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Price Gouging, Monopoly Pricing, Collusion vs Price Fixing
Kamala Harris’s 2024 presidential campaign: “so short on details,” “so short on policy proposals,” warns Joshua Hendrickson, an associate professor of economics at the University of Mississippi. Her overall vision is not even clear, Hendrickson reminds readers in NRO. ” When she does take a position, she does so haphazardly, “throwing policies at the wall” without any “coherent pattern.”
In Raleigh, NC, Harris produced a list of policy proposals. It includes a “first-ever” plan to end alleged corporate “price gouging” of groceries, forgive medical debt for millions of Americans, instate price caps for prescription drugs, build 3 million new housing units, and offer a $25,000 credit to first-time homebuyers.
Harris’s vague anti-price gouging shtick, reports Audrey Fahlberg and Brittany Bernstein in NRO, also has unleashed a wave of criticism from economists, who argue that the Kamala’s proposal misidentifies the underlying causes of inflation and papers over “the reality that the profit margin for grocery stores remains in the single digits.”
“This is not sensible policy, and I think the biggest hope is that it ends up being a lot of rhetoric and no reality,” Harvard economist Jason Furman, who previously worked in the Obama administration, told the New York Times earlier this month.
Why Price Gouging Is Wonderful
Then along comes the Grumpy Economist. At his Website, John Cochrane explains the differences various economic curiosities:
Rhetoric with No Reality
In a recent speech, Kamala Harris called for a new law against “gouging.” As Cochrane reminds Kamala and readers, price fixing is already illegal. It’s also abundantly clear, he maintains, grocery stores are not fixing prices. A “policy speech” from Kamala seems to have ignited a debate about “price gouging,” and what the government should do about it.
The Wonder of Price Gouging
Price gouging, which happens in perfectly competitive markets, is fundamentally different from monopoly pricing, collusion, or price-fixing. Supply equals demand is “wonderful,” snaps the Grumpy Economist.
Q: Well, Mr. Cochrane, what happens when suddenly there isn’t enough of an item to go around, either from a surge in demand or a contraction in supply?
Prices then 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. Veep Harris calls for a new law against “gouging.” Her premise is faulty: price fixing is already illegal, and it’s “abundantly clear grocery stores aren’t gouging.”
Give Readers an Example
Q: As far back as 302, the Edict on Maximum Prices in an attempt to curb inflation via price controls. Quickly, his edicts were ignored and became counterproductive. Please explain.
Look to Split, Croatia, (Croatia’s 2nd largest city) for a perfect example:
“Although effective while he ruled, Diocletian’s tetrarchic system collapsed after his abdication under the competing dynastic claims of Maxentius and Constantine, sons of Maximian and Constantius respectively. The Diocletianic Persecution (303–312), the empire’s last, largest, and bloodiest official persecution of Christianity, failed to eliminate Christianity in the empire. After 324, Christianity became the empire’s preferred religion under Constantine.
Despite these failures and challenges, Diocletian’s reforms fundamentally changed the structure of the Roman imperial government and helped stabilize the empire economically and militarily, enabling the empire to remain essentially intact for another 150 years despite being near the brink of collapse in Diocletian’s youth.
Weakened by illness, Diocletian left the imperial office on 1 May 305, becoming the first Roman emperor to abdicate the position voluntarily. He lived out his retirement in his palace on the Dalmatian coast, tending to his vegetable gardens. His palace eventually became the core of the modern-day city of Split in Croatia.”
How about something more immediate? Like weather. We live in KW and many times have faced the distress, realized or not, caused by hurricanes. How does an incoming hurricane warning affect life?
A hurricane is coming, people run … to hardware stores, and clean the shelve of 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 (Covid), 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 wonderful for all the reasons that letting “supply equals demand” is wonderful. When there is a limited supply, then a sharply higher price directs that supply to those who really need it. It’s day (#)2 after the hurricane. Who really needs gas? An ambulance, police, or fire truck? A handicapped person, needing to get to a doctor across town? Or someone who could bike, take public transit, or walk with just a little effort to go see a friend?
Price Control = Hoarding
Q: Hoarding goes hand in hand with Price Control, you write, Mr. Cochrane. Does hoarding really lead to empty shelves?
Why did people buy tons of toilet paper in the (COVID) pandemic? They were worried about not being able to get it in the future. If the stores had not been worried about price-gouging, they would have raised the prices a lot more, and people with that idea would have gotten the message, don’t bother to stock up now — and if you really need it, there will always be some in the store later.
“Afford,” a Squishy Concept
Q: Whatabout those who can’t “afford” $10 gas and just have to get, say, to work? How do you justify that?
Rule number one of economics is, don’t distort prices in order to transfer income. First, take a breath. In the big scheme of things, even a month of having to pay $10 for gas is not a huge change in the distribution of lifetime resources available to people. “Afford” is a squishy concept.
You say you can’t afford $100 to fill your tank. But if I offer to sell you a Porsche for $100 you might suddenly be able to “afford” it.
Q: There is the matter of “windfall” profits. Why do you claim windfall profits belong in competitive industries?
Windfall profits encourage people to enter and offer new supply. “Inventory is a great source of supply,” Cochrane explains:
If you run a Home Depot in Florida, how many 4’x8’ sheets of plywood do you keep around? Well, if you’re allowed to sell them for $100 each when the next hurricane is coming, a lot. If you must charge only the regular price until the shelves empty out, then not so much. Inventory is expensive.”
Blame the Kids
John Cochrane denies being grumpy, lay the blame for his nickname on his children, he innocently contends.
As an adjunct scholar at the Catio Institute and a senior fellow at CATO, Mr. Cochran’s opinions are his alone and do not represent the position of the Hoover Institution at Stanford University. His stories are his alone and do not represent the position of the Hoover Institute.
Cultural Acceptance of Market Behavior
It should be, “you’re free to charge what you want for your property, and I’m free to not buy. Everybody stop whining.”
A Head Scratcher
What are they doing, asks Dan McLaughlin (also at NRO):
Why is the national political press all-in for Kamala Harris, to the point where outlets such as Politico and Axios are de facto spokespersons for the Harris campaign?
Sure, we’ve seen media bias before, but the past month has taken things to new levels.
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