to be clear, masks are just an example. They would not be a good choice in the future because after this pandemic governments will actually stockpile them. We’d need to figure out what there’s likely to be a major shortage of in the NEXT global emergency.
Sure, it’s common for a reseller to bundle support, installation services, or warranty with items, in order to justify very large markups. The discount methods work too. A packaging or product change is closer to the manufacturer case—you have to deal with time/cost/capital tradeoffs to change your production rate or inventory size.
As a pure speculator, you’re starting off in a worse spot, because you’re dependent on the manufacturer(s) for supply, and you’ll start with slimmer profit margins, which makes your risk much higher if the shortage doesn’t occur as severely as you expected, or if manufacturers can ramp up faster than you predicted.
You’re also in a morally worse spot—you run the risk that you are creating or amplifying the shortage, not just predicting and smoothing the consumption of rapidly-value-changing products, and not actually increasing supply with the increasing price. If you aren’t solving the problem given in the post (you could make more, but not at your normal prices), you’re not as clearly on the side of good.
Keep in mind that simple models are pretty misleading. There are almost NO manufacturers who aren’t also middlemen for parts of their equipment. They don’t dig up and smelt their own ore, they buy everything (often significant manufactured subcomponents) from other manufacturers. There are few distributors who aren’t adding real value with some amount of warranty/returnability, and delivery or quantity options that the manufacturer doesn’t support. These things really blur the line between producer and middleman.
You’re also in a morally worse spot—you run the risk that you are creating or amplifying the shortage, not just predicting and smoothing the consumption of rapidly-value-changing products. If you aren’t solving the problem given in the post (you could make more, but not at your normal prices), you’re not as clearly on the side of good.
I don’t follow. The idea would be that you aren’t contributing to the normal supply, you just stockpile in case of future emergency. This increases production during normal times slightly, and then when there is a pandemic you would stop purchasing and start selling. This reduces the need for manufacturers to produce more at higher marginal cost. How could it create or amplify a shortage?
It’s true you’d have no profit prior to the emergency (and large costs) but in theory that shouldn’t matter as long as your investors diversify.
Stockpiling over time, long in advance of a crisis is great (but might be tough to find those investors). Supply has time to adjust and you are not hurting anyone.
Stockpiling in a burst just before a rush, when it’s too late for suppliers to adjust production, is much less clear. You’re accelerating or in some cases creating the shortage, and you’re not changing the short-term supply at all.
Ah, okay. I guess that answers my question: you don’t think it’s possible to mitigate shortages by stockpiling without losing money in expectation. I wish it were—surge production is a much more tenuous solution that depends on being able to foresee a disaster shortly before it occurs, and even then it might not be possible to produce enough to help significantly.
(all of these fall under the heading of “allow price gouging”. That’s the right answer for production-side incentives. It’s the WRONG answer for speculators …
I’m not sure that’s true. Speculators are an important part of price discovery. The problem is that lots of people hate what they ‘discover’ and thus we generally fail to heed those discoveries.
The general problem seems to be (rapid or extremely rapid) scalability and that seems like just a very hard problem to solve.
Within normal constraints and timeframes, this is absolutely true—speculators are performing an important role in predicting and propagating demand. For short-term events which are ALREADY visible to suppliers (and somewhat less so to consumers) speculation has less information value, and more disruptive impact by their normal-value of shifting demand forward. In these situations, they shift a temporary demand into a much higher peak than it otherwise would be.
In other words, speculators are valuable usually, because usually they’re flattening the curve. They’re harmful in some exceptional circumstances because they cause the spike to be artificially higher than it otherwise would be.
Note that it’s NEVER this black and white. It’s certainly true that there are both benefits and harms to different constituencies in all cases, and where you net out will depend on what you’re focusing on.
The fundamental problem that businesses solve is that marginal cost is different from average cost (usually lower, in this case higher). One standard way to address it is price discrimination—find a way to get more willing customers to pay more, by bundling, by slight variation in quality for larger variation in price, or by other things that matter more to customers than to costs.
The obvious business advice for such a manufacturer would be to introduce a new line of premium ventilators, which are mostly the same, but have copper touch surfaces or something. Do this long before any hint of specific emergency—this is normal business practice. Price them at $100K normally, and you probably won’t sell many. Start ramping these up when you predict a surge, and these will be the ones you sell when you’re out of stock of the cheaper ones.
Oh, don’t forget discount policies—you should normally have a list price of $90K, and discount that to various levels based on negotiated delivery and volume commitment. You don’t have to offer discounts for last-minute purchases that weren’t contracted 6 months ago.
(all of these fall under the heading of “allow price gouging”. That’s the right answer for production-side incentives. It’s the WRONG answer for speculators who amplify the shortage by taking away from normal supply, rather than providing new supply. And it’s deucedly hard to tell the difference from outside, so governments tend to just outlaw the whole idea.
Is there a way to do this if you’re not already a manufacturer? With, say, N95 masks—could we buy up a bunch of regular ones when there’s no shortage, do something that costs a little money and adds a tiny bit of value (maybe print cute pictures on them for doctors who wear them around little kids) and then mark them up 900%? I mean, I don’t have money to buy them with, but if stockpiling really makes economic sense then I’d think we could get investors to front it.
How do price gouging laws apply to discounted products? If we almost always offer an 80% discount, can we stop offering that during an emergency?
ETA: to be clear, masks are just an example. They would not be a good choice in the future because after this pandemic governments will actually stockpile them. We’d need to figure out what there’s likely to be a major shortage of in the NEXT global emergency.
Sure, it’s common for a reseller to bundle support, installation services, or warranty with items, in order to justify very large markups. The discount methods work too. A packaging or product change is closer to the manufacturer case—you have to deal with time/cost/capital tradeoffs to change your production rate or inventory size.
As a pure speculator, you’re starting off in a worse spot, because you’re dependent on the manufacturer(s) for supply, and you’ll start with slimmer profit margins, which makes your risk much higher if the shortage doesn’t occur as severely as you expected, or if manufacturers can ramp up faster than you predicted.
You’re also in a morally worse spot—you run the risk that you are creating or amplifying the shortage, not just predicting and smoothing the consumption of rapidly-value-changing products, and not actually increasing supply with the increasing price. If you aren’t solving the problem given in the post (you could make more, but not at your normal prices), you’re not as clearly on the side of good.
Keep in mind that simple models are pretty misleading. There are almost NO manufacturers who aren’t also middlemen for parts of their equipment. They don’t dig up and smelt their own ore, they buy everything (often significant manufactured subcomponents) from other manufacturers. There are few distributors who aren’t adding real value with some amount of warranty/returnability, and delivery or quantity options that the manufacturer doesn’t support. These things really blur the line between producer and middleman.
I don’t follow. The idea would be that you aren’t contributing to the normal supply, you just stockpile in case of future emergency. This increases production during normal times slightly, and then when there is a pandemic you would stop purchasing and start selling. This reduces the need for manufacturers to produce more at higher marginal cost. How could it create or amplify a shortage?
It’s true you’d have no profit prior to the emergency (and large costs) but in theory that shouldn’t matter as long as your investors diversify.
Stockpiling over time, long in advance of a crisis is great (but might be tough to find those investors).
Supply has time to adjust and you are not hurting anyone.
Stockpiling in a burst just before a rush, when it’s too late for suppliers to adjust production, is much less clear. You’re accelerating or in some cases creating the shortage, and you’re not changing the short-term supply at all.
Ah, okay. I guess that answers my question: you don’t think it’s possible to mitigate shortages by stockpiling without losing money in expectation. I wish it were—surge production is a much more tenuous solution that depends on being able to foresee a disaster shortly before it occurs, and even then it might not be possible to produce enough to help significantly.
I’m not sure that’s true. Speculators are an important part of price discovery. The problem is that lots of people hate what they ‘discover’ and thus we generally fail to heed those discoveries.
The general problem seems to be (rapid or extremely rapid) scalability and that seems like just a very hard problem to solve.
Within normal constraints and timeframes, this is absolutely true—speculators are performing an important role in predicting and propagating demand. For short-term events which are ALREADY visible to suppliers (and somewhat less so to consumers) speculation has less information value, and more disruptive impact by their normal-value of shifting demand forward. In these situations, they shift a temporary demand into a much higher peak than it otherwise would be.
In other words, speculators are valuable usually, because usually they’re flattening the curve. They’re harmful in some exceptional circumstances because they cause the spike to be artificially higher than it otherwise would be.
Note that it’s NEVER this black and white. It’s certainly true that there are both benefits and harms to different constituencies in all cases, and where you net out will depend on what you’re focusing on.
That’s a fantastic point and one that Alex Tabbarok made in this post recently – ‘ticket scalping’ basically.