Market Power

The Elasticity of Supply of Emergency Supplies and the Ability to "Price Gouge"

Bill Polley points us to this article about big retailers coming to the aid of emergency victims:

Northwest employees of two big-box chains received e-mail alerting them of a storm barreling toward their stores a full four days before 100-mph winds whacked the Oregon coast and murky floodwaters blocked Interstate 5 last week.

Behind a computer in Bentonville, Ark., Lucas McDonald, meteorologist for Wal-Mart Stores Inc., tracked the weather and notified colleagues that Oregon and Washington stores could lose power and the retailer should consider alternative truck routes.

McDonald's counterpart at Home Depot Inc. -- Jim Schortal, the retailer's director of crisis management -- coordinated more than a dozen recovery workers, from hazardous-material cleanup crews to structural safety assessors, to Portland. From his Atlanta office, he also summoned trucks as far as Nebraska and Texas to hightail it west with extra batteries, flashlights, heaters and generators.

I agree with Bill regarding Spencer over at Angry Bear. Spencer's comment:

Division of Labor does not allow comments, but I so wanted to make a common not to send this article to Don Boudreau at Café Hayek of other libertarians . Because they seem to be believe the only way to get supplies to natural disaster victims is some guy in the back of a pick-up truck gouging them with high prices.

I can't speak for the folks at DOL or at CH, but it seems to me that the importance of this ability to "price gouge" is not that it is the "only way to get supplies to natural disaster victims" but that it gives people an incentive to move emergency supplies to where they are most valuable. 

When we rely on what Bill terms "small mom and pop price gougers" to provide the services and supplies, we should expect that they have high opportunity costs and will charge high prices*. This is the sort of price-gouging we often hear about.  But these high prices creates an opportunity for firms with lower marginal costs to enter the market.  When you have retailers like Wal Mart and Target that have the capital and technology to get the supplies there in a quick and cheap fashion, that limits the ability of these folks in "pick-up trucks" (Spencer's term) to charge high prices when disaster strikes.

Really, it's about the elasticity of supply: the sensitivity of sellers to price changes.  According to economic theory, the supply of a good will be more elastic when firms are more willing and able to change the amount they offer for sale.  This willingness and ability depend on 4 basic factors: 1.  the ease with which they can substitute between resources; 2.  the mobility of resources;  3.  the flexibility of resources; and 4. the time suppliers have to adjust.  It seems that the technology improvements have really affected #2 and have shortened the adjustment time.  See Bill and also King for more.

And does it really matter whether Wal Mart, for example, is acting altruistically or in a self-interested fashion?  After all, it ain't about the motives.  It's about the results.

*I know I've written about this before, but I can't find the post.  I asked a construction worker friend of mine about the prices he charges people for small jobs.  He said that if he's really busy, he'll shoot them a high price.  The busier he is, the higher price he'll ask for.  If they accept, he said he'll take the job.  If they decline, it's no big deal because he's already got so much to do.  Here are a bunch of my earlier posts on price gouging.

High Gas Prices = Federal Offense

The nanny state is at it again.

The House today voted, 284-141, to pass a bill that would make gasoline price gouging a federal offense.

And why did one person vote for this?

"I was at a funeral Saturday, and when the monsignor greeted me, he said, 'My God, Bart, you have to do something about these gas prices!' " said Rep. Bart Stupak (D-Mich.), chief sponsor of the anti-gouging bill.

What would you have done, Mr. Stupak, if one of the local millionaires had said the same thing?  "I was at a funeral Saturday, and when the owner of the local bank greeted me, he said 'My God, Bart, you have to do something about these gas prices."

That doesn't have the same rhetorical ring, now does it?

How's this for a clear cut law?

The legislation would give federal authorities the power during presidentially declared energy emergencies to investigate and prosecute anyone selling fuel at a price that is "unconscionably excessive" or "indicates the seller is taking unfair advantage unusual market conditions."

Well that clears that up.  But who exactly is to determine what is "unconscionably excessive" is?  Imagine two people, me and you, who have to get to work and we both have to drive to work  You earn $100 and I earn $200 per day at work. What is an "unconsionably excessive" price for a gallon of gas in this case?

What if someone charges a conscionably excessive price?  Does he not run afoul of the law?

When the demand for gasoline rises, its price rises.  As the price rises, more gasoline is brought to the market.  Price gouging laws work a bit like price ceilings, making businesses think twice before raising prices and, consequently, offering more for sale.  A consequence of this bill, should it become law, is that there may not be as much gas to go around.

Of course widespread price gouging is a myth:

During House debate, Rep. Joe Barton (R-Texas) said that if "pandemic price gouging" were going on, states with anti-gouging laws would be flooding the courts with complaints. Instead, he said, demand for oil is up. The markets were doing what markets do, he said, noting: "If you don't have more of it, prices are going to go up."

See here and here for more on this myth.  And why is widespread gouging a myth?  Because people have many choices when it comes to gassing up their cars.  Within a few minutes of my house, there is a Kwik Trip gas station, a Conoco gas station, a Holiday gas station, a Super America gas station, and a Casey's gas station (and that's what I remember off the top of my head).  People also have choices about how they use gas.  They also have access to lots of gas price information without ever leaving their house.  See here for details.   

And lest we forget who else can be thought of as a gouger:  the government.

As the PowerMom remarked:  "Minnesota and Wisconsin try to keep gas prices high.  The US tries to keep gas prices low.  Sounds like price fixing to me."

Well done, PM.  Well done.

Great Minds Think Alike?

In a recent post on the gas station owner in Wisconsin who ran afoul of state law by charging a price that was below the state minimum, I wrote:

Wisconsin has a similar silly law on its books.  One gas station owner found out what the stick of government will do when you try go against the paternalistic state (emphasis is mine below).

A service station that offered discounted gas to senior citizens and people supporting youth sports has been ordered by the state to raise its prices.

Center City BP owner Raj Bhandari has been offering senior citizens a 2 cent per gallon 

But the state Department of Agriculture, Trade, and Consumer Protection says those deals violate Wisconsin's Unfair Sales Act, which requires stations to sell gas for about 9.2 percent more than the wholesale price.

That's a fine name for that department, don't you think?  The Department of Agriculture, Trade, and Consumer Protection.  Here, apparently, is one of the ways this department protected one consumer:

Dale Van Camp said he bought a $50 card to support the local youth hockey program. It would have saved him about $100 per year on gas, he said.

George Will wrote the following in a column on gas price gouging:

But Wisconsin's Unfair Sales Act requires retailers to sell gasoline for 9.18 percent above the wholesale price. The state's marvelously misnamed Department of Agriculture, Trade and Consumer Protection has protected consumers from Bhandari's discounts by forcing him to raise his prices. Some customers now think he is price gouging.

Gee whiz, Beav.  I'd like to say that great minds think alike, but I wouldn't want to insult Mr. Will like that.

In Praise of Price Gougers

Long-time readers know I cringe when I hear the term "price-gougers" or something similar.  When I hear that term, I see visions of populist demagogues dancing in my head.   A Las Vegas Review Journal editorialist explains:

Even though she admits the "problem" has not arisen in Nevada in recent memory, state Sen. Dina Titus, D-Las Vegas, now offers Senate Bill 82, which seeks to ban "price gouging" by classifying as an illegal "deceptive trade practice" the sale of a consumer good or service "for an unconscionable price before or during a state of emergency."

What's "unconscionable"? Selling at a price 25 percent higher than the average price of said good or service over the past 30 days "unless approved by an appropriate government or governmental entity." Or so the bill says.

Though, reading further down, there's an exception if the price hike is justified by "an increase in the costs incurred" by the seller.

I wonder if the "costs incurred" include opportunity costs.  Some say price gouging is unfair.  What's unfair about people engaging in voluntary exchange at the prices they face?

Then there's the unintended consequences:

"Consider -- if a gas station owner has gas, someone has to decide who gets it. If the price remains at pre-hurricane levels, many will fill their tanks, because they can afford to do so, against the chance (and even likelihood) that gas will later become completely unavailable (a self-fulfilling prophecy if the price is not allowed to rise).

"Many will do so even if they have no immediate need for it. But after the first few people do this, the gas will be gone, and none will be available for those who come after, because it's now tied up in the gas tanks of those who didn't really need it.

And what about anti-price gouging laws?

The best -- in the long run, the only -- way to sustain price-gouging is to give the activity the imprimatur of a government guaranteed monopoly -- which Sen. Titus and her cohorts do, all the time.

If you don't believe this, just try to offer some lower-priced competition to Nevada's taxicab operators, or barbers, or any of a hundred other "regulated" professions, without first seeking a government license or permit -- a permitting process that often requires you to demonstrate to a regulatory board made up of the very people with whom you hope to compete, that you won't hurt the people with whom you want to compete by stealing away any of their customers or undercutting their prices!

So here come the biggest "price-gougers" of all, offering to make it illegal for some small-time entrepreneur to load his pickup with bottled water and baby food, race the stuff to the scene of a disaster days before bumbling government bureaucrats can get there, and compensate himself for the risks thus sustained by selling these life-saving supplies to those who need them most for whatever the traffic will bear.

All to "protect Nevadans" by making sure that instead of being charged more for vital supplies at times of emergency -- there won't be any to buy at all.

Who's going to protect people from the bureaucrats and politicians?

HT to Craig Newmark

Making it Illegal to Raise Prices Twice in a Day

Reading an introductory microeconomics textbook, the reader might think that the processes the result in the prices we pay for goods are the result of some sort of magic process.  Adam Smith called it the "invisible hand." 

In reality, you have people trying to set "the correct" price based upon often consistently flowing information about "market conditions" - i.e. costs and benefits in the marketplace.  New information comes in, then prices will change to reflect the change in market conditions.   If it's easy to change the prices* and new information keeps coming in throughout the day, then we'd expect prices to adjust rather quickly.

Then there's the inevitable error with trying to guess what the information means and what your competition is thinking.  Sometimes you set too high.  Sometimes you set too low.  In a competitive market, if you set your price too high, it's not the government you should worry about.  It's your competition that you should fear. 

But Kip notes that some New York City politicians don't think that's good enough.  The NYC council is going to make it a crime for making a mistake on the high side of setting gas prices:

The City Council voted yesterday, 43-6, to override Mayor Bloomberg's veto of a bill that would make it illegal for gas stations to raise prices more than once a day.

The logic of this is plainly silly.  A station could raise its gas prices once in a day by 15 cents and stay clear of the law, but one that raises its prices twice by one cent each time would be a price gouger.

Over the summer months, council officials said they saw evidence of price gouging(**-Phil), with some stations raising prices arbitrarily, sometimes more than once a day.

The NYC council cannot change the fact that outside forces dictate gasoline prices and that these can change multiple times in a day.  These forces sometimes work to raise gas prices and sometimes they work to push prices down (if market conditions are such that not lowering prices would generate a shortage).  If it's a crime to increase prices a second time, what will gas station managers do when it comes time to raise prices the first time?   

*Regarding the ease of changing prices:  back in the day when I worked at the drug store, one of our jobs was to do price changes.  Back in the early 1990's, when we still used pricing guns and price stickers on everything, we would get a list of products and the new prices to which they should be changed.  We had to take the old stickers off (a chore involving a cigarette lighter and a single-edge razor blade) and reprice each unit - which involved taking each unit off the shelf and putting it back up.  It was a pain in the behind - kinda like walking barefoot in the snow uphill to school both ways.  But we really had to do it. 

But as we moved to using scanners, prices could be changed much more readily.  Someone would change the price of a good in the system, a new shelf sticker with the new price would be printed, and someone would post the new sticker.  Job done for that good.  I would not be surprised if there were numerous goods that have their prices increased more than once in a day.

As technology improves, it would not surprise me to see shelving where the prices of goods and other information is displayed electronically.  When the price of the good is changed in the system, the display price is also changed.

**I wonder if council members are happy when the prices of stocks they own rise more than once a day.  Perhaps they should check themselves for evidence of price gouging.

Construction Worker Shortages

A fundamental problem every person, consumer or supplier, faces is how to allocate scarce resources to obtain the best deal.  But how do folks know what others want and how badly they want these things?  We can have central directors, supposedly well-meaning, and their focus groups discuss the problem - a rather clunky way to do things in most instances.

In well functioning markets, prices fluctuate up and down in response to various conditions.  Prices rising in response to a demand increase sends powerful signals to would-be producers:  people want your stuff.  But when shortages persits, that, in itself, is a signal that prices aren't being allowed to fluctuate:

With tens of thousands of homes still in ruins a year after Katrina, the construction trade here needs many more newcomers like Ramsay. A shortage of workers - compounded by an acute shortage of places to house them - is making it impossible for contractors to meet the overwhelming demand for builders, plumbers, electricians and other skilled laborers.

The shortage also has left many Katrina victims vulnerable to price gouging...

Let's think through this.  Assume there is a shortage of construction services.  If so, its price should rise as consumers bid up the price.  If the shortage persists, the first thing to look at is the price:  is there something keeping prices from rising sufficiently high to make it worthwhile for suppliers to enter the market?

The problem with price-gouging laws is that they do exactly this thing:  they keep prices from rising high enough to clear shortages.  By persecuting "price gougers" in the courts (or in the press), suppliers face an added cost of raising their prices:  the expected penalty.  The net result is that localities are keeping people who are willing and able to help away from those who are willing and able to accept it.

It's also no surprise to economists that in cases of persistent shortages, black markets crop up and it is in these black markets where scams and such are most likely to occur.  Black markets attract the unseemly elements in society:

and scams by unscrupulous contractors.

And in the meantime, "price gouging" and fraud are often confused.  Voluntarily charging high prices and voluntarily paying high prices is not fraud.  Neither is the opposite side of the same coin: voluntarily charging low prices and voluntarily paying low prices.  If I shop around to find the best deal for a car, am I price gouging the car dealers?  If pay sticker price for a car without shopping around, is the dealer price gouging?   Am I price gouging if I wait to buy gas and am lucky that gas prices fall further while I am waiting? 

This, on the other hand, is fraud:

Two of the contractors they hired skipped town - with their money - before finishing the job. Unable to find affordable replacements, the couple worries they'll be the last of their neighbors to move out of a government-issued trailer and back into their home.

While the do-gooders pat themselves on the back and tell themselves what a good job they've done preventing "price gouging," the good folks of New Orleans wait for their ruins to get cleaned up.

Gas Price Gouging - A Rare Occurence in Oregon

Myers said his office has found that, in most cases, the price of gas in Oregon is the result of external factors, such as high global crude oil prices, the state's restricted access to pipeline capacity and international political instability.

No evidence of widespread unlawful price fixing, conspiracies in restraint of trade, or other illegal tactics have yet been detected, Myers said.

But he said his office will keep monitoring prices.

"We have worked hard to detect unlawful conduct in this important market, and to take aggressive enforcement action whenever the law and the facts allow," Myers said.

That is Oregon Attorney General Hardy Myers on gas price gouging claims in Oregon.  What would we do if government officials weren't there to protect us from Big Oil?  Oh, yeah:  drive to another station.

Change in Price Gouging Law in North Carolina

Current North Carolina law allows officials to go after so-called price gougers only when a state of emergency or a disaster has been declared.  But North Carolina lawmakers have approved amending their state's laws to allow such investigations when an "abnormal market disruption" is declared.

If another hurricane 700 miles away sends gas prices soaring in North Carolina, the state can seek penalties against businesses for price gouging.

N.C. lawmakers approved expanding the price-gouging law Wednesday so the governor can declare an "abnormal market disruption" when supplies are cut off by events outside the state.

The law is awaiting the governor's signature.  One can only hope that politicians have a handle on what is "abnormal" in the market and what is not (in addition to determining when a price is "too high"). 

The state could not use the current price-gouging law to investigate pump prices that soared more than $1 a gallon in the days after Hurricane Katrina. The August storm did not strike North Carolina, but knocked out the state's chief source of gas after slamming into Louisiana.

What's abnormal about that?  When supply falls, prices rise.  I'm going to go out on a limb here, but my guess is that one of the consequences of this change will be shortages in gasoline and other markets.

Why I'm Often Extremely Dismissive of Any Price Gouging Claims

When I hear politicians and others claim that refiners, oil companies, etc. are gouging consumers, I am normally very suspicious of these claims.  My guess is that consumers have too many options at their disposal for any of these producers to engage in gouging, whatever gouging is.  The Washington Post has an article that backs up my guess:

Like a general mapping out a plan of attack, Andy Barlow of Germantown checks out an online service to scrutinize where the cheap gasoline can be found before getting behind the wheel.

Aman Amin, a gas station owner in Fairfax City, makes a daily assessment of his competition to ensure his gas prices are among the lowest in the area. And in the mountains of Western Maryland, the Stonebow Inn has launched a campaign to lure guests with the promise of free gas.

Drivers are trading tips in chat rooms and signing up for gas rebate cards. Amusement parks and museums are offering discounted admission to customers showing gas receipts. An oil company is rolling out "bulk-buy" programs that will let consumers hedge against future price spikes. Even an online poker site is joining in the movement.

The end of the next paragraph caught my eye.

"When prices go up, you're going to see some interesting things," said Tom Kloza, chief analyst for the Oil Price Information Service in New Jersey. "Saving money on gas is something that's just magical in this country. Rational thought just doesn't apply to gas."

I don't get this last statement, especially within the context of the article.  What's irrational about shopping around, checking websites like minnesotagasprices.com as a customer to find the cheapest gas and as a gas station owner to make sure you are competitive?  That sounds pretty rational to me.

Here, here, here, here, here, and here are just a few of my posts on the subject.  Here is the Oil Price Information Service website.

Get the Gougers

From the Star Tribune:

Price gouging at the gas pump would be a crime in Minnesota under legislation proposed by a state senator.

Perhaps Senator Murphy should check into hoteliers in the Duluth area who raise their prices during the summer months.  Surely this is price gouging too.  And while we're at it, we might as well call the Twins price gougers too.  They charge higher prices for some games.  Surely this must be price gouging as well.  When senators vote to increase their own salaries, is this price gouging?  Lastly, when a worker gets a raise, is that price gouging?

The measure, sponsored by Sen. Steve Murphy, DFL-Red Wing, chairman of the Senate's Transportation Committee, would make it a misdemeanor for refiners, wholesalers or retailers to sell gasoline at a price that "grossly exceeds their cost," with a penalty that could include 90 days in jail and a fine of up to $1,000.

Perhaps Senator Murphy can tell us why competition doesn't already do this.  Also, perhaps he'd like to explain Minnesota's minimum gas price law which is designed to keep gas prices up!

THE Craig Newmark links to this article.

The funny part? The biggest gas price raisers of all will conduct the probe: The government.

...Besides, who's really making the money and profiting on gasoline? Here in Michigan, the government, and I'm talking about just the state of Michigan, takes about 30 cents per gallon. (Here's a PDF of how much your state takes). The local, state, and federal national average for total gas taxes is 45.9 cents per gallon. On the other side of the viscosity coin, evil oil companies make in the neighborhood of 9 cents per gallon.