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Is it price gouging or market efficiency?

(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.

Why I’m for Alternative Energy Development. Except in My Backyard

There has been much discussion in my town of  Cambridge, Massachusetts of late about a proposal to run trains carrying ethanol through the city to a blending plant in Revere. State Representative and City Councilor Marjorie Decker and School Board member Marc McGovern have been among the political office holders leading a movement to prevent the trains. Sundry neighbors and activists have announced their opposition as well, citing the hazardous nature of bringing so much ethanol through the densely populated urban areas.

I have my concerns as well. Yes, I take a back seat to no one in my support of renewable sources of energy. But, please, not when it involves my backyard. I like the idea of promoting development of alternative energy sources. I want to be able to have cheap electricity to charge a plug-in hybrid electric auto and have reasonably priced petrol to fill the tank should I need an internal combustion engine when the battery goes poof. But, I really don’t want any of the stuff that makes those available in my backyard.

I favor the notion behind a renewal energy source like wind. But please don’t put those tall turbines any place where I will be bothered by the whoosh of the turning blades. Or the shadow they cast. And what about the birds those blades might smash? Please don’t put wind mills out in Nantucket Sound, as efficient as that might be, but where they might spoil my view or interfere with my sailing or smash more gulls. Wind turbines are great. But not in my backyard.

I like the idea of power from the sun. I might put some of those solar cells on my roof, if my neighbors or the Historical Commission don’t mind. That might help heat some hot water unless it’s cloudy or dark. Those humongous fields of photo voltaic panels might be able to generate some serious power. They’re fine so long as they don’t take up any fields near me. Just find someone else’s back yard.

Hydro-electric power is clean and cheap. What’s not to like? To create more all we need to do is dam up some more otherwise navigable rivers. Yes, that involves submerging hundreds of thousands of acres of some valley, maybe relocating a few hundred farms. Fine with me. So long it’s not anyone near my backyard.

I’ve heard that we could become energy sufficient as a result of shale oil and gas, made possible through a process called fracking. The price of natural gas has already come down, which is great for me. My friend Jim lives in northeastern Pennsylvania, where much of the fracking is happening. Many of his neighbors have a new lease on life, reversing the near poverty that has come from closing old dirty coal mines out there. I’ve heard that fracking produces lots of environmetal damage, like unsavory waste water and some folks say it can make methane come out of their water faucets. No one has really substantiated that, but I don’t care. It’s happening in Jim’s backyard, not mine.

At one time there were great hopes that nuclear energy would replace most of the fossil fuels needed to create electricity. But we worry that there is no guarantee that there can't be a melt down. I agree it’s still a promising technology. Low carbon emissions. Cheap electricity. So we should build more nuclear power plants. I live near the coast, so what if we have another tsunami? Build the plants by all means. Obviously, though, it couldn’t be in my backyard.

Even a plug-in hybrid needs gasoline for those long trips. So I suppose we will need a supply of gasoline for the foreseeable future. And aviation fuel for our jet planes, because I haven’t heard any proposals for a plug-in electric 747. They say that there’s a pretty good supply of crude oil to be had off shore and up in Alaska. Yes, there could be another spill someday, hurting the fishes or elk. But in the scheme of things, that’s not my concern. I want cheap gasoline. How can I have that without drilling? Just be sure it’s not in my backyard or anyone’s where there might actually be oil.

I read where we still generate almost half our electricity from coal. Dirty. Well, technology has helped cut coal burning pollutants going into the atmosphere in half in recent years. Anyway, the coal comes from faraway places like Wyoming. They get it to our power plants by mile long trains. Fortunately they don’t come through Cambridge—too close to my backyard. We read about coal mining disasters every now and then. Did I see that more people have been killed mining coal than by any nuclear plant crises? But I don’t know any of them. They don’t mine coal in my backyard.

As I think about it, there are some drawbacks to any source of energy creation. But what if no one allowed it to be mined, drilled for, generated or transported in their back yard? I guess someone has to take some risk. But not me, here in Cambridge.

Maybe I was born too late. It would have been a simpler life, say 200 years ago, before we needed so much energy to fuel our lives. Just a few gallons of oil to light our lamps and a few acres of trees to chop to heat my house and fire my oven.

Oops—how then could I have opposed clear cutting forests, polluting the air or saving the whales? Sticky. But it might have all worked out, so long as none of it was in my back yard.

Are Big Media Owners Surpressing Coverage of SOPA?

At a  recent family gathering my much younger cousin (once removed) was trying to convince me that corporate ownership of the mass media biased news coverage in favor of big business interests. I thought I was fairly eloquent in rebutting that myth.

The gist of my argument can be distilled to an observation made by A.J. Liebling, perhaps the most cited press critic of the 1940s and 1950s. He famously wrote in a  "Wayward Press" column that "Freedom of the Press is guaranteed only to those who own one.” But Liebling also wrote, in another column quoted far less often:

The profit system, while it insures the predominant conservative coloration of our press, also
guarantees that there will always be a certain amount of dissidence. The American press has never been monolithic, like that of an authoritarian state. One reason is that there is always money to be made in journalism by standing up for the underdog…. His wife buys girdles and baking powder and Literary Guild selections, and the advertiser has to reach her.”

 That is, any media owner must keep in mind the audience: advertisers who want to reach potential customers through the media outlet they choose to advertise in. While the owners of the media may have the platform to say what they want, their self-interest pulls in the direction of greater populism.

On the one hand...

Apparently I didn't convince my young cousin. In a recent email he wrote me about the proposed Stop Online Piracy Act (SOPA):

Just saw this and thought it was an interesting data point given how you've argued that corporate ownership of media was a non-issue in their news coverage in the past, or am I mis-remembering/mis-quoting you?

I'm outraged about SOPA, but they should at least be covering a controversy that has practically every major Internet company considering a "nuclear option" of blacking out their public facing web pages for a day to raise consumer awareness of the issue.... how is THAT now news?

If you, like most of your countrypersons, have not been following the proposed legislation, SOPA, introduced in Congress with bi-partisan sponsors, would expand the ability of U.S. law enforcement and copyright holders to fight online trafficking in copyrighted intellectual property and counterfeit goods. My aim here is not to discuss the provisions of the bill itself, though that would make an appropriate post for The Two-Sided Pancake. Needless to say there are contentious provisions. To draw on the non-judgemental description of the bill from the Wikipedia entry, as it stands today:

Proponents of the bill say it protects the intellectual property market and corresponding industry, jobs and revenue, and is necessary to bolster enforcement of copyright laws especially against foreign websites. They cite examples such as Google's $500 million settlement with the Department of Justice for its role in a scheme to target U.S. consumers with ads to buy illegal prescription drugs from Canadian pharmacies. Opponents say that it infringes on First Amendment rights, is Internet censorship, will cripple the Internet, and will threaten whistle-blowing and other free speech.

 But my cousin's concern is that big media, presumably on the pro-SOPA side, is not providing coverage because they want it to slide under the radar. His implication is that the media owners are keeping this quiet.

I could point out that with a handful of exceptions, the "owners" of most media companies are millions of stockholders, pension funds, mutual funds and the like. Ownership is extremely fragmented. Those who, in aggregate, "own" the companies are interested in a return on their investment. Implementation of SOPA might add a cent or two to earnings, but in any event mutual fund managers do not weigh in with the newsroom editors who decide what to cover.

Flipping the Pancake

The lack of big media coverage of this issue is far from a conspiracy or cover-up of any kind. Lack of coverage of SOPA is indeed a non-issue. And here's why: The major video media rarely cover issues.  It has nothing to do with ownership. TV news specializes in events, in action. Look at how these guys cover the elections: it's about the  "horse race." Even the debates, with two minute answers and one minute responses, are about keeping up the pace. SOPA isn't covered because it is not made for TV. The  issue has many facets and subtleties. The arguments are long and detailed. And most people don't care.  And most people shouldn't. They need to worry about their jobs, paying college tuition, fixing the leak in the roof, repairing the muffler. Intellectual property is not high on the "what do I need to worry about" list. They don't see how it will impact their lives. And it won't, even if it passes (and that's not likely) in its present form.

Now, if there is some contentious hearing, where Bono appears before a Congressional committee, then it might get 30 seconds-- with the focus on Bono and a short description of what the hearing is about.

Moreover, even a Mom-and-Pop media firm would be lining up with the big guys on one side.

MSNBC, CBS News and the like do not have you or me as their target market. A relative few of us live in a rarefied world of issues. And covering SOPA is not going to change that. Anyone who is concerned have many avenues to pursue the argument they like, such as at ReadWriteWeb. The mass audience has the Today Show and the ABC Evening News. Maybe the Daily Show will give SOPA the visibility my cousin wants. That's where more of my students seem to be learning about the news anyway, not on CNN or MSNBC.
 

Use less-- and pay more. What's wrong with this picture?

Conservation is one of the mantras of  the 21^st century. And we are always hearing that by using less we will spend less:  Spend extra for a hybrid Prius and you’ll save on your gasoline bill. Replace incandescent light bulbs with much more expensive CFL bulbs and you’ll save enough on your electricity bill and bulb replacement to justify the difference.

But what if we use less and that causes us to pay more? This is quite possible when there are high fixed costs in providing a service. For example, in my town of Cambridge, Massachusetts, I was notified that water and sewer rates are increasing this year because, said the City Manager, “using less water contributes to an increased rate.”

The Associated Press reported today that apparently this is a national trend.  It confirmed that “Many water utilities are raising rates because water use is down.” The infrastructure of water and sewer systems are fixed costs and don’t vary with the amount of water flowing through it, so the operating costs as well as debt service incurred in building it are insensitive to our conservation efforts. The total cost must be recouped by charging more per unit of water.

So next time I feel the impulse to buy a low flow shower head or pay a premium for a low water use toilet, I’m going to keep in mind that by using less I may end up paying more per shower and per flush.

I’ve never seen a pancake so thin it didn’t have two sides

This blog is about perspective. It is not about right or wrong, about the best or worst. It is about appreciating that there are few absolutes. Free speech is to be honored, but we cannot shout “Fire” in crowded theater in the absence of a fire. War is undesirable but when an enemy bombs our Naval bases in Hawaii, it may be needed. Capitalism seems to work better than other economic systems, but as we have seen repeatedly, it needs to have limits set.

I first heard the aphorism, “I’ve never seen a pancake so thin it didn’t have two sides,” over a decade ago from Lee Fritchler, at the time the President of Dickinson College. It stuck with me, perhaps because it fit my world view.

It summed up my approach to political philosophy, to the business world, and to many of life’s every day issues. It is an extension of the line of thought inculcated in me by S.I. Hayakawa’s classic work, “Language in Thought and Action.” I read that first semester freshman year at the aforementioned Dickinson College as part of the much maligned Social Science 10 course.

Seeing the world from both sides now (another formulation, credit to Judy Collins) is highly recommended for diplomacy, mediating arguments of all sorts and otherwise leading a stress reduced existence. It does not work well for advocates, militants or protest song writers.. You are probably not familiar with the 1960s satirical songs of Tom Lerher. In 1980 a show based on his old songs was produced. In a concurrent interview in The Wall Street Journal, Lerher, who had long since stopped writing or performing, was asked why. His reply, which I may have clipped but have no idea where it might be, responded something to the effect that as a younger man he saw the world and its issues in black and white. As he got older he recognized it was more like shades of gray. “It’s hard to write a protest song with lyrics ‘on the one hand, but on the other hand.’” Lerher had been hobbled by the two sided pancake.

My world view infuriates my teenage daughter. She called to my attention at dinner one evening that I never took “her side” in any dispute. What she was referring to was my two sided perspective, which I wanted to imbue her with, but she saw as being just contrarian. For example, she may have complained back in high school that it was so unfair that Mrs. X didn't allow the students to chew gum in class. I suggested that while she (my daughter) may have chewed quietly, it may be that others annoyingly popped their gum or too often left it parked underneath the desk. Rather than have to single out individual culprits Mrs. X thought it fairer just to make a blanket rule. My point was not that the rule was fair, only that it may not have been arbitrary. At least, I tried to say, see the other point of view.

I’m not going to be writing here about gum in the classroom. But from time to time (these issues don’t arise every day), I will offer in this space “the other side.” In many cases it will be to suggest that in going with one side of the pancake there are untended consequences that had not been considered. If this approach interests you, click in from time to time to get a feel for what I mean.