Price gouging or just capitalism?

Great Debates
41

In order to increase supply, the higher price must go to the manufacturer, not the retailer. For the most part, these rapid extreme price changes we would call gouging are at the retailer level, not the producer level.

Look at Oredigger77’s post, he’s describing a 15% increase in price as “sky rocketed”. Pass that 15% increase to the customer, and your $3 bottle of hand sanitizer is now $3.45. That isn’t preventing hoarding, it’s never going to prevent hoarding, but it will increase supply. The price that is necessary to prevent hoarding exacts a large toll on the poor, and puts money in retailer pockets.
The free market is wonderful. You can set loose people on the market and they naturally create an efficient market. They don’t have to be nice, or considerate, or anything, they can be greedy self serving assholes and the market just hums right along. But it isn’t perfect. There are times when letting it run wild doesn’t make the world better for the people living in it. Sometimes, people need to use their morality to make a decision that isn’t profit maximizing, because it improves lives.

42

Man, I went back and looked the only thing I saw me describing as sky rocketing was the demand for hand sanitizer and it’s ingredients. I didn’t say price has sky rocketed unless we’re talking about a specific individual who is trying to be an asshole and he did triple the old market cost from 3 weeks ago.

I think we’re in agreement though increasing the price has led to an increase in supply and everyone wins in which case its not gouging. Someone tripling cost just to capture more money is gouging and really uninvolved in the base ingredient cost increase.

43

Part of the reason why the US is in such a dire state with PPE right now is because of price gouging laws/perception. Medical equipment manufacturers know that demand for PPE is going to drop back down to normal levels in 6 months time and ramping up production beyond a certain point means investing in very expensive machines that they will have to scrap as soon as the emergency is over. If they can’t amortize the cost of the machine over the very short life span of the pandemic, then they lose money and if they lose enough money, they go bankrupt. This has happened enough in past pandemics that medical manufacturers are once bitten, twice shy. Unless the government can step in and guarantee payment (essentially, “price gouging” but to an invisible tax payer instead of a visible consumer), then medical manufacturers are going to drag their feet.

China went from making 20M masks a day to 200+M masks a day. Taiwan went from making essentially no masks to 10M+ masks per day. They did this by convening a council of the top manufacturers and promising them they wouldn’t lose money through this. People assume the US doesn’t have the domestic capacity to make all of this stuff but that’s not true, the capacity exists but the economic incentives are at odds with the best course for the nation.

44

I basically agree with this.

45

Damn, if only there were some way the President could do that . . . if only.

CMC fnord!

46

I don’t think there is a distinction between price gouging and capitalism. Prices skyrocketing in times of extreme high demand or disrupted supply is what you’d expect from capitalism. As to whether it’s desirable, the options are:

  1. Ride it out - keep everything at normal prices: They’re still making toilet paper and webcams, eventually the hoarders will have their hoard, and then everything will return to normal. No one has to pay extra, but some will be unable to get any. Because it’s toilet paper and webcams, and not food and water, I personally find this acceptable. This rewards the most devoted/time rich. It could be longer until it returns to normal because it incentivizes people to buy and resell at price gouging prices, but that just has the advantages of 4) price gouging, with the added drawback of rewarding arbiters rather than producers.

  2. neutral rationing: a 2 per customer style policy. This has the advantages of 1) with hopefully fewer people having to go without. This will still have the issue of people trying to buy and resell, but it is at least it is more difficult.

  3. Government controlled rationing: The government tries to weigh people’s needs and distribute goods. I have not seen this proposed by anyone for the toilet paper and webcam discussion we’ve been having, though it is kind of happening for ventilators and masks for hospitals.

  4. Allow price gouging: The advantages and disadvantages have been hashed out a lot in this thread, so I will just add that it doesn’t go to the neediest, or to the richest. It goes to the neediest relative to the price sensitivity of the person. It will give a webcam to a work from homer before a teen who wants to hang out, but maybe not a teen with their parent’s credit card who wants to hang out. Since everyone wants toilet paper and ventilators roughly equally, I suspect those markets would just go to the richest.

Personally, I think 2) makes the most sense for products that everyone has a similar need for like toilet paper, food, and water. It’s game-able, but it is more difficult to and for less gain than other options, and the results of gaming it just gets us to de facto 4) anyway, so I don’t see it as a huge burden. For products like webcams, where different people legitimately have different needs, I’m ok with 4).

47

The President can’t do it and didn’t do it.

Congress on the other hand…

48

Please show where I was “shown to be incorrect.” These drive by snipes are not worth responding to. Do you have anything at all of value to add to this topic? Please explain how those very simple concepts are not part of basic economics?

They indisputably are. The issue is that people want to tinker with the free market so as to be “fair” and replace the free market with a modified form of socialism. Shit, you see it in this thread—let’s have government control over the price of toilet paper and hand sanitizer so the poor can afford it.

Caring for the poor can be done without screwing with the market through these gimmicks. There are always going to be poor people. The upshot of your views is that no free market can ever exist because poor people will be shut out while the rich buy up everything.

Why don’t you guys just admit that you are toned down versions of Bernie Sanders and we can be done with it and have the honest free market v. socialism debate.

49

Basic economics includes the concept of externalities. Impacts to humanity that go beyond the simple supply and demand curve and efficient market based rationing of limited resources.

Ultimately it comes down to this:

The economy exists to serve humanity, not the other way around.

50

What an utterly trite and meaningless statement. And widely plagiarized, we can see from popping it into Google. The economy doesn’t exist to . . . anything. It simply exists. As an emergent phenomenon because we trade.

51

Taxes are not deadweight losses. Deadweight losses are a side effect of most taxes.

This is the same as the difference between, “Carbon emissions are a side effect of internal combustion engines,” and, “Internal combustion engines are carbon emissions.”

We’ve had this exact discussion previously on this board.

52

Talk about trite and meaningless. It simply exists so we should just let it do whatever the fuck it wants?

At least “a rising tide floats all boats” attempts to tie unfettered market efficiency to human well being. It’s wrong, but it tries.

Lots of things “emerge” from human activity, if these things don’t benefit humans, we don’t suffer their existence lightly. If they do benefit us, like the economy does, then we tend to it, we manage it, so that it continues to benefit us, not just within the narrow scope of its existence, but broadly.

53

The pro price gouging argument is that the goods will go to whoever is willing to pay the most. It doesn’t take a Socialist to see that that is mostly going to be the rich.

54

OK, so let’s say that there’s a company that makes webcams and other electronic devices. Ordinarily, they sell them for $50. That means that $50 is enough higher than their costs to make one that they’re making a profit on each one sold.

And yet, they make a limited number of them. If every webcam they make sells for a profit, why don’t they make more? Why not fold their profits into more manufacturing facilities, to make as many webcams as possible? Obviously, because they know that there’s a limit to how many webcams they’ll be able to sell for $50. A lot of people out there aren’t willing to pay $50 for a webcam, so there’s no point making them for those folks. Some of them might be willing to pay $10, but they don’t matter, because the company can’t make a profit selling them at that price.

So now, all of a sudden, there’s a big demand for webcams. The people running the electronics companies aren’t idiots; they can see that with their own eyes, even without the “information” of price increases. A lot of people who didn’t want $50 webcams before, now do want $50 webcams.

And so, even if there were an anti-price-gouging law in place, that prevented the company from raising the price on webcams, they’d still make more of them, for the same reason that they made the first batch: Because they can sell them for $50, which is a profitable price.

55

Industrial goods don’t scale up linearly. Generally, each manufacturing line has some degree of “slack” built in that you can temporarily scale up ~20% just by delaying some maintenance, running the lines a little bit faster etc. Then you get a bit more capacity from running a 3rd shift, skimping on Q&A a little etc to get ~50% more capacity. Beyond that though, it generally involves building a new line which is hugely expensive, especially if you need it done in a week and not in 6 months - 2 years like you normally might do.

If you anticipate a persistent increase in demand over a ~10 year timespan, then a new line makes sense as you can amortize the cost across millions of units. If you know with 100% certainty that your demand is going to drop down to it’s previous level (or even lower as there’s now a glut of used webcams on the market), then it can be a company ending decision to try and fulfil that excess demand.

A good example of this was when consumer video cards became useful for blockchain mining. Gamers were virtually unable to buy cards as all of the inventory was being snapped up for mining farms and the prices shot through the roof. Despite this, both nVidia and ATI both refused to ramp up production as they correctly guessed that blockchain volatility was just too high and they could be left with huge white elephants if they reacted to this demand.

56

The video card example is a good one. Because price gouging is allowed, cards that used to be $400 were suddenly $1000. So most gamers looking for an upgrade dropped out of the market and waited, easing demand.

In the meantime, if you absolutely needed that video card (say, a dev team needs cards for testing or development), you could still get them if you were willing to pay the price.

The high price for the cards also caused some people who currently weren’t using theirs to put them up for sale on eBay. Supply increased and demand decreased, which eased the shock.

If the card prices hadn’t been allowed to float up, the beneficiaries would have been the first data miners who would have seen even more profits. They would have placed orders that swamped production, maybe for years, making those cards unavailable to anyone at any price. And once the cards were hard to get, but not worth any more, it would have triggered hoarding behaviour. Why would you sell your card for what you paid for it, when you know they are in high demand and if you sell it you can’t get another?

As for solving the problem with a 2-per-customer limit, that assumes there is enough supply to fill that limit already. And it doesn’t work at all for things like webcams where you only need one but there aren’t nearly enough for everyone who wants one. Just how are you going to ration them? By what decision-making?

As other authoritarian, rationing countries have shown, what usually happens is that the goods go to:

  1. Government officials and their families
  2. Party members
  3. Connected or famous individuals
  4. People who can navigate the black market and have the resources to pay ‘real’ prices, and finally
  5. The rest of the rabble who can queue up for whatever is left.

It is impossible for central authorities to be able to establish a reasonable rationing scheme that actually matches the needs of individuals. You need the people themselves to negotiate with each other to establish relative values of goods. The only way to do that in a crisis is to allow prices to float to their market-clearing values, which allows for self-organization.

If you really need to control the process because you can’t stand the thought of people being left to make their own choices, you can buy up some of the products and then ration them out as you see fit to the poor and needy. Let everyone else solve their own problems - it’s much more efficient.

57

We have, and I apologize that I continue to state it imprecisely. Apart from this semantic point, how have I been proven incorrect?

I disagree. The super rich who will make frivolous purchases for their own amusement and the poor who cannot afford an increase in basic household items are outliers in the economy. (Again, not to say we shouldn’t have a safety net for those poor people).

In the absence of price gouging laws, the toilet paper market or webcam market, as example, would work far more efficiently. Or are you saying that the super rich would be buying years’ worth of toilet paper and making frivolous webcam purchases at current (without price gouging laws) prices and we would still have shortages?

58

Anti price gouging laws are creating an absurd underground bartering system:

https://www.msn.com/en-us/finance/smallbusiness/the-return-of-the-barter-economy-swapping-eggs-for-toilet-paper/ar-BB11Y2il

59

I’m in touch with a few people in China trying to co-ordinate PPE supplies for around the world and they’re uniformly telling me that suppliers in China are unenthusiastic about trying to make deals with Americans as it’s “too much hassle”.

Right now in China, you have two types of companies:

Companies that were making masks before the pandemic, they have all the certifications, good reputation. These companies have the pick of who they sell it to. They’re demanding cash upfront, they can name their price and they can sell to anybody they want with no negotiation on terms and instant decision making.

Then you have the companies who literally started making masks in the last few months. Some are well intentioned but don’t know what they’re doing, some are out and out scammers. China’s mask production has increased 10 fold in the last 3 months so the vast majority of companies fall into this bucket. The ones who are doing it well, they’re establishing a reputation and can sell for almost as much as the former group because their masks actually protect HCW. Anyone looking for a “bargain” or pre-crisis pricing is only going to encounter the rest of these companies and they are going to find a reason there’s only a few companies willing to sell masks at such a low price.

Not only are inflexible American regulations meaning that any negotiation turns into an endless back and forth over certifications, any American company that manages to secure a supply from the former group is immediately castigated for price gouging, leaving only the 2nd group as options for American brokers to deal with.

There’s many Asian Americans on both sides of the ocean furiously trying to ship as much medical supplies to America as possible but more and more, the supplies are going to countries who are willing to make the process as hassle free for the Chinese suppliers as possible.

More details: Buying Face Masks and Other PPE from China: Not For the Faint of Heart

60

Also, if you are in touch with any large medical groups or state level buyers who need PPE or ventilators right now, Medical Equipment Purchase Request is trying to move heaven and earth right now to make it happen so put them in touch!