There is No Such Thing as Price Gouging

Michael Dilger
Last Updated 2020 Apr 4th

Ignore money for a just a second and notice what is going on

I'm going to start by focusing your attention on the real economy, ignoring money.

Within any country, people need to eat. People can eat a little bit more or a little bit less, and they eat more when the are exercising heavily, and more when they are growing teens, but overall, the amount of food that people need to eat is pretty steady. In aggregate it is even steadier. As some people diet, others gorge, and it all balances out to a very even demand.

The food industry needs to produce at least the amount of food that people eat. Any less and people would be malnourished. It can produce more, but any extra food will go to waste. Waste itself is not a good thing. Wasted food requires inputs and effort to produce: fertilizer, labour, transportation, etc. But we'd rather produce more than enough than not enough, and having slack in the system is a good thing, so there will always be some waste.

Now that you are focused on the real economy, keep this model in mind and let’s next look at how money and pricing come into the picture.

The Clearance Price

When a product has a very low price, people buy more of it. Even with food, they will tend to shop for lower prices and skip the expensive $12 cauliflower. Food is mostly exchangable with other food. If some food is expensive, people will be driven to whatever is cheap at the moment.

If a price is too low, stores will run out before more supply is available. Because people will buy it up at the low price while that price is on offer. In order to make more money, stores will notice this and raise the price. But that greed also has the effect of making sure there is always some product on the shelves and the shelves aren't going bare.

But what if the greed is too much? If a price is too high, stores will see the food rot on the shelves and have throw it out. They would be better off selling it for at least something. They get nothing at all for food they have to throw out.

So there is a range that prices can be in. They cannot get too low or too high, both situations cause bad problems (empty shelves or gluts of supply) and both situations cause the store to not make as much money as possible.

But how big is that range? In fact it turns out that it is just a single price. That price is called the clearance price. It is the price that is just low enough to clear all the product, but no lower.

Because sellers are greedy and want to make as much money as possible, they work hard to constantly adjust their prices in order to hit the clearance price.

Notice how the clearance price isn't just made up by the seller. It is whatever price happens to work. It is, as economists tell us, determined by supply and demand. More supply causes it to go down, less supply raises it. More demand causes it to go up, less demand lowers it.

In fact, sellers of products are trapped by this clearance price. They are not really in charge of the price they sell products at. They can miss the target for a while, selling too high or too low, but that state of affairs will not last long as supplies will either run bare or pile up.

So just because they are greedy and care about their profits and really don't care about your wellbeing at all, doesn't mean that they are ripping you off. As I think I've shown, they can't rip you off (at least not in a sustained way) even if they wanted to.

New Zealand is asking people to dob in price gouging

Unfortunately the New Zealand government doesn't understand the basic economic principle that I've just laid out. They are asking people to dob in stores that are gouging prices. And as of this writing they have received thousands of reports. They know full well that they have disrupted normal market forces, and are of the belief that this can somehow be fixed by administering prices as is done in third-world socialist countries. It can't. We will suffer the same fate as Venezuela is suffering. Any price they force downward will have the obvious and expected effect: shelves will go bare. Enough of this kind of behavior and people will become malnourished and potentially even starve.

Similarly, any price that they force upwards (telling businesses that they cannot open functionally sets their prices at infinity) will cause gluts of supply. The obvious and expected effect has occured: we are seeing meat and vegetables rot. Many companies in the industry are folding. You might not feel bad for companies, but you might feel different once you realize that nobody is going to replace them anytime soon, and that means the country won't be producing quite enough food for everybody. Fixing that takes a lot of time. Setting up new production is not a quick operation, especially in the world of food where the aggregate demand has always been expected to change very slowly. Food takes months (crops) or even years (meat) to produce. Very few entrepreneurs would dare enter a marketplace that is price controlled.

This is a very serious issue, at least as serious as the Coronavirus. And this issue is exacerbated by the very serious distribution issue: read about the potential disaster as supermarket throughput falls.

Prepare yourself. Grow food at home and establish barter networks. Do it now.


Exceptions

Under very special situations, there is a possibility of price gouging. So my statement is not absolute. But it is almost always true. Here is an exception. In September 2015, Martin Shkreli raised the price of the antiparasitic drug Daraprim from $13.50 to $750.00, generating the nickname "Pharma bro" and becoming the most hated man in America. In this special circumstance, there was only one manufacturer, the was no alternative drug, and the people who needed Daraprim were often in life or death situations. Given that situation, raising the price forced many of these people to buy the drug anyways. But even given the special circumstance, there was an option, and many people took it: they stopped taking the drug and hoped their immune system could handle the infection. $750 was probably an overshot of the clearance price, and that would have borne out over time. But the free market worked even faster. Just one month later, competitor Imprimis Pharmaceuticals announced it had made available the same drug for $99.00. The price gouging didn't work for long.