InstituteforInternationalEconomicPolicyWorkingPaperSeries
ElliottSchoolofInternationalAffairs
TheGeorgeWashingtonUniversity
SurgePricingandPriceGouging:
PublicMisunderstandingasaMarketImperfection
IIEP-WP-2015-20
StevenSuranovic
GeorgeWashingtonUniversity
December2015
InstituteforInternationalEconomicPolicy
1957ESt.NW,Suite502
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SurgePricingandPriceGouging:
PublicMisunderstandingasaMarketImperfection
StevenSuranovic
TheGeorgeWashingtonUniversity
DepartmentofEconomics,
TheGeorgeWashingtonUniversity
2115GStN.W.,Suite340,
WashingtonD.C.20052.
(202)994-7579:[email protected]
Abstract:
Thispaperevaluatestheeconomicandethicaleffectsofsuddenexcessdemandforgoods
orservices.Thenormalmarketresponseof“surgeprices”or“pricegouging”invokes
sharpnegativereactionsbyconsumerswhoconsidertheprofitseekingmarketresponseto
beunethical.Publiccondemnationoftenpreventsmerchantsfromfollowingmarket
signals,orinducesgovernmentstointervenebyimplementingpriceceilings.Thispaper
arguesthatpublicmisunderstandingpreventingefficientandfairoutcomesisthetrue
marketimperfectioninthesecases.Thepaperprovidesreasonsforthepublic
misunderstandingandsuggeststhatdemonstrationeffectswouldbethemosteffectiveway
toinducemorefavorablemarketoutcomes.
JELCodes:L51,D63,D43,D80
Keywords:Surgepricing,PriceGouging,Imperfectinformation,Shortages
2
1.Introduction
InDecember2014,asagunmanheldcafépatronshostageinSydneyAustraliaand
thecentralbusinessdistrictwasevacuatedbypolice,theUbertaxiserviceautomatically
implementedsurgepricing.1Residentsreactedwithoutrageatthecompany’sinsensitivity
untilthecompanyquicklyrespondedbyofferingfreeridesinthecityuntiltheemergency
subsided.
Inotherlesscriticaltimes,Uber’ssurgepricinggoesintoeffectwheneveryouwould
normallyexpecttoobserveashortageoftraditionalcabs;onNewYear’seve,after
fireworksdisplays,andduringrainstorms.Inthoseinstances,Ubercustomersareoften
quicktocomplainaboutthehighpricesonsocialmediasiteslikeFacebook,Twitterand
Instagram.2
Othernaturallyoccurringemergenciessuchassnowstorms,hurricanes,and
earthquakesalsocausesuddensevereshortagesofgoodsandservices.Merchantsinthese
areasaresometimesinclinedtoraisepricesevenbeforethedisasterstrikesinresponseto
asurgeinprecautionarydemandsforgasoline,snowshovels,hotelroomsandmanyother
items.Customersusuallycalltheseactionspricegouginganddecrythecallousnessand
insensitivityofprofiteeringmerchants.3Publiccondemnationhaspreviouslybeenso
1Asurgesituationariseswheneverthereisasuddenandsignificantincreaseindemand
and/ordecreaseinsupplyofaproducttoamarket.Surgepricingoccurswhenacompany
respondstotheexcessdemandbyincreasingthepriceinordertoagainequalizemarket
demandwithavailablemarketsupply.
2http://www.today.com/money/163-uber-twitter-explodes-after-pricey-new-years-eve1D80396181
3Kahneman,KnetschandThaler(1986)reportthat82%ofsurveyrespondentssaythat
raisingthepriceofasnowshovelwhenasnowstormisapproachingisunfair.
3
strongthat34USstatesandtheDistrictofColumbiahaveimplementedpricegouging
legislationprohibitingunconscionablepriceincreasesinemergencysituations.4
Incontrasttopublicopinion,supportersofsurgepricinginthesecircumstances,
whichincludesUberandmanyeconomists,contendthatinafreecompetitivemarket,if
productpricesrisetoequalizesupplyanddemand,goodsandserviceswilltherebybe
allocatedinamoreefficientmanner.5Economicefficiencymeansthattheavailablesupply
isallocatedtothemostvaluableusesfirstandtolowervalueduseslater.6Thisisa
remarkableresultespeciallywhenonerecognizesthatitisthepursuitofprofitbyfirms
andutilitybyconsumersratherthananycentraldirectionorcontrolthatcangeneratethis
favorableoutcome.Indeed,itisthewell-knownideaattheheartofAdamSmith’sinvisible
hand.7
However,theeffectivenessofthemarketpricemechanismtoallocategoodsand
servicestothosewiththegreatestneedalsodependsonthewillingnessofthemarket
participantstoacceptthemechanism.Ifpeoplebelievethatsurgepricingisunfairandact
onthatbeliefbyencouraginglegislatorstoputintoplacepricecontrols,orbyshaming
companypricingpracticesuntiltheirreputationistarnished,thenthemarketwillceaseto
functionefficiently.8Hereinliesthepolicydilemma,namely,shouldethicalconcernsabout
4Therearenumerousonlinestorieswrittenafteremergenciesdecryingthetendencyfor
merchantstoraiseprices.Seeforexample,
http://www.cbc.ca/news/canada/montreal/uber-price-surge-new-ears-montreal1.3395623
5Uber’sdescriptionoftheirsurgepricingpolicy:“What is Surge Pricing?”
Uber, 2015. https://help.uber.com/h/6c8065cf-5535-4a8b-9940-d292ffdce119
6SeeBrewer(2006),Zwolinski(2008).
7Therearenumerousonlinestoriesafteremergenciesepisodessupportingpricegouging
including:http://www.cnbc.com/id/49622944,
http://abcnews.go.com/2020/Stossel/story?id=1954352&page=1
8SeeKahneman,KnetschandThaler(1986).
4
fairmarketbehavioroverridethemarketmechanisminthesecircumstances?Should
politicianslistentothegeneralpublic,ortoeconomists?
InthispaperIwillevaluatetheimplicationsofthetwoalternativepoliciesand
arguethatthefreemarketresponsedominatesinalmosteveryrespect.Almosteveryone
affectedbytheemergencycanbeshowntobebetteroffwiththesurgepricing/freemarket
response.Thisresulthasbeenexplainedinmanyuniversityclassrooms,inacademic
papers,andinmanynewsmagazineaccounts.Despitethesepreviousexplanations
though,mostpeopleremainsoundlyagainstthefreemarketinthesesituations.9Why?
Thesecondpartofthepaperwillprovidesomerationalesforthepubliccondemnationof
surgepricingandpricegougingbehavior.Thegeneralpublicisnotstupidwhenthey
decrythefreemarketinthesesituation,howeverIwillsuggesttheyhaveincomplete
informationandareledastraybymarketconfusionsthathavenotbeenadequately
emphasizedbyeconomicteachings.Finally,Iwillsuggestseveralmethodstoinspirea
transitiontoasurgepricing/freemarketresponseinemergencies.Afterall,ifthegeneral
publicdoesnotbelieveinthefreemarketresponse,thenevenifitisbestforthem,the
policywillnotmaterialize.Sinceitisunlikelymostofthepublicwillreadthispaperand
beconvinced,amorepracticalmethodfordisseminatinginformationisproposed.
2.InSupportoftheFreeMarket
2.1SurgePricing
Considerasurgepricingsituation.ThepriceofUber’staxiserviceswillrise
automaticallyinresponsetoasurgeindemandaswhena4thofJulyfireworksshowends
9SeeforexampleMunger’s(2007)accountofconsumersreactingtopricegougingaftera
hurricaneinNorthCarolina.
5
orwhenasuddenrainstormhitsacity.Whenthedemandsurgeisunexpected,demand
willgreatlyoutstripsupplyunlessthepriceisalsoincreased.Thehighpriceservesto
reducedemandsubstantiallyasthoseunwillingtopayforaquicktriptotheirdestination
looktothenextbestalternative.Inaddition,thepriceincreasewillacttobringmore
driversintotheareawhoareattractedbythehigherrewards.Themorerapidlynew
driversrespond,thefasterthepriceswillfallbacktonormallevels.Withsurgepricingin
placethosewhoaremostinneed,andthusthosemostwillingtopaymore,receivearide
quicklywithverylittlewaitingtimewhilethosewhoarepricedoutofthemarketmoveon
toothermodesoftransportationorwaituntillater.
Incontrast,whensurgepricingisnotineffect,thesuddenexcessdemandremains
highwhilesupplyremainsatitsnormallevel.Theoutcomewillbeasubstantialamountof
unsatisfieddemandintheformofgreatlyincreasedwaittimes.10Inthiscase,the
allocationofrideswillberandom.Themostsignificantcostwillbetothosewho
desperatelyneedtheservicequickly,let’simaginebecausetheyjustlearnedtheirchildis
sickathome,butwhowillhavetowaitalongtimeforaride.Atthesametimemanyother
luckyridersmayhavelittleurgencytogetsomewherebutinsteadwillberandomlychosen
togetaridequickly.Thisisthenatureoftheunseeninefficiency;ridesareordered
randomlywithoutsurgepricinginplace,notonthebasisofgreatesttoleastneed.
Asecondunseeninefficiencyisthattotalcumulativewaitingtimeswillbelonger
withoutsurgepricingbecausenewsupplierswillnotbeattractedtothemarket.Withor
withoutsurgepricinginplacemostconsumerswillwaitlonger.However,themechanism
10ForevidenceofincreasedwaittimeswhensurgepricingisnotinplaceseeHall,
Kendrick,andNosko(2015).
6
willbedifferent.Withoutsurgepricing,consumerswillcallforarideandwillwaitan
uncertainamountoftimebeforetheirservicearrives.Withsurgepricingmostconsumers
withouturgentdemandwillwaitforthepricestogodownbeforehailingtheservice.What
cannotbeseenthoughisthatthetotalwaittimeacrossallconsumerswillbehigher
withoutsurgepricing.
2.2PriceSurgesinEmergencies
Considernextthefreemarketresponsetoanimpendingemergency,suchasan
approachinghurricaneorsnowstormandtheeffectonthemarketforacriticalproduct
suchasgasoline,animportantproductforbothbusinessesandconsumers.Gasoline
demandwillbegintoriseevenbeforetheeventasindividualsbegintohoardasa
precautionagainstdisruptedfuturesupply.Atthesametimegassupplierswillrecognize
thatthefuturedeliverywilllikelybedelayed.
Profitseekinganduncertainmerchantswouldchoosetopricedynamicallyinthis
situation,whichimpliesseekingapricesothatdepletionoftheproductproceedsatapace
suchthatsupplyrunsoutjustasthenextshipmentarrives.However,becausethereis
greatuncertaintyaboutbothhowmuchextrademandtherewillbeandwhenthenext
productshipmentwillarrive,merchantsarelikelytochangethepriceregularly
(dynamically)inresponsetochangesindepletionratesandasnewinformationchanges
theexpectationsoffutureresupply.Whendepletionrisestoofastthemerchantraisesthe
pricetoslowsalesandwhendepletionslowstoomuchthemerchantlowerstheprice.
Whenallmerchantscompetingwitheachotherpricethisway,therewilllikelybea
highvarianceinpricessinceeachmerchantwillhavedifferentexpectationsanddifferent
7
initialconditions.Forexample,ifagasstationthatisrunninglowonsupplylearnsthatthe
shipmentduesoonwillinsteadbedelayedanotherday,themerchantmayraiseitsprice
wellabovethecompetitiontoslowdepletionconsiderably.Incontrast,agasstationthat
hasrecentlyreceivedanewshipmentmaychargealowerpricethanthecompetitionas
theyallowforamorerapiddepletionrate.
Asthepricerises,severalthingswillhappen.First,higherpriceswillreduce
demandandvirtuallyeliminatetheprecautionarydemand.Linesofpeoplewaitingtobuy
theproductswillalmostdisappear.Itisthefearofnothavingenoughgasthatleadstothe
precautionarydemandandthelonglines;withdynamicpricingconsumerfearisreplaced
byconsumerannoyancebecausetheyareunwillingtopaythehigherprice.Theonly
consumerswhowillpurchasetheproductwillbethosewithimmediateneedsandwhose
economicneedfortheproductexceedsthehigherpriceperunit.Second,themerchants
willmakeagreaterprofitonperunitsales.However,forsomemerchantsthismayonlybe
enoughtomaintaintotalrevenueinthefaceofdecliningsalesvolume.Thus,althoughthey
maymakeconsiderablymoreprofitperunitofthegoodssold,becausetheywillalsosell
fewergoodsinsubsequentdaystheirtotalrevenuemaynotriseverymuch.
Perhapsthemostimportantaspectofdynamicpricingthoughisthatlonglinesare
unlikelytoform.Merchantswithverylowinitialsupplieswillraisetheirpriceswellabove
thecompetitionbutthesepriceswillguaranteethatthereisalwayssomeproductavailable
withnowaitingifoneiswillingtopaythehigherprice.Nolineswillalsomeanthat
averagecitizensneednotworrythattheproductwillrunout;theyneedonlyworrythat
thepriceswillbetoohightoinvitepurchase.Alsotheimmediatehighpriceswill
8
discouragemostofthehoardingsincetheopportunitycostofdoingsowillbeextremely
high.
Thethirdeffectofthemuchhigherpriceswillbetosignalholdersoftheproductin
nearbyareasthatthereisaprofitopportunityifonecanmovenewsuppliesintothe
affectedareasquickly.Thesearetheindividualswhowillmakethegreatestpureprofit
fromthesituationsincetheywillsellsimilarquantitiesbutathigherprices.However,they
arealsotheoneswhoseactionswillreducethelengthoftheemergency.
Rationalmarketparticipantswillrecognizethatthehighpricesituationis
temporary.Eventuallythestormswillpass,thesupplychainswillbereestablishedandthe
priceswillbelower.Thus,themerchantswhoarefirsttoactandquickesttomovenew
suppliesintotheareawillalsobetheoneswhoprofitthemost.
Thisoutcomewillbeefficientbecausethecriticalscarceresourceswillbeallocated
viathepricemechanismintheorderofgreatesttoleastneed.Onlytheconsumerswho
independentlyjudgethattheywilllosemorebynotpurchasingthehighpricedproducts
willbuythehighpricedgoods.Theotherswillwaituntilthepricefallstoalevelforwhich
itisintheireconomicinteresttojumpin.Someobserversmaybelievethatonlywealthy
consumerswillpaythehighpricesbutthisisnotlikelybecauseevenmanylesswealthy
consumersmaylosevaluableincomeiftheycannotgainaccesstosomeofthescarce
resources.Also,wealthyindividualswillbejustaslikelytoeconomizeontheirpurchases
asotherssincetheytoowillrecognizethatproductsarealwaysavailableforsaleandthat
thepriceswillfalltonormallevelsinthenearfuture.
9
2.3PriceControls
Nowcomparetheoutcomeabovetotheconstrainedsituationwhenpricesdonot
increasesubstantially.Whenpricesaremaintainedatthenormallevelsinthefaceof
expectedshortagesconsumerswillbegintostockuponsupplies.Forgoods,thiswill
meanrapiddepletionofessentialfoodsfromstoreshelvesandlinesformingatplaceslike
gasstations.Thedesiretohoardwillripplethroughthecommunityasnoonewillwantto
beleftwithout.11,12
Topreventexcessivehoardingfromoccurring,merchantswilloftenplacelimitson
theamountofaproductthatcanbepurchased,forexample10gallonsofgasolineper
customer.Theconsumerswhoreactearlyenoughwillhavesuppliestolastthroughsome
stagesoftheemergencybutthosewhodonotactquicklymaydiscoverthatsupplieshave
runout.Productswillbemisallocatedbothbecauseeachconsumerwillbeallowedan
equalamountandtheultimateneedswillnotbeequalandbecausepurchasesaremade
beforetheconsumersknowtowhatextenttheywillpersonallybeaffectedbythe
emergency.
Aftertheemergencyeventoccurs,demandforproductswillremainhighandlong
linesmayformforitemsthataremostinneed.Linesatgasstations,forexample,mean
thatindividualswillpayahigherpriceforfuel,butitwillcomeintheformoftimewaiting
ratherthaninmonetaryterms.Linesofpeoplewaitingtopurchaseagoodatthenormal
pricemeansthesepeoplearenotattendingtoothermattersthatmaynotrequirefueland
11ThereisgoodevidenceonthisinthedaybeforeapredictedsnowstorminmanyUS
regionsinwhichsnowfallsareirregular.Entiresuppliesofmilk,eggsandbreadareoften
boughtevenwhenitisknownthestormseffectsmaylastnomorethanadayortwo.
12Thisnewsarticleprovidesagoodaccountofthepanicbuying,hordingandtimewasted
whenpricesdonotriseandsuppliesrunout.http://www.washingtonpost.com/wpdyn/content/article/2008/09/25/AR2008092504159.html
10
thusareincurringanopportunitycost.13Forexample,notcleaningoutabasementwhile
waitingtogetfuelforachainsaw,or,notdrivingadeliverytruckwithemergencysupplies
whilewaitingtogetthefueltomakeitpossible.Alsotheequalquantityconstraintsonthe
mostneededproductslikegasolinewillmeanthateveryonewhoisluckytobuygaswillbe
presumedtohaveanequalneed.Thussomeonewhoonlyneedsafewgallonstogetby
willsurelybuyuptotheconstrainttosatisfytheirprecautionarydemand.Otherswho
haveneedformuchmorethanthelimit,becauseperhapstheyaredrivingemergency
vehiclesallday,willpurchasethelimitbutwillbeforcedintoanotherlineonceitrunsout.
Withoutthepricesystemtoallocateonthebasisofgreatestneedssomeconsumerswith
greatneedwillnotgettheproductswhileotherswithmuchlesserneedwill.Indeed,the
allocationsystemthatarisesinanemergencywithnopriceincreasesismostlyrandom
becauseitisbasedontheluckofwaitinginline.Somewillobtainaproductquickly
becausetheyareluckytobeatthefrontoftheline,otherswillwaitalongtime,whilestill
otherswillwaitonlytobeturnedawaywhensupplyrunsout.
Anotherwaytoseethedifferencesbetweenthetwoallocationmethodsistolook
onlyatthefinaleffects.Inthecaseoffreemarketpricing,scarceproductsingreatdemand
intheemergencyareallocatedtoindividualsandbusinessintheorderofgreatesttoleast
immediateneed.Theneedisjudged,notbysomeindependentparty,butbythebusinesses
andconsumersthemselves.Thusfirstresponderemergencyvehiclesandworkersand
consumerswhoseemergenciesarethegreatestwillgettheproductsfirstwhereasothers
whoseneedsarelesscriticalwillwait.Furthermore,underthefreemarketprices,profit-
13SeeDeaconandSonstelie(1989).
11
seekingindividualswillquicklydivertproductsintotheaffectedareatherebyreducingthe
durationoftheemergency.
Incontrast,underthealternativemechanisminwhichpricesdonotrise,scarce
productsareallocatedrandomlytoindividualsandbusinessesonthebasisoffirsttolastin
line.Everyone’sneedisjudgedtobeequalandthusthosewhoreceivetheproducteach
getthesameamount.Thedurationoftheemergencyisextendedfortworeasons.First
becauseindividualsspendconsiderableamountsoftimewaitinginlinestoobtainashare
ofthescarcegoods,thusincurringanopportunitycost14,andsecondbecausefewer
suppliesfromoutsidetheregionwillbedivertedtohelpthoseinneed.Somecharitable
responseswilloccur,butthesewillquitelikelybemuchlessthanthesuppliesmade
availablebyself-interestedmerchants.
Thiscomparisonsuggeststhatthemaineffectofimposing“fairness”or“ethics”in
thissituationandthuspreventingthefreemarketresponseistoprolongandworsenthe
emergencysituationforalmosteveryoneinvolved.Veryfewpeopledobetterinthe
constrainedpriceoutcome.Thosethatdofairbetter,dosooutofsheerluck.
3.TheSourcesofthePublicMisunderstanding
Inanti-pricegouginglaws,theuseoftheword“unconscionable”accurately
describesthesentimentofmostobserverstotheprohibitedpriceincreases.Most
consumersexpressmoraloutrageaccusingmerchantsofprofiteeringoffthebacksofthe
vulnerable.Becauseofthestrongnegativereaction,eventhemerchantsthemselvesare
14Waitinginlinetoobtainascarceresourcemeansnotdoingothercleanuptasksthatdo
notrequiretheresource.Forexample,apersonfacingahighgaspricemightattendto
othertasksinstead.Waitinginlinetoobtainthegoodwillputoffthisworktillalatertime.
12
reluctanttoraisepricesbecauseitseemswrong.15Thusmanyseethisbehaviorasaclear
exampleoffreemarketfailure.Evenlegislatorswhoarefreemarketproponentswilloften
supportregulationsagainstpricegougingandsurgepricing.16
Onereasonfortheresistancemaybethatthereisaprincipledethicalormoral
justificationagainstfreemarketbehaviorinthesecircumstances.Somehavearguedthat
despitetheconsequencesofallowinghighpricesinanemergency,thebehaviorisjust
inherentlywrong.Sullivan(2014)arguesthatsurgepricingfeelswrongbecausewewish
welivedinaworldwherepeoplewouldcharitablygooutoftheirwaytohelpothersinan
emergency.Snyder(2009)usesadeontologicalexplanationsuggestingthatmerchants
haveadutyofbeneficencetomaintainusualpricesandnottotakeadvantageofconsumers
indistress.
Sandel(2009)suggeststhefollowingaboutpricegouging,“Greedisavice,abad
wayofbeing,especiallywhenitmakespeopleoblivioustothesufferingofothers.More
thanapersonalvice,itisatoddswithcivicvirtue.Intimesoftrouble,agoodsocietypulls
together.Ratherthanpressformaximumadvantage,peoplelookoutforoneanother.A
societyinwhichpeopleexploittheirneighborsforfinancialgainintimesofcrisisisnota
goodsociety.Excessivegreedisthereforeavicethatagoodsocietyshoulddiscourageifit
can.”
15Seehttp://www.forbes.com/sites/harrycampbell/2015/08/05/would-uber-be-betterwithout-surge-pricing/2/
16ForexampleJebBush,http://www.ontheissues.org/2016/Jeb_Bush_Energy_+_Oil.htm
andChrisChristie,http://business.time.com/2012/11/02/post-sandy-price-gougingeconomically-sound-ethically-dubious/
13
InthissectionIwillsuggestseveralreasonswhypeopleareledastraybyfaulty
logic.Thefirstreasonisbecauseprofiteeringitselfisgenerallyheldinlowesteemby
manypeople.Profiteeringimpliesgreedandgreedisviewedasunethical,immoralor
evensinful.Thesecondreasonisbecausethewindfallprofitcomesfromthosewhoare
sufferingfromanunexpectedoremergencysituation.Itseemsunfairtochargethosein
distressmorethanusualsincethatseemstoonlyaddtotheirburden.Andfinally,allowing
highpricesmeansthatwealthyindividualscancontinuetopurchasethescarceproducts
butpoorerindividualssuffermorebecausemanycannotaffordthehigherprices.Itseems
inequitabletomostpeopleifthewealthyhavegreateraccesstonecessitiesthanthepoor.
Let’sconsidereachoftheseinturn.
3.1AgainstProfiteers
Thereasonprofiteeringisheldinlowesteemisbecauseitisbadinmany
circumstances.Forexample,ifproductionorconsumptionisbesetbyexternalityeffects,
thenprofitseekingmerchantsmaydogreatcollateraldamagetoothers;aswhenindustrial
plantspollutetheairandwater.Or,ifmarketshavesupplyconcentratedinthehandsof
onlyafewcompaniesratherthanbeingfreelycompetitive,thenincomemayalsobecome
concentratedinthehandsoftheprofitseekingmerchantstherebyexacerbatingincome
inequality.Ifmarketparticipantsarenothonestaboutthenatureoftheirproductsor
engageinanykindofcoerciontoforceatransaction,thenprofiteeringoccurswhile
underminingthewellbeingoftheconsumers.Recognitionofthesecommonmarket
occurrencesresultsinageneralmistrustofself-interestasanappropriatemotivatorfor
14
economicactivity,somuchso,thatforsomeobserversthepursuitofself-interest,orgreed,
inamarketsettingisperfunctorilycondemned.
Ifgreedleadstoanyofthesecommonbusinesspracticesthenprofiteeringisworthy
ofcondemnationbecauseefficientmarketswillonlyarisewhenagentspursuetheirself
interestwhilerespectingpropertyrights,fulfillingpromises(contracts),providingaccurate
informationtocustomerssotheycanmakeinformeddecisions,donotmonopolize
resourcesorsupplyinamarket,anddonotinduceanyexternalityeffectsupontherestof
thecommunity.Violationofanyoftheseconstraintsresultsinamarketimperfectionand
therebygeneratesinefficientandunfairoutcomes.Itisappropriatetoregulateanyof
thesepracticesbecauseself-interestalonewillnotsustainfairallocationsandanefficient
market.
Inthecaseofprofiteeringinemergencysituations,however,itisimportantto
recognizethatnoneofthesemarketimperfectionconditionsapply,unlessbychancethey
appliedbeforetheemergencyaswell.Inotherwords,thesuddenchangeinsupplyand
demandconditionsdoesnotreducecompetition;therearestillnumerousservicestations,
hotelsandsupermarketscompetingagainsteachother.Thesuddenchangedoesnotcreate
anynewexternalities17anditdoesnotinspiredeceptionortheftbytraditional
merchants.18
17Rapp(2005)suggestsanovelnegativeexternalitycausedbydisasters,namelythe
breakdownofareaATMmachinesreducingcashflowforconsumersandbusinesses.This
isunlikelytobearegularoutcomeinallemergenciessituationsthough.
18Emergenciesdoinspireentrybyfraudstersattemptingtoprofitfromthoseindistress.
Forexample,somewillclaimtobecollectingmoneytohelpemergencyvictimswhenin
facttheyarenotengaginginanysuchservice.Greedthatinspiresthisbehaviorisdifferent
fromtheself-interestthatinspirestraditionalmerchantstoraisepricesofscarcegoods.
Whenaservicestationownersellsgasolineinanemergency,theconsumerisreceiving
preciselywhatisexpected,albeitatahigherprice;thereisnodeception.
15
Thus,profiteeringbymerchantssellingscarcegoodsandservicesisnotoneofthe
circumstancesinwhichmarketsfail.Instead,asshownabove,thisisoneofthesituations
inwhichthemarketdoesaremarkablyeffectivejobinallocatingthescarcegoodsfairly
andhelpingtoeliminatetheshortagemorequickly.Inthiscasethemarketworksjustas
isimaginedineconomictheory.
Thus,oneimportantsourceofpublicmisunderstandingisthatpeopledonotmake
theappropriatedistinctionsbetweenfairandunfairprofiteering.Thisisamistakethat
Sandel(2009),quotedabove,makes;believingincorrectlythatallcasesofprofiteeringare
thesameandworthyofcondemnation,includingtheprofiteeringseeninemergency
situations.19
3.2Don'tAddInsulttoInjury
Significantlyhigherpricesinemergenciesseemespeciallyegregiousbecausethe
peoplewhomustpaythehigherpricestotheprofiteeringmerchantsarealreadysuffering
fromthenegativeimpactsoftheemergency.Itseemsthatthemarketaddsinsulttoinjury.
Infactthough,somethingverydifferenthappens.Inthesesituations,thehigherprices
actuallyservethepeopleinthemarketbysendingtheappropriatesignalofsudden
scarcity.Thatsignalforcesconsumerstoself-assesswhethertheirownneedforthegood
isashighasthecurrentpriceandinspiresalternativesuppliersinotherregionstomove
productsintothearea.Theseresponsesarewhathelpeveryonebyallocatingtheavailable
suppliesfairlyfromgreatesttolowestneedandbyreducingthescarcitywithnewsupplies.
Thus,whileitmayseemasthoughpeoplearebeinginjuredevenmorewiththehigh
prices,itiskeepingpriceslowthatwillincreasethedistressofthepeopleinneed.A
19SeeSuranovic(2015)foramethodofdelineating“goodgreed”from“badgreed.”
16
shortageisoccurringforreasonsoutsidethecontrolofthemerchantsorconsumers.The
shortagewillnecessitatethatsomepeoplewillhavetogowithoutamuch-desired
commodityorserviceforsomeperiodoftime.Theissueishowtoallocatetheavailable
supplyinafairmannerandhowtoeliminatetheshortageasfastaspossible.Onboth
issuesthefreemarketdoesabetterjobovercomingtheemergencythanthemorepopular
response.
Themarketresponsealsoenablesmorepeopletoshareinassistingothersinthe
emergency,sometimesinverysurprisingways.Forexample,whenpricesriseinthe
affectedareas,profit-seekingmerchantswillshiftsuppliesfromunaffectedareasto
affectedones.Intheunaffectedareasthiswillreducesuppliessomewhatandmaycause
increasesinprices.Inessencethepeopleinnearbyunaffectedareaswillhelppayforthe
quickerresupplytotheaffectedareas.Ifpricesarenotallowedtorise,thensuppliesare
notshiftedfromnearbycommunitiesandthusthepainandsufferingisconcentratedmore
onthepeoplesufferingfromtheemergency.20
Theideathatbypursuingone’sownbestinterestinamarketonecan
simultaneouslydogoodforothersandthatgoodsandserviceswillbeallocatedtoserve
thegreatestneedsofthepeoplewithoutanysortofcentraldirectionorregulationis
extremelycounterintuitive.Itiswhytheoperationoftheinvisiblehandissoremarkable
whenitdoeswork.However,thisresultisonlyassuredwhencertainassumptionsare
valid.Thecasesofsurgepricingareperhapsthebestexamplesofsituationswherethe
assumptionsareindeedfulfilled.Andyet,thesearealsothesituationswherethecasefora
freemarketismostoftenmisunderstood.
20SeeGiberson(2011)foragooddescriptionofthisphenomenon.
17
3.3ProtectingthePoor
Finally,wemustconsidertheissueofequityacrossincomeclassesinashortage
situation.Onefinalcomplaintofthegeneralpublicwithregardtolargepriceincreasesis
thatitservesthewealthyattheexpenseofthepoor.Wealthypeoplecanpaythehigh
pricesandwillnotsufferasmuchaspoorerpeople.Whenonecomparesthesituations
carefullythisturnsoutnottobecompletelyaccurate.First,withhighpricesthewealthy
willbeinclinedtoeconomizeontheirpurchasesjustlikeeveryoneelse.Theywill
recognizethatnewsupplieswillquicklylowerthepricesinsubsequentdaysandwillbuy
onlyasmuchasneededeachday.Thatwillleavemoretogoaroundforothers.Secondly,
whenpricecontrolsareineffect,thewealthywilloftendevisealternativewaystoassure
theyreceivethesuppliestheyneed,whichonlyaddstoextraprecautionarydemands.For
example,whenlonglinesformatgasolinestations,thewealthyhavebeenknowntohire
multipleindividualstowaitingasolinelinestoassureanadequatesupplyforthemselves.
Thistechniqueandothersusuallyassurethatthewealthyremainadvantagedevenwhen
thepricesremainlow.Third,itismistakentothinkthatpoorerindividualsare
automaticallybetter-offwithlowerprices.Keepingpriceslowresultsinconsiderable
waitingtimesforrichandpooralikeandlimitstheamountofgoodsonecanpurchaseeach
time.Forexampleconsiderapersonwhomakes$100perdayatajobbutneedsafulltank
ofgaseachdaytomakeworkingpossible.Ifhisusualdailycostforgasis$30thenhisnet
payisjust$70.Intheemergency,ifthepriceofgasdoublesthenhisnetdailypaywillfall
to$40($100-$60),buthecanstillworkandhisearningsarestillpositive.Incontrast,if
thepriceiskeptlowinorderto“benefit”him,hemayspendhalfthedaywaitinginline
onlytogetaninsufficientamountofgasduetothequantityconstraintandmaynotbeable
18
toworkforseveraldays.Inthiscase,helosesmoremoneywiththepricecontrolthanhe
wouldwiththepriceincrease.Sincenewsupplieswilleliminatetheshortagemore
rapidly,thetotalnumberofdayswithlowernetincomewillbereducedaswell.Note,that
hewillnotbehappyaboutpaying$60adayforgasoline,buthewillstillbebetteroff
earningsomethingratherthannothingeachday.
Finally,considerthecaseofademandsurgeforservicessuchasforUbertaxis.In
thiscasewhensurgepricingisineffect,itistruethatmoreofthewealthywillreceivethe
quickridessincetheyhavetheabilitytopaymore.However,foreachofthesehigher
pricedrides,thelowerincomedriverswillearnextraincomecomingdirectlyfromtheir
wealthycustomers.Thus,surgepricingfacilitatesanautomaticredistributionfromricher
consumerstopoorerUberdrivers.Furthermorewithoutsurgepricingineffectonlythose
lesswealthyindividualswhoareluckyenoughtogetthelimitednumberofrideswill
benefit,whilemostotherlesswealthyindividualswillbelessluckyandwillnotbenefit.
3.4AMoralDuty
Letmereturntothegeneralargumentinsupportofpricecontrolstoprevent
profiteering;theideathatmerchantshaveadutytobebeneficentespeciallyintimesof
emergencies.Thisseemsareasonablecompassionateresponsethatwewouldwishpeople
tohavewhenotherareindistress.However,itisbasedonthefalseimpressionthat
keepingthepriceslowinthesesituationsissomehowhelpfultoothers.Asshownabove
though,lowerpriceswillnoteliminatetheshortagebutwillinsteadextendthedurationof
theshortage.Lowerpriceswillcreatelinesforscarcegoodsandneedlessandcostly
waiting.Panicbuyingwillguaranteethatsomeportionofthehighlyneededgoodsand
serviceswillgotopeoplewithlowneedswhileotherswhohavehighneedwillgowithout.
19
Lowerpriceswillhurtbothrichandpoorbutwilllikelyhurtthepoormore.Onlyafew
random,luckyindividualswillbehelpedbykeepingpriceslower.
Itispuzzlingthentosupportadutythatwillmakeoutcomesworseforalmost
everyoneinvolved,allocatehighlyneededproductsonthebasisofluck,inspirewidespread
panicandthehoardingofgoodsbythosewithlesserneed,andextendthelengthofthe
emergency.Amoraldutytodosomethingshouldnotrestonsatisfyingtheanalytical
errorsofthegeneralpublic.Itwouldbesimilartoarguingthatdoctorsaremorallybound
toprescribeanantibioticforapatientwithavirussimplybecausepatientsmistakenly
believethatantibioticscanbeeffectiveinthesecases.Alternativelysupposewe
discontinuetheallocationsystemfororgantransplantslikekidneysandhearts.Insteadof
allocatingonthebasisofgreatestneed(aspriceswoulddointhemarketswedescribe
here)supposetheorganswereallocatedfirst-come,first-servedleavingmanywithhigh
needforanorgantodieinstead.Ofcourse,theconsequencesofmisallocatinggoodsand
servicesinemergenciesarenotassevereasmisallocationsoforgans,buttheprincipleis
thesame.
4.AProposalforChange
Ineconomicsthetheoryofthesecondbestsuggeststhatwhenamarket
imperfection(orfailure)ofanysortispresentthereareoftenmanywaysinwhichpolicy
intervention(taxes,subsidiesorotherregulations)canbeimplementedtoimprove
economicefficiency.21However,inchoosingbetweenpolicies,thefirst-best(oroptimal)
interventionistheonethatistargetedmostdirectlyattheimperfectionitself.
21LipseyandLancaster(1956).
20
Ifonebelieves(incorrectly)thattheimperfectioninthemarketistheinappropriate
pricingbymerchantscreatinganunfairoutcome,thenonesolutiontoovercomesurge
pricingconcernsisforgovernmenttointervenebyregulatingthemarket.Thishasbeen
accomplishedbycontrollingpricesinthetaxiindustryinmanycitiesandbyimplementing
pricegouginglaws.Theregulatedtaxisolutionimposesaveragecostanduniformpricing
acrossdriversandacrosstimetokeeppricesconstantregardlessofthesupplyand
demandconditions.22Inthecaseofshortagesinemergencies,governmentalsodoes
sometimesintervenetoimposepricegouginglawsthatlimittheallowablepriceincreases.
Althoughbothpolicieswillassuageirritatedconsumers,theydosobyimposingadditional
costsoneveryone.Inotherwords,toobtainasenseofjusticeeveryonewillsuffer
additionalburdensandeconomiclosses.
However,thetrueimperfectioninthemarketisnotunethicalbehavioronthepart
ofthemerchantscharginghighpricesbutratheristheimperfectinformationonthepartof
thegeneralpublicabouttheeffectivenessofthefreemarketintheseparticular
circumstances.Thispublicmisunderstandinginspirespeoplebothtoreactstronglyand
negativelyagainstmerchantswhoraisepricesandtosupportpricecapsandpricegouging
legislation.Thisreactionresultsinagreatlyinferior(efficiencyisreduced)andunfair
(productsarerandomlyallocatedtosomewithverylowneed)outcome.
Thefirstbestpolicyinthesesituationsissimpletostatebutdifficulttoimplement.
Ifthesourceoftheproblemisthepublicmisunderstandingofhowthemarketworks
effectivelyinthesesituations,thenthemostdirectsolutionistochangethepublic
22EdwardGallickandDavidSisk(1987)explainthehistoricaljustificationfortaxiprice
regulationinwhichdriversarerequiredtochargeauniformpriceequaltotheaveragecost
ofatrip.
21
understanding.Buttoaccomplishthis,manypeoplewouldsomehowneedtorecognize
thatthosewhoseektoprofitinaturbulentmarketenvironmentactuallyprovideapublic
service,despitethewindfallgainstheyenjoyfromthosewhoaremadevulnerablebecause
oftheemergency.
Buthowdoesoneinducethepublictochangetheirattitudes?Onemethodisbetter
educationineconomicscourses.Traditionaltextbooksdonotadequatelyhighlightthe
marketfailuresassociatedwithunethicalbehavior.Theyalsodonotemphasizehowselfinterestandprofitseekingbehaviorworksforthesocialgoodonlywhentheseethical
constraintsaremaintained.Morecomprehensiveteachingoftheseideasmayencourage
morepeopletounderstandthefullconsequencesofthedamaginggovernment
interventionsinthesecases.However,itseemsunlikelythatthiscouldhavemuchofan
impactanytimesoon.
Asecondmethodisforthepublictoexperiencehowthingscanworkwhenthefree
marketprevailsinthesetypesofsituations.Uber’srecentuseofsurgepricinginmany
marketsisprovidingthatexperiencetoUberusers.IfUberissuccessfulinitspublic
relationscampaigntoexplainthebenefitsofsurgepricingthenanewgenerationofpeople
maylearnwhypriceincreasescanamelioratemarketshortagesmoreeffectively.Other
businesseshavebeguntousesurgepricingincludingtheairlineandhotelindustrieswhere
peoplehavealreadylearnedtoacceptthatpriceswillbehigheratpeaktimesandthat
discountsareavailableinperiodsoflowerdemand.EvenDisneythemeparksmaysoon
22
beginimplementingsurgepricing.23However,theseconsumerexperiencesareunlikelyto
carryoverdirectlytoattitudestowardspricinginmoresevereemergencysituations.
Inemergenciesmostpeopleareunawarethatthelonglinesandpanicbuyingis
causedbythereluctanceofmerchantstoraiseprices,whichinturniscausedbypublic
indignationatprofiteering.Onepossibilitythenisformerchantsinlocationswhereprice
gouginginnotyetillegaltoagreetopricetomarketbutatthesametimetosoftenthe
expectedmoraloutragebypubliclyannouncingthatallextra-normalprofitswillbe
donatedtolocalemergencyreliefcharities.Thiscouldenabledynamicpricingtoprevailin
anemergencyandprovideanopportunityforthegeneralpublictolearntheeffects
throughexperience.Forexample,theywillwitnessthedisappearanceoflonglines,the
eliminationofthepanicbuyingandthemorerapidrecoverytime.Theirangerat
profiteeringmerchantswillbeassuagedbythemerchants’publicpronouncementsof
charitablegiving.
Ofcoursethissolutioncreatesanewproblem.Ifmerchantsdonatetheextraprofit
tocharitythentheyhavelessincentivetoquicklyredirectsuppliestotheemergencyareas.
Remember,itistheopportunitytomakeagreaterprofitthatwillinspiretherapid
movementofreplacementresourcesintothearea.Onewaytopartiallyresolvethisissue
isformerchantswhoarepermanentlylocatedintheemergencyarea,andwhowould
potentiallysufferfromthenegativereputationeffectsofprofiteering,topublicallypledge
theirextraprofittocharity.However,merchantswhodonothaveapermanentpresence
andwhomoveproductsintotheareafromoutsidemightnotmakeasimilarpledge.This
23Seehttps://www.yahoo.com/travel/disney-considers-new-pricing-structure1295103128952886.html
23
allowsforsomeoftheresupplytotakeplacebythosewhowouldnotsufferfromany
negativereputationeffects.
Anideallearningopportunitycouldbealsocreatediftwoneighboringstatesthat
arelikelytobehitsimultaneouslybythesameemergencycouldtaketwoapproaches;one
implementingpricecontrolsandtheotherencouragingthefreemarket.Forexample
NorthandSouthCarolinamayonedaybehitequallybythesamehurricane.Theoneusing
thefreemarketwouldneedtorunapublicrelationscampaignbeforehandtoexplainthe
experimentandperhapsalsoencouragemerchantstopubliclypledgesomeprofitshareto
charities.Ifadisaster,suchasahurricane,strikesbothstatesequallythiswouldallow
peopletoseeforthemselveshowthetwostates’experiencescompare.Itwouldalso
enableresearcherstomeasurethedifferencesintheoutcomesbetweenthestatesand
provideamorecompleteevaluation.
Iftheseadjustmentsweremadeandifthegeneralpublicwitnessesthepositive
effectsoffreemarketallocationtimeaftertimeinemergencies,thenthepublicmay
eventuallylearnthatmarketscanbeeffectiveinthesesituations.Intimepeoplemaybegin
toacceptthatpricesofscarcegoodsriseinemergencies.“Ofcoursetheyrise”peoplewill
say.“itisnotonlynaturalforthepricestorise,itisalsobeneficialforall.”Oncepublic
sentimentchanges,merchantsmayrecognizethattheynolongerneedtopledgetheir
profitstolocalcharities,however,aftersomeyearsofdoingso,merchantsmaydevelopa
charitablehabitandcontinuewiththepracticenonetheless.Actingonself-interestin
businessdoesnotmeanthatonecanneverbecharitabletowardsothers.
24
5.Conclusion
Freemarketswillworkveryeffectivelytoallocategoodsandservicesfairly,
meaningintheorderofhighesttolowestneed,whencertainconditionsorassumptionsare
fulfilled.Amongthesearetheethicalassumptionsunderpinningallvoluntarytransactions
includingrespectforproperty,andhonestbehavior.However,themarketalsorequires
oneothercriticalthingtoworkeffectively:itrequiresthatmarketparticipantscooperate
willinglyintradeatthepricessetbythemerchants.Whenmarketconditionschange
suddenlysuchthateithersupplyfalls,demandrises,orboth,thenrationalprofitseeking
merchantshavegoodreasontoincreasetheprice,sometimessubstantially.Themarket
incentivetodosoishigherprofit.However,ifconsumersofproductsreactadverselyto
thepriceincreasesandtheprofitmakingbyexpressingillwillandangertowardsthe
merchants,or,iftheypetitiongovernmentorintervenetoprotectthemfromtheprice
increases,thenpublicreactionwillinduceaninferioroutcomeinwhichvirtuallyallmarket
participants,withtheexceptionofafewluckyones,willbemadeworseoff.Inthiscase
themarketdoeshaveanimperfectionbuttheimperfectionthatrequirescorrectingisnot
thebehavioroftheprofitseekingmerchantsbutratherthepublicmisunderstandingabout
theeffectivenessofmarketsinthesecircumstances.
Whenconsumershavealegitimatecomplaintaboutthefunctioningofamarket,it
makessensetoaccommodatethedesiresofconsumersbyintroducingregulationsor
controls.Thismakessensewhenconsumersdespairbecauseofnegativeexternality
effectsaswithapollutingindustry.Italsomakessensewhenconsumersfretabouthigh
pricesinaconcentratedindustry.However,intheparticularcircumstancesdiscussed
here,Uber’ssurgepricingandresponsestonaturaldisasters,themarketimperfectionis
25
thepublicmisunderstandingaboutmarketeffectiveness.Inthiscase,thefirstbestsolution
istoworktochangepublicopinion.
Governmentcanplayarolehere,buttheroleshouldbetohelppersuadepeopleof
theappropriatenessoffreemarketsinthesecircumstances.Thisisnotanew
phenomenon.Forexample,governmentshaveoftenimplementedpublicservice
campaignstoencouragepeopletoactdifferently.Amongthesearepublichealth
campaignstodiscouragesmokinganddrugusage,towearseatbeltsandtoavoiddrinking
anddriving.Governmentcanandshoulddothesameinthecaseofsurgepricingandprice
gougingatleastinsomelocationssothatpubliclearningcanoccur.Thispapersuggests
thatthebestwaytoconvincealargenumberofpeopleisthroughdemonstrationeffects.
Uber’ssurgepricingexperimentssetanexample.Ifonlyoneortwostatescouldsupport
theprogramdescribedhereinthecaseofemergencies,thencitizensinthosestatesand
manyotherswhowatchfromafarcouldlearnhowmuchmoreeffectivemarketscanbe.
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