Monday, July 15, 2013

Why "Price Gouging" is desirable and should be re-branded "Sustainable Pricing". A name is everything!

Here is a very nice summation of why "price gouging" should not be discouraged by the government imposed price ceilings (a price, by law, is not allowed to go above a certain level).  Businesses, for the most part, are not going to raise prices in normal times above the market price because competition will restrain them.

 However, if people expect those prices to go up considerably in the event of a disaster created shortage then the anticipation of "gouging" can actually have a positive affect.

  1. Without price increases, many people buy extra supplies “just in case”, regardless of what they have tucked away at home already. If too many people do this, supplies run out and people who need them much more urgently miss out. With price increases, people who don’t really need supplies will leave them on the shelf, not out of the goodness of their heart, but out of concern for their wallet.
  2. Price increases encourage conservation of resources people already have. Those who can most easily adjust their consumption will do so, leaving resources free for those who can’t. People might, for example, use their cars more sparingly to avoid having to fill up while prices are inflated.
  3. The ability to raise prices encourages businesses to stock excess reserves. Space in stores and warehouses is limited and products (even water) go off over time. If they’re not allowed to raise prices on those items, they’ll use that limited space for other products that have higher profit margins the rest of the time.
  4. Allowing price gouging actually encourages citizens to be more prepared for disasters. Do you have enough food and water and other essentials stored at home for you and your family if disaster strikes your town? Or do you just assume you’ll be able to go to the store and buy what you need when something goes wrong? Knowing that prices might double, triple, or more during a disaster is a pretty big incentive to go and stock up now instead of waiting — even for that person who lives right next door to the store!
  5. Finally, rising prices attract more resources from outside of the disaster area, where prices are lower. Nearby businesses, small or large, can easily profit by shipping essential supplies in and selling them at a premium. Without the ability to charge that premium, they would actually end up losing money through shipping costs, overtime wages, and inherent risks of operating is a disaster area. Without the profit motive, many don’t take the risk.

I also find the new name branding he gives "Price Gouging"---he calls it "Sustainable Pricing", a more accurate description:
“Price gouging” is a derogatory term meant to belittle. A more accurate description would be “sustainable pricing” — pricing that ensures supplies are sustainable to meet the demand of future customers.
Hope it catches on!

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