In response to my last post, Spencer comments:
After disasters major corporations like Wal Mart, Home Depot, etc.., usually do a very good job of resuppling the damaged area with the suplies they need without a significant increase in prices.
Do you have any evidence that a bunch of "price gougers" in pick-up trucks would ever generate a significant increase in the supply of basics like gasoline, electricity, food, medicine and water. Or, is this just another example of assuming a can-opener.
The question got me thinking about those "price gougers in pick-up trucks". Because that is often how they are portrayed in the media. They swoop in with a load of water or chainsaws, charge a bundle, and they're gone. They tend to be from out of town, and the local politicians see it as their duty to keep such opportunists out.
Of course the very reason that price gougers often fit this profile is the fact that the state has made the act illegal. There is a risk to doing what they are doing. That alone contributes to the higher prices that they charge. It also means that it may attract people who are have less to lose, people who are willing to take a risk. The risk is not that the entrepreneurial venture might fail, but that the law might come after them. Established, reputable firms do not want to run afoul of the attorney general, and so you don't see them doing the price gouging. Reputable firms use the opportunity to create goodwill.
Case in point: Culligan donated five semi-truck loads of bottled water after Hurricane Katrina (see the list for a number of other corporate donations). Nice sentiment, and I'm sure the people who received it were grateful. But we wouldn't be having this conversation if a donation of five semi-truck loads was enough to satisfy the demand for water after the hurricane. I did not hear stories of Culligan increasing their sales of water in the area. A brief Google search doesn't turn up much either. But I do find multiple sites mentioning the five donated truckloads.
Consider Spencer's mention of Wal-Mart and Home Depot. Again, a lot of what they provide was donated. And while that is a wonderful thing, there is something a bit odd about the overall picture. What the large companies do in providing donations is good, but falls short of meeting the total demand for these items. Again, the fact that we are having this conversation suggests that in a perfect world these companies would do even more. Are they instead doing just enough to generate some goodwill, some TV ad copy, and a feeling among the residents that they care more than the price gougers in pick-up trucks?
It is also important to note the relevant time frame. The typical pattern as I have observed it reported in the media is that the price gouging tends to be worst in the immediate aftermath. As basic utilities are restored and transportation becomes easier, then the regular retail function of Wal-Mart, Home Depot, et al. can resume. And then price gouging (be it by big boxes or guys in trucks) becomes less of an issue.
Another possibility to consider is that the national chain stores could take a loss on bottled water for a short time in a localized area in the interest of goodwill with the community. That adds an insurance dimension to the problem. Remember that the increase in price after the disaster is associated with the cost of arbitrage across locations. That cost is likely to be smaller for a retailer with a national distribution network, and they might just eat all or part of that cost.
But as long as these disasters continue to lead prosecutors to start a "witch hunt" for anything even resembling a profit motive, reputable companies will not do enough to satisfy the demand. Sure, the token five truckloads of water will come, but that is, pardon the pun, a drop in the bucket. All you will see are guys in pick-ups, who make good targets for politicians wanting to score points with the voters.
There is that which is seen, and that which is unseen. What is unseen here is that Wal-Mart, et al. could possibly satisfy more of the excess demand if they weren't afraid of being punished for trying.
The fact that we treat bottled water in a disaster area in a manner that encourages reputable, national firms to make token donations rather than engage in the unseemly profiteering that might actually help more people should give us pause. The fact that this attitude in government also makes the actions of the less scrupulous profiteers more harmful by forcing them to take additional risks and fly under the radar should also give us pause.
So no, I don't have evidence that guys in pick-up trucks would do a better job. That's the wrong question. I do have a very strong reason to believe that large companies could do a much better job if they knew they wouldn't be excoriated by politicians and the media for making a modest amount of money from it. While I praise them for their generosity, I think you'd get more than five truckloads from Culligan if they could charge a modest amount for their trouble. The fact that there are still guys in pick-up trucks means the established, reputable companies are not doing enough.
The guys in pick-up trucks are a second-best solution to the problem. The first-best solution is for established, reputable firms to enter those areas and drive the high cost risk takers out of business. But that will only happen if the government eases ceases vilifying the notion of profit, even a modest amount, in these situations.
I do have evidence that the government does an absolutely lousy job of providing these goods and services. I don't think that the private sector would do this.
My comment was not about doing a better job.
It was about doing it at all. Is there any evidence at all that what you are claiming actually happens?
Economic theory says higher prices leads to greater supply. I agree almost completely in a general sense.
But what I see you and others doing is making the claim that after a disaster price gouging leads to increased supply. I doubt this is at all true. What I see is overwhelming evidence that the supply response is by responsible corporation that is not at all in response to higher prices. I am simply asking for people who make this claim to provide any evidence that it is at all true.
Your response does not do that. You make all kinds of assertions about guys in pick-up trucks and politicans without providing any evidence that your assertions are accurate.
For example Cafe Hayek and other screamed bloody murder about the politicians charging gas station owners for gouging after Katrina. After Katrina the state of florida charged one station owner with gouging and he was located on the interstate in Northern Florida miles and miles away from any damage or supply interuptions by the storm. He took advantage of the situation to gouge people fleeing the storm and his charging higher prices had no impact on supply.
Economic theory is great. But the american people and american business is not always the
"economic calculating machine" we base economic theory on.
The real point where I would disagree with you is what you elected to say about WMT. Yes they made donations and they obviously helped. But their donations were a drop in the bucket compared to the really important thing they did, reopening and resuppyling their stores. They did that because it was both the right thing to do and good business.
Do you really believe that the american business
community and business leaders can only be motivated by the prospects of great profits
to get their businesses going again after a natural disaster? Is that what you teach your students?
One of the arguments I hear is that higher prices are the best way to allocated limited supply at a time like this. I know if I were preparing for a storm and went into my local hardware or drug store to buy candles and/or batteries and found they has raised the price I would never shop at that store again. Moreover, I would make it an active boycott and would encourage all my friends and neighbors to boycott the store. In real life stores allocate limited supplies be limiting the number of batteries, etc, that one individual can buy and I find that to be far superior in terms of both morals and of long term business interest. Just because we have a theory that changing prices are the most efficient way to allocate supply under the assumptions of the perfectly competitive model does not mean that it is always the best way to do it.
Big chains like Home Depot and WalMart have inventory models that determine how much stock they'll have on hand. If you added to those models the probability of a hurricane (for example), plus the opportunity to raise prices during the hurricane, the model would certainly say to hold more inventory in hurricane-prone areas during hurricane season. Even if it were legal to raise prices during disasters, the current mood of the country makes that counterproductive. The public is understanding if the stores run out, but they would not be understanding of price gouging, even if accompanied by increased supplies of critically needed goods. Perhaps another reason we need to encourage a better understanding of economics by the general public.
Bill Conerly -- nice theory .
But do you have any evidence that your theory has any validity.
WMT has a professional staff that has worked out a very detailed disaster response that allows them to respond very quickly without any need to raise prices.
One of the reasons WMT and other big box retailers are so successful is that they have developed a fantastic ability to manage inventories and minimize this business cost.
So now you are arguing that the very firms that have done so much to lower the price of durables
and whose business models centers on their ability to deliver low prices is only waiting for someone to give it the freedom to raise prices.
You are not just assuming a can-opener, you are living in a fantasy world.
Spencer writes,
"You make all kinds of assertions about guys in pick-up trucks and politicans without providing any evidence that your assertions are accurate."
I have seen enough disaster coverage in the media to know that price gougers in pick-up trucks exist. I don't believe that anyone has collected data on the price gougers in pick-up trucks. But they are there. And the politicians don't like them. Florida's former Attorney General, Bob Butterworth, would be the shining example.
http://www.sptimes.com/2004/08/30/Business/Gouging_gets_a_bad_ra.shtml
Butterworth was AG in Florida during Hurrican Andrew, which was before newspapers went on the web, so not a lot of links, but Lexis-Nexis has plenty of stories if you have access. I will say that even in those news accounts, there aren't a lot of stories of "guys in pick-up trucks". TV cameras sometimes catch them, but I think it is reasonable to suggest that many of them are able to evade prosecution. That doesn't mean they don't exist. The stories in print media are usually about general contractors who charge elevated fees for doing the work. They draw the ire of politicians.
Here's one old media reference. Sorry, no link. Christian Science Monitor, Sept. 10, 1992. The first part of the article reads:
"THE first week after Hurricane Andrew, South Florida was the scene of price gouging: ice at $ 8 a bag, overpriced gasoline, batteries, generators, and chain saws."
"As the immediate crisis subsides and relief flows in, profiteers will look for longer-term opportunities. Building materials and contract labor are prime targets. They will be in short supply as residents rebuild."
"At some stores here, a sheet of plywood sold for $ 30 - more than twice the pre-hurricane price. The Florida attorney general's office investigated the retailers, who blamed the wholesalers. On Aug. 27, it issued seven subpoenas to wholesalers."
You also said...
"But their donations were a drop in the bucket compared to the really important thing they did, reopening and resuppyling their stores. They did that because it was both the right thing to do and good business."
I would like you to comment on what I wrote originally (in which I tried to anticipate what you said)...
"It is also important to note the relevant time frame. The typical pattern as I have observed it reported in the media is that the price gouging tends to be worst in the immediate aftermath. As basic utilities are restored and transportation becomes easier, then the regular retail function of Wal-Mart, Home Depot, et al. can resume. And then price gouging (be it by big boxes or guys in trucks) becomes less of an issue."
"Another possibility to consider is that the national chain stores could take a loss on bottled water for a short time in a localized area in the interest of goodwill with the community. That adds an insurance dimension to the problem. Remember that the increase in price after the disaster is associated with the cost of arbitrage across locations. That cost is likely to be smaller for a retailer with a national distribution network, and they might just eat all or part of that cost."
Thoughts? More later, if I have time tonight.
One more thing... when you said,
"Do you have any evidence that a bunch of "price gougers" in pick-up trucks would ever generate a significant increase in the supply of basics like gasoline, electricity, food, medicine and water."
From the beginning, I have never said anything about food or medicine. Gasoline, no, not in any significant way by guys in pick-up trucks (nor did I suggest anything like that). Electricity, in the form of generators--I've seen news reports of those being sold out of the back of trucks. Water, chainsaws, building materials, and the builders themselves working out of a truck, yes. There is ample evidence that such activities happen. But they are not sufficient (in the numbers usually seen) to satisfy demand.
What started the whole discussion was water.
Spencer, I expect you'll never read this, but you should know that during the 1998 ice storm, it was crucial for some people to have a generator to prevent pipes in your house from freezing. The marginal value of a generator shot up .... but the price couldn't, due to anti-gouging laws. Of course there was a shortage of generators.
One public-spirited business, LeBerge and Curtis, sent a truck down to Syracuse with instructions to buy every available generator at whatever price was necessary. They brought them back up to the North Country, sold them (presumably with a profit, but maybe not), and were charged with gouging consumers.
That kinda thing sure takes the helpfulness out of a person ... profit or not.