The wrongs and rights of disaster price gouging

In 1986 the behavioural economists Daniel Kahneman, Jack Knetsch and Richard Thaler published a classic study showing that in a hypothetical snow storm a large majority of people would think it unfair for a hypothetical hardware store to raise the price of a hypothetical snow shovel.


Ordinary people don’t like price gouging, was the finding.


We don’t need hypotheticals to tell us that in the grim age of Covid-19.


Just look at the backlash against Mike Ashley’s attempt to hike the selling price of his weight-lifting equipment at his Sports Direct chain last month, shortly after the lockdown began.


And new Office for National statistics data today shows that the online price of cough and cold medicines jumped by 10 per cent in a week last month, prompting talk of profiteering by digital retailers and demands for a state crackdown.


The reason why the Kahneman paper was well-known was because it was – to economists at least – problematic; another piece of that famous corpus of behavioural research showing that people don’t think and behave according to the axioms of old-fashioned economic textbooks.


Economists generally believe that markets work because prices are allowed to reflect the balance of supply and demand.


So if the demand for snow shovels surges in a snowstorm it’s natural for the price to rise to reflect that - welcome even because it transmits a signal to snow shovel manufacturers to produce more of them. Or because it incentivises others to put their own stocks up for sale.


Prices and price changes are information and if you interfere with the flow of information you’re going to get inefficiency.


What this misses, of course, is context.


People who would, in normal times, be content to see the retail price of a snow shovel fluctuate, perhaps reflecting the costs of production of the manufacturer, feel very differently about the shop owner who whacks up prices in a time of perceived social emergency in order to make a profit - and especially so when it involves goods that are seen as essential such as medicines.


Markets are embedded in societies. And societies – people - care about fairness.


For free market fundamentalists and libertarian commentators to rail against this reality is the economic equivalent of howling at the moon.


There’s clearly a justification for fairness consideration to trump efficiency in this pandemic, certainly when it comes to anything related to health.


Yet the market fundamentalists are not entirely wrong to warn against the popular urge to stamp out price fluctuations.


Wartime-style direction of industrial production works up to a point.


The Government can requisition private businesses to convert their factories to produce ventilators rather than cars. The state can transform conference centres into field hospitals.


But total state control of the economy, even in a health emergency like this one, is neither feasible nor desirable.


It’s generally agreed that we want private businesses to survive this crisis so they can continue to employ workers. But if we hammer their profits margins in the name of fairness we risk undermining this goal.


Happily, it’s likely that most people understand this. One of the perhaps more interesting findings of the Kahneman paper was that a majority of those questioned were willing to accept price rises (and wage cuts) from firms when the firm was in danger of going bust.


Context matters. So how do we apply all that now?


As so often, it’s a balance. Market regulators and the government need to judge when to intervene and when to let the market operate. Businesses need to judge what’s socially acceptable behaviour when it comes to pricing and what isn’t.


It’s won’t be easy. But relative to the other agonising dilemmas thrown up by the coronavirus pandemic it’s not the hardest job either.

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