Price Gouging: We Ask Is It Always Wrong In Practice?
Price Gouging: if you are watching television or reading the paper at the moment (does anyone still read newspapers?) – you will no doubt be aware of the terrible season of extreme weather in the United States. The recent biblical style floods in Texas and the ongoing Hurricane Irma in Florida and the Caribbean region. We send our best wishes to all affected by these events and hope the situation resolves quickly.
The press recently has covered a couple of stories focusing on incidents of price gouging whereby unscrupulous business owners have been perceived to take advantage of people affected by the disasters. In this blog we will look at an alternative view point – and ask is it always wrong to increase prices during a natural disaster.
Taylor Wells is a specialist team building organisation focused on pricing and revenue management. We help businesses optimise their pricing approach – and find the vital experts needed to put those changes in place.
Price gouging – lots of criticisms but can there be benefits?
It is well known that increasing prices during a crisis is a great way to become very unpopular. CNBC reported:
“Hotels aren’t the only ones guilty of price gouging as Houston grapples with continued rainfall and flooding from Hurricane Harvey, the most powerful storm to hit Texas in more than 50 years. Over the weekend, more than 500 complaints of price gouging were lodged with the Texas attorney general’s office, according to CNBC—including $99 cases of bottled water, gas at $10 a gallon and hotels tripled or quadrupled in price.”
“These are things you can’t do in Texas,” Texas Attorney General Ken Paxton told CNBC in an interview Monday. “There are significant penalties if you price gouge in a crisis like this.”
Some free market economists and adherents to very low controls over capitalism often argue that price differentiation is usually better than a rationing or queue system.
An article at zerohedge.com – a popular finance news site argues the opposite position:
“But people fleeing Hurricane Harvey were in desperate need of hotel rooms. And the news crew was complaining about paying a high price.”
“The news team reported on the terrible incident of gouging. But they actually demonstrate exactly why prices need to go up when demand goes up.”
“I wonder if they decided to bunk up together and buy fewer rooms because of the high price. After all, that is the whole point of “gouging.”
“When demand shoots through the roof, the reason prices need to go up is not simply business greed. Higher prices slow demand.”
Another example provided was:
“$100 cases of water means people only buy what they really need, thus leaving a case for the next person in dire need. Otherwise, why not stock up on ten cases of water? You may have six cases leftover at the end of the disaster, while twenty other people dehydrated or desperately drank contaminated water.”
Think of the future – not just today
It is very important for businesses to remember that a crisis can last a very short (if extremely traumatic) space of time – but a business hopefully will last and prosper for many years. If a business is perceived to have been guilty of price gouging in customers hour of need – they will likely have no commercial future when the storm ends.
It is for this reason that a form of rationing or queue system would likely be a better system – i.e. it ensures stocks are maximised and the business is not viewed as exploitative. Trying to justify increasing prices significantly during a crisis will be a very tough explanation for business owners to achieve.
At Taylor Wells – we are big believers in looking after your customers, as without them you would not exist as a business. We would be interested in your view on the topic above.
For more common scenarios – see our blog on dynamic pricing models.
See our blog on price increase strategies.