Praise for Price-Gouging

by John H. Cochrane, The Grumpy Economist, Aug. 20, 2024- ... What is price gouging and how could I possibly say that? The classic case of “price gouging” happens in a natural disaster or pandemic. A hurricane is coming, people run down to hardwares stores and clean out the 4’x8’ plywood to board up their windows. Stores raise their prices, people who have them sell at high prices to those that don’t. After the storm, gas trucks can’t get in for a few days. Gas stations raise prices to $10 per gallon. In the pandemic, people got worried about toilet paper and went out to buy, cleaning out shelves. Stores that raised prices were accused of “gouging.”

Price gouging is fundamentally different from monopoly pricing, collusion, or price-fixing. Price gouging happens in perfectly competitive markets. There suddenly isn’t enough to go around, either from a surge in demand or a contraction in supply. Prices rise sharply above what people are used to paying. Those that have inventories, bought when prices were lower, can turn around and make a temporary profit. ... 

Price gouging is wonderful for all the reasons that letting supply equals demand is wonderful. ... Hoarding goes with price controls, anticipated empty shelves. Why did people buy tons of toilet paper in the pandemic? They were worried about not being able to get it in the future. ...

Laws limiting price gouging also reduce supply. ... “Windfall” profits belong in the pantheon of saints along with price-gouging. In competitive industries, that’s what encourages people to enter and offer new supply. ...  companies are very reluctant to price-gouge. Costco let the shelves run out of toilet paper rather than raise prices. Other stores rationed: you can only have 4 rolls ... Uber surge pricing was an important lesson to me. I loved it. I could always get a car if I really needed one, and I could see how much extra I was paying and decide if I didn’t need it. I was grateful that Uber let me pay other people to postpone their trip for a while, and send a loud signal that more drivers are needed. (read it all)

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