You're Probably Willing to Price Gouge (and That's OK!)
Imagine that Walt is gently swaying in a hammock on a well-deserved vacation day when his phone rings. It’s his boss. She tells him that his co-worker has an emergency and can’t come into work. Although it’s last minute, she asks if Walt would be willing to work today—otherwise, the store will be too short staffed to open.
Walt says, “Look, I’m enjoying my time off even more than I thought I would. And, as you know, I’ve been looking forward to this vacation day for a month and I’d really rather not come in. But I’ll tell you what—if you give me double pay for the day, I’ll put down the lemonade and get to work.” His employer agrees given that the benefit of opening the store exceeds the cost of Walt’s extra pay.
I suspect that most of you can relate to Walt and, indeed, find yourself sympathetic to his situation—it doesn’t seem like it’s wrong for him to insist upon something extra for breaking up his vacation to clock in at work.
Notice, though, that Walt is guilty of “price gouging.” A wage is just the price of labor, after all. And here Walt is taking advantage of the shortage of labor and raising his “price.” But it also seems like he is making a reasonable ask.
For one, Walt has the right to ask for double pay to come in on his day off. Here’s the argument:
If Walt is within his rights to not work at all on his day off, he is within his rights to work for double pay on his day off.
Walt is within his rights to not work at all on his day off.
So Walt is within his rights to work for double pay on his day off.
What can be said in defense of the first premise? Consider that, from his employer’s perspective, Walt’s offer of expensive labor is no worse, and potentially better, than an offer of no labor. If she rejects his offer of expensive labor because it wouldn’t benefit her, she’s no worse off than if Walt had not offered to work at all. If she accepts the offer because it would benefit her, she’s better off than if Walt had not offered to work at all.
As for the second premise, I’d imagine everyone agrees that Walt is within his rights to not work at all on his day off. It’s surely generous for him to come him, but it’s not as though his employer (or the government) may force him to come in. So we should conclude that Walt is within his rights to “wage gouge.”
Moreover, allowing Walt to “wage gouge” has good consequences. If he didn’t have the right to ask for double pay, he’d have stayed in his hammock. And this outcome would have left both Walt and his employer worse off. Walt would be worse off because he wouldn’t receive the pay that he values more than his day off and his employer would be worse off because she wouldn’t be able to open the store, which is something she values more than the double pay she’d give Walt.
If you think that these reasons justify Walt in asking for double pay, you should think that they also justify more traditional cases of “price gouging.” For instance, it seems as though people are within their rights to not offer any ice at all to those at a disaster site (although it might be the generous thing to do). That is, the government doesn’t have the right to force Walt off of his hammock to buy and transport bags of ice to the site. And if Walt may offer no ice, he may offer high-priced ice—it either makes prospective buyers better off, in which case they’ll buy it, or no worse off, since they can simply refuse the offer. Moreover, the opportunity to make an unusually high amount of money can motivate Walt to get off the hammock and bring the ice to those who need it. Although we more readily empathize with “wage gougers” than “price gougers,” we have equal reason to permit both.
This post first appeared on EconLog.
Perception of fairness is an important aspect of functioning markets too. People are happy to participate in a market with well-enforced contracts because they perceive it as fair.
If, for example, upon purchasing a new iPhone from the Apple Store it was revealed to be an older model in a newer box, consumers would be rightly angry, even if they had agreed to getting that phone in the fine print. Apple of course would never do this, since the risk to their reputation would exceed anything they could hope to gain, but the same dynamic doesn’t really work in price gouging during a disaster scenario.
People raising prices in a disaster give the impression that they are benefiting off the desperation of others (which is true). Although they may make the people better off had they not had the ice in the first place, they create the feeling of an asymmetrical deal, where the beneficiaries are only in that position of superior bargaining power because of some misfortune that has befallen the other person. Under normal circumstances, the ongoing reputation risk discourages “unfair” behavior, but under one-off disasters there’s no reputation to preserve, making “unfair” market behavior, that would usually be punished in a free market by consumers not purchasing the good or service anymore, squeeze by.
I’d probably sign away my entire net worth if it meant getting a glass of water minutes before dying of thirst, but that wouldn’t stop me from feeling incredibly resentful about it. And I certainly wouldn’t be thanking the guy for taking advantage of my temporary misery.
It’s the same reason a market may not be particularly good at regulating food sold at rest stops. Most customers will never return, so the restaurant can get away with providing lower quality (or even sickening) food, as their reputation is always back to neutral when new people stop for lunch on a journey. The market dynamic that normally incentivizes fair-dealing (an incredibly important perception for their to be efficient markets), disappears, without some regulatory body like the FDA verifying the food is safe to eat.
Markets are great, but there are some circumstances on the margins where the normal logic doesn’t hold.