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December 9, 2007
I hope Wal-Mart puts all the small time mom-and-pop price gougers in pickup trucks out of business
Spencer at Angry Bear points us to a Division of Labour post. This is from The Oregonian.
In cases of extreme weather and natural disasters, some of the nation's largest retailers now behave like municipalities -- sometimes better.
[R]etailers have created specialized divisions -- or hired outside firms -- to gird for emergencies. The goal: to speed recovery for customers, employees and ultimately sales.
No one is clear how many retailers operate internal emergency units, but the practice is now standard among the biggest players, including Target Corp. and Lowe's Cos. Inc.
This past week, Wal-Mart donated a 40-foot tanker of potable water to Vernonia, [Oregon,] while up north Home Depot opened its still-waterlogged Chehalis store for the town's Chamber of Commerce to pick up face masks and cleaning supplies free of charge.
Such coordination became clear during Hurricane Katrina in 2005, when local governments praised initial responses from retailers as more expedient than those of the Federal Emergency Management Agency.
Spencer adds a jab at libertarians.
Because they [libertarians] seem to be believe the only way to get supplies to natural disaster victims is some guy in the back of a pick-up truck gouging them with high prices.
Well, I don't know if I'm the right guy to defend libertarians. I sympathize with them often, but don't really fully consider myself one. But anyway, I'll bite. After all, spencer has raised the issue here before. I suppose we could dig into the archives and see what I wrote then...
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 [of bottled water] 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.
In the present story as well as back then, most of the supplies from the big box stores were donated. A cynical person might say that the big boxes are making that donation hoping that when things get back to normal people will remember their generosity and buy their rebuilding supplies from them. Think of it as a tax deductible advertising expense.
Even so, I don't have any problem with them doing this. I think it's great. Look, there are many reasons that a big box company might have for making these donations. But the bottom line is that they can get supplies into these areas at a low cost, so they aren't losing much. Furthermore, they can afford to take a bit of a hit in the short term in the name of goodwill, community relations, advertising, or what have you.
Let me put it even more bluntly. I hope that Wal-Mart puts all the small time mom-and-pop price gougers in pickup trucks out of business. The world would be a better place.
Maybe it is starting to happen. I think you see fewer stories these days about "guys in pickup trucks" these days. (Though they did at one time exist, and I think they still do. My above-mentioned post has some links in the comments where I point to media discussions of them, though they are getting a bit dated.) But even so, I think the big boxes are still going to fall short of the optimal outcome, meaning the "price gougers" will still exist in the hardest-to-get-to areas.
Here's where the rubber meets the road. There are two reasons that prices can go up. It's either a supply issue or a demand issue. (It can, of course, be both.) In the immediate aftermath of a disaster, the supply of certain items decreases and demand for those items increases. But if a number of large (competing) firms with nearly constant marginal costs and with vast distribution networks can move the supply from one area to another at a low cost, then prices will not rise very much... even if demand increases.
However, I'm not at all convinced that the big boxes are going to donate enough to satisfy all of the demand. Why would they? At some point they would be donating to people who would be willing and able to pay the retail price that prevailed before the storm. Are they able to donate close to the "right" amount that would get the goods to the people who need them most and then sell at the previous price to those willing to buy? Admittedly, I do not know the answer to that question. Though I suspect the answer is no. Do we suffer some loss of efficiency because the big boxes are careful not to give even the appearance of profiteering? Admittedly, I do not know the answer to that question. Though I suspect the answer is yes.
So in the end, what the big box stores are doing is definitely a good thing. The fact that they are doing something (and doing it well and at low cost) is beneficial. They seem to do better than government at times. In fact, maybe the government should pay Wal-Mart and Home Depot to step it up a notch! One way or another, price incentives still are important. Donations won't completely solve the problem.
Ask anyone reading these stories if they think that the big box stores could do more. You'll probably get a lot of "yes" answers. So then the next logical question is, "why don't they?"
UPDATE: More in the comments. And King has more at SCSU Scholars.
Posted by William Polley at December 9, 2007 11:02 PM
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Comments
There is nothing in the article to suggest that the big box stores are donating the supplies and it is contrary to my general understanding of how they operate. They go to a lot of extra expense and trouble to get replacement and extra supplies into their stores in disaster area as quick as possible as just good business -- both from a long run and short run point of view. And you are right that goodwill is part of the reason.
But my point is that they get the supplies into the area without having to raise prices sharply and/or gouge the victims.
The traditional economic analysis that uses a supply and demand diagram to show that at higher price you get greater supply -- the explanation of why the guy in the pick-up truck is a good thing -- does not apply. It is a misapplication of a theory that is way too simple and does not explain the real world. The libertarians thesis is that the guy in the pick-up truck charging high prices is a good thing. My argument is that in the real world the higher prices are not necessary to get the supply so all the guy charging high prices is doing is exploiting the victims.
Posted by: spencer at December 10, 2007 9:19 AM
"This past week, Wal-Mart ***donated*** a 40-foot tanker of potable water to Vernonia, [Oregon,] while up north Home Depot opened its still-waterlogged Chehalis store for the town's Chamber of Commerce to pick up face masks and cleaning supplies ***free of charge***."
I'll give you a mulligan on that one. They did donate the items. And that was the case in the example we discussed several months ago too.
I'm working on a follow up post to this. Comments are open on this. Check in again later for more.
Posted by: William Polley at December 10, 2007 12:27 PM
My position is simple. The libertarian -- freshman economics -- position is that the higher prices are needed in a disaster situation to attract more supply. I disagree. The big box retailers and other businessmen do a great job of getting additional supplies into disaster situations with jacking up prices. Not only are the higher prices not necessary, but it is not what happens in the real world.
You can still be a great capitalist and act in line with economic theory without trying to maximize short run prices with every transactions.
Justifying the guy in the pick up truck jacking up prices in a disaster situation is both bad morality and bad economics.
Posted by: spencer at December 10, 2007 12:59 PM
I started thinking about a follow up post, but three final exams tomorrow and an approaching ice storm are slowing me down. Maybe I'll get to it at some point, but for now, I'll just say a couple more things here.
I will stipulate one thing. Because modern supply chains and logistics have made it possible for big box corporations to move goods at very low cost per unit, they are able to increase the supply rapidly without needing to raise the price very much. However, this is a fairly recent phenomenon and still does not apply in all areas, to all goods, and in all disasters. There's still some room for discussion along the margins.
Economic theory is not the problem. The problem is that sometimes the theory is misapplied (or that times and circumstances change). Elasticity is the issue. Because of the big box distribution network, the supply of these goods is much more elastic than it was in years past. That means the price should rise less than before the big box distribution networks existed.
This is entirely consistent with the hypothesis that price gougers in pick-up trucks are a dying breed. They had their heyday in the times of Hurricanes Andrew and Hugo, but these days Wal-Mart and others have shut them down.
This is a good thing. I think we agree on that. What I'm trying to say is that economic theory can explain this too. I also am of the opinion that there are some cases where the Wal-Mart contribution is not quite enough and that the disaster area would benefit from additional supply, and in some cases, a higher price may be necessary and beneficial for a period of time.
Posted by: William Polley at December 10, 2007 4:47 PM
Yes, it's elasticity.
http://www.scsuscholars.com/2007/12/always-low-prices-defeats-gougers.html
Posted by: kb at December 10, 2007 5:05 PM
Thanks, King. It's funny. When I wrote that last night, I was thinking of elasticity, of course. But since I frequently talk to people who don't toss that term around a lot, I automatically say things like "But if a number of large (competing) firms with nearly constant marginal costs and with vast distribution networks can move the supply from one area to another at a low cost, then prices will not rise very much... even if demand increases."
With your radio show, I'm sure you know what I mean. I'm prepping for a radio interview later this week. Maybe I'll come up with an occasion for a gratuitous use of the word elasticity.
Or not.
Posted by: William Polley at December 10, 2007 5:18 PM
Let me speak up for the guys bringing in stuff in their pickup trucks. Normally they cannot compete with WalMart or Home Depot. IF THEY CAN, then we need more supply of whatever it is. Be happy they are there. Be even happier when the big boxes do the job well enough that the guys in the pickup trucks can't make a profit. But don't put down the guys trying to make a buck in a disaster.
It's worth remembering the seige of Antwerp in 1584. Smugglers evaded the Spanish army to bring in goods--at high prices. Price controls were instituted to prevent gouging. The smugglers stopped their work, it no longer being worth the risk. The citizens became so hungry that they demanded their leaders surrender. Oops. Another unintended consequence.
Posted by: Bill Conerly at December 10, 2007 10:57 PM
I'm agnostic on the big-box vs mom and pops, but there's no denying the impact of the largest retailers. Google Answers put together a terrific list of the biggest chain stores in the US:
http://answers.google.com/answers/threadview?id=444275
which goes well beyon the usual Top 10 or Top 100 type of lists. It may be useful.
Posted by: David at January 3, 2008 9:03 AM