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Pros, cons of price gouging

Price gouging is becoming an issue thanks to Hurricane Harvey and Hurricane Irma.

Although Texas and Florida have laws against the practice, a bigger deterrent may be the wrath of the customer. Companies fear social media. But price gouging, in spite of its obnoxious-sounding name, is usually the best of a set of bad alternatives. If you are inveighing against high prices after a storm, you are lining up with the interests of American big business at the possible expense of storm victims.

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 a smartphone, snap a photo and post it on social media. The photo may go viral, and many people, including legal authorities, will be mad at the company.

Reluctance to raise prices is especially strong for nationally branded stores. 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 quickly apologized for its store selling water at such a high price, blaming the incident on an overzealous local manager.

Instead of raising prices, 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 tragedy and want rather than selfish corporate behavior. It's too subtle an image to snap the price tag at pre-storm levels, contrast it with empty shelves, and lecture your Facebook friends about the workings of market-clearing supply and demand and the virtues of flexibly adjusting prices.

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. 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.

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?

There is yet another reason businesses don't always raise prices. Where I live in northern Virginia, we have periodic power blackouts, in part because trees fall on 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. So I bought a bunch of flashlights in advance 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.

Editorial on 09/10/2017

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