Friday, November 28, 2014

Gouging is good business

New York State General Business Law section 396-R outlines the state’s interest in price gouging – the process by which businesses charge “excessive prices” to consumers “during periods of abnormal disruption of the market caused by…extraordinary adverse circumstances”. It is believed that the offending merchants “take unfair advantage of consumers” at such times.

Gouging and the State’s interpretation of it are entirely subjective matters. It is up to the courts to determine that “the amount of the excess in price is unconscionably extreme”.  

Under such a definition, the determination of gouging is neither quantifiable or qualifiable. Even so, bureaucrats are quick to point an accusatory finger at businesses during market disruptions. We saw
Attorney General Eric Schneiderman do this during Hurricane Sandy and we saw him do it again to gas stations, grocery stores, and hardware stores a few weeks back when the “Snovember” storm struck parts of Western New York.   

The law’s nebulousness is to be expected. It’s poor in execution because it’s poor in foundation: Price gouging is not evil; it’s actually good business --- for all parties involved.

Gouging is no different than your everyday economic transaction. ­­Prices and the supply of goods and services are based on two drivers: One, the paucity or abundance of resources and, two, the level of consumer demand.  

In times when there are not crises, sellers can offer products at whatever price they want, as long as buyers are willing to pay. That’s why every Christmas you see fad toys sell in the $50 to $100 range, even though they cost a pittance to produce as made evident by the much-lower shelf prices in subsequent years. Consumers will use their dollars to fight other consumers for goods if they want them bad enough. A smart businessman will adjust his prices and profits accordingly.

It only makes sense that the same practices take place when there is a natural disaster. If the infrastructure leading into the affected region is damaged, that means that there is or will be a scarcity of what once may have been abundant resources.  Any profiteer worth his weight in gold would increase prices accordingly as the demand either remains exactly the same or has measurably increased for the item of need. He’s only logically managing the economics of supply and demand.

As for the purchaser under this scenario, if you truly find that you are in need of gasoline under a state of emergency, are you better off paying $5/gallon for 20 gallons and getting your 20 gallons (as you were willing to pay the premium that other consumers weren’t) or paying the standard market rate that existed pre-crisis and hoping that you can beat the other customers to the pump (which could lead to zero gallons in your possession) and/or not suffer the woes of rationing (by which you might receive 5 gallons)? If you value the resource and the certainty of having it, you don’t mind getting gouged.

The seller in this equation is also obligated to the best interest of his business and its stockholders to sell highly-needed resources at a premium in order to keep his business afloat at a time when Mother Nature is not in his favor. He has to cover his overhead (power, rent, etc) and pay his staff. He would normally do that by selling gasoline and all of the ancillary goods you find at a gas station. But, in a disaster, he finds his clients wanting only gasoline – it’s not as if they are making a dangerous jaunt to his shop to get Slim Jims, Hubba Bubba, the National Enquirer, or cigarettes.

Gouging laws can hurt the consumer even more by actually inhibiting the entry of necessary goods into the affected region.  Let’s go back to the October Surprise that smacked Buffalo and the North Towns in 2006. With power out for days on end, residents dearly wanted generators and were willing to pay a premium. But they couldn’t get them because hardware stores would have been accused and likely found guilty of gouging even though they weren’t.

Here’s why: It’s not as if hundreds of generators were just sitting in a Lowe’s or Home Depot distribution center. They would have had to pull them from stores across the US. That costs money – staffing and shipping individual units. A $500 generator would have had to sell for $700 just to come out even. That would be “gouging” under state law. Stores were not willing to bring them in for fear of getting into a legal battle or paying the state’s $25,000 fine which would have sucked all the profits they would have gleaned.

So, before denouncing gouging, consider the consequences. Businesses need to survive and so do you.

From the 01 December 2014 Lockport Union Sun and Journal

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