(It's been quite some time since I've posted here. Hopefully this will be the first post to revive this blog).
As the coronavirus pandemic took hold in the U.S. In March
and April, hand sanitizer, as well as commodities such as toilet paper, became
scarce. And, as night follows day, stories about price gouging became
plentiful.
In a post on my local version of Nextdoor.com, one neighbor
complained “A certain convenience store… is selling hand sanitizer at an
outrageous $15 a bottle. This is ridiculous and affordable to no one.” (Well, I
suspect it was affordable to some).
Another neighbor asked, “What can we do to have the federal
government prevent price gouging….?” Yet another explained that “price gouging
happens any time theres [sic] a change in market conditions.”
And therein, finally, lies the beginning of the explanation.
What is derisively called price gouging is actually the marketplace at work, a real
life example of what every microeconomics course starts with-- supply and
demand.
My objective here is not to explain the economics but rather
why so-called price gouging is a logical response to excess demand or limited
supply. It’s a useful application of economic principals.
The quest for hand sanitizer
This might be the backstory for the Nextdoor poster’s rant
on price gouging:
It’s early into the Covid-19 pandemic and Justine is looking
to buy a bottle of hand sanitizer. Her local CVS is cleaned out, as is
Walgreens. She looks online—nothing. She stops by a local convenienve store
late one afternoon and asks a clerk, “I suppose you’re out of hand sanitizer.”
He says they do have a few bottles, half way down this aisle. Justine is
elated. She finds several bottles there, picks up one and starts to make her
way to the checkout.
Suddenly she stops. Having turned the bottle to the bottom, she
sees a price tag: $15. What? She continues to the checkout. “Is this correct?
$15. The last time I bought some it was about $4.” "Sorry," is all the clerk can
say. "We’re not likely to get any more for awhile, so that’s the price.”
Justine leaves the bottle and storms out of the store
without hand sanitizer. At home, she vents on Nextdoor.com
Scenario 1
Here’s what likely would have happened if the store had
priced the sanitizer at the usual $4.
Early in the day the convenience store gets a delivery of
supplies ordered the previous week. It includes a half dozen bottles of the
hand sanitizer. The clerk sticks on the $4 price tags and places them on the
shelf.
Not 10 minutes later Jeffrey enters and asks if they have
any hand sanitizer. Jeffrey is surprised when he’s directed to its location
halfway down the aisle. Knowing how hard it is to find, he decides to get two
bottles, to have an extra, “just in case” the supply stays scarce.
In short order Audrey enters the store to pick up a few
items. She wanders about and happens to notice the sanitizer on the shelf. Audrey quickly calls her mother to ask if she
needs any. “Well, I think I’m okay because I’m not going out, but if they have
some, sure, get it and drop it off when you come by with my groceries.” Audrey picks
up three bottles.
The final bottle is purchased by Marggie, who feels
fortunate to have found the last bottle on the shelf, figuring she could keep
this bottle in her new work at home office in addition to the bottle she has
keeps in the car for after her grocery shopping trips.
Within an hour of stocking the shelf that morning, the
supply is gone. Justine comes in later that day. They’re all out, she’s told.
She leaves the store without hand sanitizer. There is no post needed on Nextdoor.
Scenario 2
And this may be how a $15 bottle was available when Justine was shopping:
Early in the day the convenience store gets a delivery of
supplies ordered the previous week. It includes a half dozen bottles of the
hand sanitizer. The clerk sticks on the $15 price tags and places them on the
shelf.
Jeffery enters 10 minutes later, is surprised that the sanitizer
is in stock, but figures for $15 he can live without. Audrey and Marggie also
reason that it’s not worth $15 when there are work-arounds, like washing hands
when they return from being out. So the only reason why there is even hand sanitizer
by the time Justine arrives is because of the $15—the price gouging—kept it
there.
This also means that the store has not made any sales of
hand sanitizer. But shortly after Justine leaves, Ben, the owner of a small restaurant
that is trying to survive on take-out and delivery, comes in desperate for hand
sanitizer. He promised his delivery man
some masks, which his wife made, and the sanitizer, which has been nowhere to
be found. He’s sympathetic with Mike, who he recently hired to deliver take-out
orders but wants sanitizer. The $15 price is high, but this is important to his
business. He buys three bottles.
First thing the next morning, Janice is the first customer.
She find there is sanitizer that she also very much needs. She runs a day care
for the children of the medical workers at the nearby hospital and has an
exemption to the closure of day care facilities. But her regular supplier of
hand sanitizer says there will be no more this week. She, too, is surprised at
the $15 price, but she is elated to find the product at all. She takes the remaining
three.
The Bottom line
Was this price gouging, or was this rationing the supply so
that those who would get the most value from it had a shot of finding it? The only
reason the sanitizer was available for Justine was because its price kept the
earlier customers from purchasing a bottle. It wasn’t worth $15 to her. In scenario 1,
there would have been none on the shelf when she arrived.
Clearly, there may have been other customers who also needed
the sanitizer but couldn’t afford it. Perhaps a home health worker earning $12/hour
for whom paying $15 would have been onerous. But if it had been priced at $4 it
probably wouldn’t have been on the shelf anyway unless, by happenstance, she or
he had arrived just at the right moment.
How I benefited "price gouging" in a small way long ago
A personal experience with “price gouging”: In the early
1980s, an electronics store in New York advertised it had a new calculator
that was the size of a credit card, for $29 (about $80 today). This was a real
Wow! back then. I was in New York that week and stopped in the store, thinking
this would be a great gift for my father’s upcoming birthday. Alas, they were out
of stock. Disappointed, I was walking past another electronics store and hesitated
briefly by its window display, when a hustler for the store asked if I was
looking for something. I quickly asked if he had the credit card
calculator. “We do,” he beamed, as he ushered me in and disappeared behind the
counter. With a flourish he produced the package and handed it to me.
Great.
“How much?,” I ask.
$45, says he.
What? It’s $29 at your competitor up the street.
So buy it there.
They’re out of them.
Well, when we’re out of stock, we also sell them for $29.
I bought it. My father was thrilled.
