In Defense of Price Gouging

Thursday, January 29, 2015

Price gouging sounds like an awful term. It refers to the practice of raising rates significantly above what is considered "fair" and often occurs in the presence of an economic marketplace that has experienced a significant shock. One classic example of a pricing gouge is the increase in price of building materials after a natural disaster.

Governments are known for passing anti-price gouging regulations - the one from New York State being just one such example. I understand the basis for these laws - everyone knows that it's considered impolite to kick a dog when he's down. That said, most of these regulations accomplish nothing but demonstrate that most politicians know little about market economics.

Price gouging and gasoline
Image courtesy of Wikipedia

When prices are capped, product shortages magically appear. Frustrated folks are forced to wait in long lines, hoping that they might be lucky enough to buy a given good. When prices are allowed to rise to what the market will bear, those shortages disappear. Products are sold to the people willing to pay the most money for them and long, inefficient lines vanish. The market will clear, sellers will profit and buyers who consider the new pricing unfair are welcome to go without purchasing the items in question.

Allowing prices to rise results in the following:

No matter your opinion on price gouging, understanding how pricing works is critical to any business. If you don't understand how to price your good, why not contact me for a consultation or read through my book on software pricing? Some say knowledge is power, but I say it's something even better - profit!