Price Gouging in the News

As our nation responds to the coronavirus situation, stories have spread about the behaviors of some profit-seekers. The New York Times reported on a pair of brothers in Tennessee that used a U-Haul truck to collect more than 17,000 bottles of hand sanitizer and thousands of packs of antibacterial wipes from mostly rural dollar stores. Their plan was to resell these items on Amazon at a steep markup, before Amazon removed all their product listings (and the listings of thousands of other sellers) in response to concerns about inflated prices from third-party sellers. Likewise, Newsweek reported on a Canadian couple who made over $70,000 reselling disinfectant wipes on Amazon. In one case, they sold a package of wipes for about $64.50 when that package normally sells for about $14.50.

Naturally, stories like this have generated accusations of price gouging. The definition of price gouging is relatively subjective. Generally, it involves outlawing excessive price increases in emergencies, such as when a state governor or the president declares a state of emergency.

Over a dozen states have rules against price gouging, but there are not always clear guidelines of how high price increases must go before they become price gouging. New Jersey specifically labels any price increase over 10% during an emergency as price gouging, but other states define price gouging as increases that are “unconscionable” or “exorbitant”.

Lessons from Economics

One consideration is that this is not a pricing problem per se. Rather, the high prices point to a supply problem.

Most economists will tell you that high prices send economic signals to the market, and those signals help businesses with determining the optimal allocation of scarce resources. Higher prices lead to higher profits, so a profit-maximizing businessperson may shift production to these scarce, high-profit items, or shift distribution to the most deprived (and highest-priced) areas. Both of these actions increase product supply. Additionally, other businesses may elect to enter this market to capture some of the newly available profit, thus further increasing product supply.

The end result is an elimination of the supply shortage, with buyers and sellers both getting what they want, and with everyone living happily ever after. At least, everybody does in the economic models.

However, businesses must grapple with the fact that they do not make decisions inside an economic model, and the work of behavioral economists has shown that humans do not act as rationally as some models suppose. Specifically, businesses must anticipate whether their actions will be perceived as fair by their customers.

What’s Fair?

If you thought the above definition of price gouging was a little woolly, you are not going to like the definition of fairness. Being fair involves taking actions that others perceive as “just” or “right” or “deserved.”

But concepts of fairness depend heavily on which audience is doing the perceiving. Behavior that is considered fair in one culture will not be considered fair in another culture. Research indicates that while some components of fairness may be universal, others appear to be heavily dependent upon societal influences.

Customers judge whether a price is fair based on their price expectations, which have been formed through previous product purchases. A large price increase can easily be interpreted as profiteering or taking advantage of a customer with little buyer power. Customers expect businesses to share some of the surplus benefits created by their offering with customers. Additionally, the concept of fairness will play a larger role in products that are considered a necessity versus products considered discretionary.

Unfortunately for executives, violating a customer’s sense of fairness is a great way to immediately stop current purchases. Future purchases will also become much more unlikely. And if enough customers are sufficiently infuriated, executives should expect to ramp up spending on public relations to manage the damage.

So, if you are considering raising prices due to a supply shortage, be aware of your local laws. Ask yourself what level of price increases are common for your offering category. Be proactive in communicating to your customers why the price increase is fair and how you are sharing the surplus benefits with them. And listen to your customers if they tell you that your “fair” price increase is not so fair.

References:

Blake, P. R., K. McAuliffe, J. Corbit, T. C. Callaghan, O. Barry, A. Bowie, L. Kleutsch, et al. “The Ontogeny of Fairness in Seven Societies.” Nature News. Nature Publishing Group, November 18, 2015. https://www.nature.com/articles/nature15703.

Nicas, Jack. “He Has 17,700 Bottles of Hand Sanitizer and Nowhere to Sell Them.” The New York Times. The New York Times, March 14, 2020. https://www.nytimes.com/2020/03/14/technology/coronavirus-purell-wipes-amazon-sellers.html.

Slisco, Aila. “Canadian Couple Made over $70,000 Reselling Lysol Wipes on Amazon at Inflated Prices.” Newsweek. Newsweek, March 14, 2020. https://www.newsweek.com/canadian-couple-made-over-70000-reselling-lysol-wipes-amazon-inflated-prices-1492307.