Price gouging can be a type of hurricane aid... seriously
Price gouging has become an issue again after Hurricane Harvey, both in the Houston area for food, water and tools, and in a broader region affected by gasoline supply cutoffs. Florida and Puerto Rico, with Category 5 Hurricane Irma on the way, may soon be seeing the same.
Although Texas and Florida have laws against the practice, a bigger deterrent is perhaps the wrath of the customer: We have entered an era when companies fear social media to an unprecedented degree. But I wish to suggest that price gouging, in spite of its obnoxioussounding name, is usually the best of a set of bad alternatives. If you are inveighing against high prices after a storm, basically you are lining up with the interests of American big business, at the possible expense of storm victims.
How does that work? There are still shortages of food and water in parts of the Houston area, due to malfunctioning waterworks and postponed deliveries. Let's say bottled water was selling at $42.96 a case at the local Best Buy. A customer can take out his or her smartphone, snap a photo and post it on social media. The photo may go viral, and many people, including the legal authorities, will be mad at the company.
The reluctance to raise prices is especially strong for nationally branded stores. A local merchant may not care much if people in Iowa are upset at his prices, but major companies will fear damage to their national reputations. The short-term return from selling the water at a higher price is dwarfed by the risk to their business prospects. More and more of the value of business capital is intangible capital, more than 84 percent of the S&P 500 by some estimates. That's why Best Buy so quickly apologized for its store selling the water at such a high price, blaming the incident on an overzealous local manager.
Consider an alternative: Instead of raising prices to very high levels, let's say that the local big-box store sells out quickly during an emergency and has empty shelves for water. If those photos circulate, they will be interpreted as signs of general tragedy and want, rather than selfish corporate behavior. It's too subtle an image to snap the price tag at prestorm levels, contrast it with the empty shelves, and lecture your Facebook friends about the workings of market-clearing supply and demand and the virtues of flexibly adjusting prices.
To be clear, market-clearing prices are not always best. In emergency situations, very high prices can end up placing too many critical resources in the hands of the wealthy. Sometimes rationing can be fairer and promote human happiness. Nonetheless, the balance of argument does favor allowing and indeed encouraging higher prices in most emergency situations. If the store doesn't raise prices, attentive customers may buy up the whole stock, resell it during the emergency and price gouge themselves. Or store employees may funnel the scarce goods to their friends and relatives. Don't think the alternative to corporate price gouging is necessarily a fairer outcome, but that subtle point doesn't always translate well to social media.
The higher prices, if they can be done without bad publicity, encourage stores to have more emergency supplies on hand in the first place. They also create an incentive for people to bring in more of the scarce resources from outside. When Hurricane Katrina created problems with the power supply in Mississippi, one entrepreneur drove in 19 generators and tried to sell them for twice the normal price. He was arrested, spent four days in jail, and his generators were confiscated. Did that help anyone?
Finally, there is yet another reason businesses don't always raise prices. Where I live in Northern Virginia, we don't have big rainstorms comparable to Houston's. But we do have periodic power blackouts, in part because trees fall on the power lines when it snows or rains. I used to think I could just buy a flashlight when needed, but when a storm is announced, the stores sell out of flashlights right away because they don't raise their prices. What did I do to compensate? I bought a bunch of flashlights in advance, and stored them in easy-to-access places around the house, as insurance against a sudden blackout. By making it clear I couldn't buy flashlights on demand, the store probably got more money out of me.
Higher prices during an emergency can create problems, but usually they are the best alternative for potential victims. If you're against them, just know you have a powerful partner in your crusade: American big business.
Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "The Complacent Class: The SelfDefeating Quest for the American Dream."