[L]ike millions of other people up and down the East Coast, we stocked up this weekend on peanut butter and crackers and powdered milk and bottled water and cans of beans and tomatoes and tuna. The prices for all those things were the same as they always are…
Even in states without price gouging laws, most stores won’t raise prices for generators or bottled water or canned food. Which raises a question: Why? Why doesn’t price go up when demand increases? Why don’t we see more price gouging?
The people Kahneman surveyed said they would punish businesses that raised prices in ways that seemed unfair. While I would have paid twice the normal price for my groceries yesterday, I would have felt like I was getting ripped off. After the storm passed, I might have started getting my groceries somewhere else.
Businesses know this. And, Kahneman argues, when basic economic theory conflicts with peoples’ perception of fairness, it’s in a firm’s long-term interest to behave in a way that people think is fair.
The reasoning of the store is an impeccable rational choice strategy: even if the store owner wants to make money in the short run, he forgoes the extra profit in the short run to make money in the long run. That is, even if he is not altruistic, he plays the same strategy as the altruist by refraining from price gouging. That leaves the consumer. In one version, suppose the consumer does not know if he is dealing with an altruistic store owner or a “rational” player. If the store price gouges, the consumers learns the store owner is not an altruist as an altruist would never price gouge. The consumer cares about the future, like the store owner. Since the store owner is rational, he may cheat the consumer sometime in the future. This could be because of end game effects when the store owner is desperate for cash or because he thinks he is has lost the consumer’s long run business so they have switched to a “bad” equilibrium of the repeated game. (This is standard repeated game reasoning in the style of Abreu-Pearce-Stacchetti or Fudenberg-Levine-Maskin or reputation reasoning in the style of Kreps-Milgrom-Roberts-Wilson.) So, the consumer rationally does not buy in the future from a store that price gouged him in the present not because of unfairness but because he will be cheated by the store owner. So the store and consumer strategies hang together as an equilibrium based on rational choice principles.
This narrative should be added to the storybook of rational choice analysis as well as behavioral economics alternatives.
Cheap Talk 
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October 30, 2012 at 9:28 am
jhe
I would put in an exception for oligopoly behavior. I think the institutions which have oligopoly / near monopoly positions seem to do things that seem like they’re trying to screw their customers all the time (cf. credit card issuers, phone service providers).
Competitive markets, sure. Oligopoly markets… not all the time or even most of the time.
December 1, 2012 at 11:18 pm
Cos
These books were free when the post was made and they were free into the morning hours. This is why we post free books when we first find them and sggseut that you get the free offerings as soon as possible.
October 30, 2012 at 2:32 pm
Patrick R. Sullivan
That well established retailers won’t serve their customers by increasing their costs (and passing them on) is understandable, they have a long run outlook, and can afford to pass on short run profits.
This makes anti-gouging laws doubly idiotic. With the normal channels non-functioning we need incentives to draw in the quick buck artists in their pick-ups and station wagons to fill the gaps. They need to believe there’s money to be made by finding needs and filling them.
March 4, 2013 at 5:53 pm
Raziq
With regard to the qutieson of late filing of a fax to the EPO (I assume that this was for the filing of a debit order), OJ EPO Special Edition 5/2007, page 200 explains that in such cases an extension under Rule 134(1), last sentence applies where the transmission of documents by technical means (inlcuding fax) are affected by a technical interruption in the service. The extension under Rule 134(1) is, in theory, automatic.What I would suggest in such cases is to telephone the EPO formality officer for the file and enquire if there is a disruption in the centralised fax receipt service. If there is, then you can try again the following day by fax and if this fails again repeat the procedure once per day until the fax is successfuly sent.Keep any documentation from your fax machine which shows that your transmission to the EPO failed. If the EPO then issues a communication of a loss of rights under Rule 112(1), you can request a decision under Rule 112(2), citing this documentation as evidence that the time limit should have been extended under Rule 134(1) to the first day when the fax service resumed (which must also be the day when the fax was sent).As a precuationary measure, in case the decision under Rule 112(2) does not go your way, you can request further processing as an auxiliary request (provided this is not excluded by Rule 135(2)) and authorise deduction of the necessary further processing fee in the event that the decision under Rule 112(2) does not go your way (see also J23/96, where the Legal Board allowed a party to have a main request under Rule 112(2) and an auxilliary request for re-establishment).It is a cumbersome procedure I know, but it can be handled by secretarial staff rather than the agent her- or him-self and it avoids a 50% surcharge on the late paid fee for requesting further processing.If there is not a general interruption in the EPO fax service, then it may be your telephone service provider which is experiencing problems in which case epoline is probably your only option if this is not an opposition or appeal case(and assuming your fax and Internet connections are not interlinked).Hope this helps, best regardsMad_as_a_hatter
October 30, 2012 at 3:59 pm
Price gouging: Can economics justify a price cap? | Knowledge Problem
[…] Sandeep Beliga, Cheap Talk, adds, “Why is there no price gouging in NYC?“ […]
October 31, 2012 at 8:12 am
Michael Giberson
As an empirical matter, price gouging is happening in New York City: http://www.reuters.com/article/2012/10/31/uk-storm-sandy-newyorkers-idUSLNE89U00V20121031
The price of two batteries, which normally cost around $5, had been jacked up to as much as $15 in the few neighborhood bodegas that were open despite the loss of power. “They can get away with this very easily,” [Professor Lee Fleischer] said. “They are exploiting their customers and the community, though.”
At La Delice Pastry Shop, in nearby Kips Bay, the price for a cup of coffee had been raised from $1 to $3. A store clerk said the reason was that they had to use bottled water to make the coffee.
October 31, 2012 at 8:22 am
Michael Giberson
Of course the Reuters story complements the Goldstein story (and also aspects of the Kahneman, Knetsch, Thaler article referenced). The customers roaming the streets seeking out the “few neighborhood bodegas” open are not likely the regular customers at those shops, so the potential loss of future business is small. By comparison, Goldstein’s story referenced a supermarket where his family and others in the neighborhood regularly shopped.
At the coffee shop, the clerk has a cost-based reason for raising the price and KKT report that consumers are willing to accept as fair cost-based price increases that don’t increase the profit margin of the seller.
November 1, 2012 at 9:59 am
Sandeep Baliga
Thanks for the reference to Reuters article. I agree it is consistent with Planet Money article.
October 31, 2012 at 3:28 pm
Assorted Links « azmytheconomics
[…] 1. Why economists love price gouging and why it’s so rare. Sandeep Baliga comments. […]
December 2, 2012 at 3:35 am
Arijanet
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