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Price Gouging at the Supermarket

By: Frank Yunker

Date: 2018-03-15

Itís time to explain what price gouging is and what it is not.

Imagine a scene. A can of store-brand coffee sitting on a shelf for six dollars. Next to it is a can of gourmet-brand coffee selling for twelve dollars. What we have is not price gouging. Itís competition. Is one cup of quality, gourmet coffee worth 2 cups of average, nothing-special coffee? The choice is yours. Itís a voluntary exchange. Buy one or the other. Or neither.

Imagine you go home without coffee because even $6 was too much for coffee. You brew a cup of tea and halfway through the cup you are finally awake enough to realize that you really do want the $6 store-brand coffee. Back to the store you go only to find the store-brand coffee is sold out. The only thing left is the $12 gourmet coffee. Thatís not price gouging. Itís unfortunate, but itís not gouging. Sometimes youíve got a $6 wallet in a $12 world. We canít all afford everything.

Every argument could be made to allow the shopkeeper to let the law of supply and demand to dictate the price. Price is a signal to the market. Price tells you what to do. It also tells other people Ė suppliers and demanders Ė what to do.
Letís imagine the shopkeeper raises the price to $20. Now, thatís price gouging. If the coffee keeps flying off the shelf then itís probably better called ďentrepreneurship.Ē If people willingly pay the price, then the price is not too high.

But letís say the $20 coffee sits on the shelf unsold. Should there be a law that requires the shop keeper to lower his price? That sounds a little over-bearing. The government should not tell you what to sell and at what price. What happens, then?

Prices create a signal to the market. That is how it becomes clear which items are in short supply. And what items are high value. The price and the marketís reaction to that price signals both consumers and the shopkeeper.

The shopkeeper needs to convert that can of coffee to cash. He canít buy a chicken and ribs dinner with a can of coffee. He needs to convert it to cash. If it does not sell at $20, then he will eventually need to drop the price to $19. If it still doesnít sell, he will need to drop it again to $18.
Meanwhile, other actors in the market might just use price to foreshadow a change in their behavior. Imagine your next-door neighbor bought that $6 can of coffee when it was still $6. He offers you a half can for $6. He will get all his money back and still have a half-can of coffee for free.

Whether you accept his offer is up to you. Itís a voluntary exchange. Youíd be buying average coffee for the old price of gourmet coffee. That, too, is a signal. The shopkeeper will realize his $18 price is still too high. With former buyers now becoming sellers, the market is changing. Itís getting more competitive. And with that, the price will drop again to $17. Or $15. Or $12. Half-cans might be selling for less $5. All that supply is moving back into the market for a reason. Price signaled it was needed.

While all this is happening, there is more intrigue afloat. People talk. In economic terms, the free exchange of information is vital to the free market. Imagine a whisper campaign against the shopkeeper. No a planned boycott with signs and chanting and reckless media coverage. Instead, just imagine people talking to their neighbors. I wouldnít readily keep going to a shopkeeper that treats his steady, loyal customers that way. Maybe Iíd spend the $20 on coffee Ė depends on my level of desperation Ė but I know Iíd begin looking for a new shopkeeper. And so would everyone else I talk to because Iíd let them know how greedy the shopkeeper was during the shortage.

People remember. The shopkeeper might make a profit today and lose all his customer base tomorrow when the shortage is eliminated and the market returns to normal. With the threat of losing business long term, the shopkeeper may be a bit reluctant to spike the price.