Price Gouging


Its happening again. A firm grows from a darling, often mentioned glowingly in the media, that benefits consumers into a large corporation that is harming employees and communities, etc. If you want a lower standard of living, stagnant economy, no new jobs, and no new products then have the government try to fix the problem. It will stifle the dynamism a prosperous society needs.

Some critics call low pricing ‘predatory pricing’, supposedly to conjure scary images of a ravenous wild animal looking for its next prey.

Take this article by a writer who trades for a living.

New firms often use low prices to build market share and to get their products into more hands. They burn through investor’s cash, pay their employees with some cash and either shares of stock or products or some other way to save the cash for investing in business growth. Amazon never changed course.

People made a similar case against Walmart years ago when it was taking market share from other retailers: its harming other retailers, killing jobs, putting mom-and-pop shops out of business, etc.

Well guess what? Now Walmart is competing against Amazon and other brick-and-mortar retailers and other e-commerce sites. No government action against Walmart was needed. Indeed, it would have been harmful to consumers, its suppliers, and its employees.

The people who work at Walmart and now Amazon are doing something extraordinarily well. They have a successful strategy and business model and are executing. Don’t get in the way. Its up to others to figure out how to leap-frog over them in the marketplace. Other business models and strategies will emerge even though we cannot foresee what that will be. In fact, that success only becomes known after the fact because the growth of the firm will make the news. It will have survived the initial response by Amazon, Walmart and other competitors.

Yet we benefit from their low prices. It makes our family budgets go farther. The employees of the firms harmed by these super successful firms need to turn inward to management to demand they get their act together, or welcome outside investors to maybe buy the firm and install new management with new ideas. Its new ideas, new management, new/outside capital, new strategy, new business model that leads to dynamic growth.

Now, if Amazon is using the government to enact specific laws that benefit it, like, say, Net Neutrality, then that law or regulation should be eliminated.

If you want to help these firms, stop encouraging politicians and regulators to take sides and trying  to solve this problem. Its not a solve-able problem and government is a poor mechanism to solve problems.

UPDATE: Amazon May Be the Next Tech Giant Muscling Into Health Care. That’s what American health care needs. Smart, successful people in the private sector to figure out how to improve a highly government-controlled industry.

The southeast US is being hit twice with fuel disruptions.

The first event was by a pipeline leak of the Colonial Pipeline in Alabama (here). People panicked as a result of hyped-up media coverage. People filled up as a way to hoard gasoline in their vehicles and hopefully have enough until supplies returned. Luckily, there were no price gouging laws because that would have discouraged suppliers from coming in from unconventional sources to provide more fuel. Slowly, supply is returning.

However, the end is in sight. Woodring said gas is already coming in and the shortage will end soon.

“We got it this morning, but only half a tank. We usually get 7,000 to 10,000 gallons when we’re out and we got 3,000. So that’s what happens,” Woodring said. “It is pumping in right now, but it still has to fill up.”

 

The second event is Hurricane Matthew. It is about to hit the state of Florida and travel up the coast. Any existing price gouging laws will limit supply.

These laws are intended to protect sellers from taking advantage of consumers. But more often they exacerbate shortages by forcing sellers to sell gasoline at prices that are below what it would actually cost to obtain additional supplies.

Although many of these laws allow prices to increase to reflect higher costs, stations and fuel suppliers are often unsure of how their relevant costs might be interpreted by enforcement agencies.

As a result, they frequently choose to keep selling until supplies run out rather than increasing their price.

So how would things be better if gasoline prices had risen to, say, $3.50 a gallon last month? First, many of you would have bought a little less gasoline and drove a little less by combining trips, postponing unnecessary driving, or sharing rides. The higher the price, the more you save by using less. This would ensure gasoline is still available at the station for those who really need it.

Second, higher prices in areas impacted by the supply disruption would encourage even greater efforts by suppliers to bring in additional supplies from surrounding areas. Relocating fuel from other regions can be quite costly, and less fuel will flow in if this additional cost cannot be recouped when the gas is sold.

Third, if prices were high enough to significantly reduce usage and increase supply imports, stations would be much less likely to actually run out of gas. “Panic buying” and consumer stockpiling can occur if consumers believe they may not be able to purchase when they need to.

In the supply/demand calculus, price gouging laws limit supply and increase demand.

Here.