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.
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:
- Many businesses will realize that there is significant money to be made in times of crisis and will consider investing in more robust supply chains. This allows for greater profit levels in times of crises for the business while at the same time increasing the aggregate quantity of necessary goods available to consumers (and thus reducing their prices in times of need).
- Price gouging prevents black-marketeering. When customers are willing to pay more than the officially sanctioned ("fair") price but are prevented from doing so, illicit organizations will begin selling goods on the black market. This will prevent governments from collecting tax revenues and monitoring transactions.
- High prices will convince businesses to ship needed goods into a market that needs them. While businesses may think twice about paying to ship items from distant lands for marginal returns, there is no greater incentive in business than the potential for massive profits.
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!