Enough whingeing about price gouging

‘The latest advice is that there is no need to queue at forecourts or “top up your tank” as there will not be a strike over Easter. The [energy] department is also urging motorists to stick to speed limits to conserve fuel. ’
Financial Times, April 2

Good morning. How are you?

I’m distraught. No Easter egg for me last Sunday.

You’re joking.

It’s true. My wife went to a fancy patisserie to buy one, only to discover that they’d sold out. A cheap one would have done, to be honest.

They’re all cheap now.

They are. It’s puzzling, though. If it’s fine to cut the price of eggs when demand falls, why not raise the price when demand is high? Why didn’t the patisserie put up the price of their last few eggs, rather than sell out on Maundy Thursday?

I don’t think that would have gone down well. Price gouging, don’t you know.

I’d rather think of it as dynamic pricing. I realise people use pejorative terms to describe it, but we’d all be better off if certain products varied in price a bit more.

Example?

Well, last week we discussed water and proper metering and seasonal pricing as a rational alternative to hosepipe bans. Or petrol. Remember the petrol panic a couple of weeks back, when everybody rushed out to fill up their tanks, causing queues and shortages?

You think petrol stations should have whacked an extra 20p on the price?

Of course. Think about it. There was a sudden demand for petrol because of the fear of a strike and shortages.

It was a government-engineered panic.

It was, although the point is, the demand was purely precautionary. The actual need to drive around didn’t change. Some people whose cars were empty had to queue for hours, or even go without. Those who needed petrol would have been able to get 10 litres quickly and easily at the cost of an extra couple of pounds. Meanwhile, the people who late last month were topping up their tanks because – well, why not? – would have waited for prices to fall again. The petrol stations would have provided a valuable social service by charging more, as well as making money into the bargain.

The petrol stations that did raise prices were vilified.

They were, which shows that some people don’t know what’s good for them. The idea of the “just price” has a long history but very little economic basis. There are some theoretically sophisticated stories one can tell explaining why prices tend to stick, but the truth is that in most cases we’d be better off if they moved more. The latest toys wouldn’t all sell out at Christmas, there’d be fewer hosepipe bans, you wouldn’t need a lottery to allocate Olympic event tickets and I’d have been chowing down on an Easter egg last weekend.

Life doesn’t always respect your fancy economic models.

Indeed not, and thank goodness – although the laws of supply and demand are hardly fancy. But the fuss about price gouging really does make us worse off. There are two problems with prices that don’t rise quickly enough in the face of fixed supply and high demand. First, the goods may not reach the people who want them most. Second, even the lucky customers who get the cheap product may lose out because of the non-monetary costs of getting it.

Such as?

Such as queueing for hours to get the latest iPhone or a day pass to Wimbledon, for example. Many, surely, would happily pay a little extra to sidestep these wholly avoidable costs.

If this is such a brilliant idea, why don’t we see more of it?

The simple answer is because people hate it and call it price gouging. Why people hate it is another question and one to which there is no straightforward answer. The riddle deepens because some products are routinely sold using dynamic pricing and nobody complains – for example, seats on an aircraft.

It’s not true that nobody complains. You complain about Ryanair all the time.

Yes, but that’s because of the opaque drip-pricing, the unassigned seating and the lack of customer service. It’s not about the same type of seats at different prices. I have no problem with that idea and, curiously, I’ve never heard anyone else complain about it either. But if you tried to price Wimbledon tickets like that, there would be a riot in SW19.

Why, what’s the difference?

I have no idea. But at least I was able to feast on cut-price chocolate eggs all week.

Also published at ft.com.

14th of April, 2012 • Other Writing • Comments off