Internet Goosing the Antithesis

Saturday, November 05, 2005

The price-gouging myth

Let me state this strongly enough : there is no such thing as price-gouging. It is anti-capitalist propaganda, given to us by people who should know better, and some who know better.

Let me put it this way. If the government was in charge of a high demand situation, they would RATION everything. Would anyone complain then if they didn't get what they wanted ? I'm pretty sure most of them wouldn't. And yet when the free market preserves the information about the value of the product, people rage against "price gougers".

What could "price gouging" possibly mean ? Price is a piece of information. It tells us what people agree upon on being the monetary value of a product or service in a given context. If the price is too high, then the seller won't be able to sell, and thus make maximal profit. If the price is too low, then there will be shortages and once again maximal profit will not be attained. So a rational seller has no interest in setting a non-rational price. "Price gouging" can therefore only mean the presence of an irrational seller.

As for the oil industry, you'd have to be an idiot to think that an industry within a market with high competition and low profit margins could possibly act irrationally and stay in business.

Please, if you don't understand basic economics, morality or politics, don't talk about it. You only make people like me mad.

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At 11/05/2005 5:41 PM, Blogger breakerslion declaimed...

I will risk your ire only to state one reality of the free markets as they exist today. The market is driven by forces above and beyond the simple buyer-seller relationship that you describe. Speculators in the "futures" markets will drive the price of a commodity up beyond where market forces would have naturally sent said price. It rarely works the same way in the opposite direction because there is more money to be made by driving a price up than by predicting a price lower than the current one. Futures is in quotes above, because any rational person can tell you that the future does not yet exist. However, speculation takes place in an "as-if" situation, where everyone frantically tries their best to predict future trends. The oil industry sets a price on their finished product according to their best guess as to how much it will cost them to replace the raw materials required to make that finished product. The price of those raw materials is not set by the seller, but rather by the futures market because this normally smoothes out the bumps between supply and demand. When there is an anomaly of any kind, (military coup, or war, or other disruption of supply) the futures market tends to go nuts short-term, "as-if" this anomaly was permanent. This is what can cause windfall profits whenever such an event is shorter-lived than predicted (which is often the case, since the market tends toward pessimism). One can often pay a higher price than hindsight would suggest was reasonable, but the perceived gouging is a product of that hindsight. In the case of a commodity like gasoline, the buyer has limited recourse, since the family probably does not have an alternative to buying, like hitching up the team of oxen to get to work. This makes for buyer resentment when the price is (retrospectively) seen to be higher than was necessary.

At 11/05/2005 7:08 PM, Blogger Francois Tremblay declaimed...

Well, of course. Markets exist within a context of risk. That's true of everything, but especially if you're selling a product. You're risking fluctuations in demand but also fluctuations in the price of the supply. But that doesn't mean it's "gouging".

That reminds me that, with the general hostility to car pollution, people should be complaining that gas prices are not high enough, not too high. Or perhaps it's easier to demand things when you don't have to suffer the consequences.

At 11/06/2005 10:23 PM, Blogger breakerslion declaimed...

There are some people who are glad to see the price of gasoline climb to a point where Joe Average will think twice about feeding the family SUV. Next time, Joe might even buy something more efficient to take his 185-pound carcass to work than a truck that can haul 1000 pounds.

I was not disagreeing with you about gouging, Just pointing out that there are times when the price is set higher than the old storekeep's standard of cost plus markup. This is because cost on commodities like oil are not set on cost of raw materials, but rather cost to replace raw materials, and that is a forecast. When the price of crude spikes up, refiners can avoid the peak by reducing inventory (that was purchased at a lower price), but they still cost their inventory at the going rate. When the price pulls back, they replace inventory, often causing a second, smaller spike as demand-pull drives the price back up. This causes a short-term profit spike that consumers bitch about, but only the stockholders complain when other forces in the industry drive profits down. Forces like replacing inventory and then watching the price of crude fall below what you paid. Now you have to price your product too low in order to compete with refiners who didn't buy at the higher price. Then there is the cost of exploration and drilling, and all those dry holes.



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