What is price gouging and how is it different from typical inflation, dynamic pricing, or the economics of supply and demand?
In: Economics
Price gouging is a very subjective term with no fixed definition in economics. It is usually used rhetorically to push some kind of narrative. Most businesses face decisions daily but in uncertain situations the risks rise dramatically. Questions like
1) Do I have enough inventory to meet projected demand?
2) Will my current supplier(s) encounter additional uncertainties? Can they continue supply at my requirements? Will their prices to me increase due to difficulties from their suppliers?
3) Will I have to consider purchasing raw materials from a new supplier? Will these alternates have supply? What prices will they charge me?
4) Are there other supply disruptions? Will my transportation costs increase? Will my delivery times increase?
5) Can I maintain production? Will my workers require more pay? Are workers going to need to stay home and productivity reduces at my factory? How do I cover fixed costs over lowered output?
6) What is my customer outlook? Will they cancel orders? Or will they order MORE because of increased uncertainties and they need my product just in case? Are there new potential customers because of supply disruption across my competitors?
7) What is my competitor going to face? Can I gain market share? Will they run into fewer difficulties because they have a better supply chain?
All these factors play into current and near future pricing of the products. As uncertainties mount, producers will increase prices to cover these unknown factors. In nearly all cases of uncertainty, producers will try to chart a “safe” path. If they do better than anticipated, their profits rise tremendously. If things turn out bad, their decisions might avert the worst case outcomes.
Few people understand the details of any business – so it is simple to make claims like “profiteering” or “price gouging”. The people running the business usually have a responsibility to maintain their business viability as a duty to their owners.
Latest Answers