Monday, December 10, 2007

Always low prices defeats gougers 

William Polley writes about WalMart and offers of assistance in emergencies. Of course a firm's generosity is dictated in part by a desire to be seen as generous in hopes of improving sales. I am unwilling to denigrate a beneficent act simply because of the benefactor's motives. But Bill goes on with something more interesting:

I think you see fewer stories these days about "guys in pickup trucks" these days. (Though they did at one time exist, and I think they still do. My above-mentioned post has some links in the comments where I point to media discussions of them, though they are getting a bit dated.) But even so, I think the big boxes are still going to fall short of the optimal outcome, meaning the "price gougers" will still exist in the hardest-to-get-to areas.

Here's where the rubber meets the road. There are two reasons that prices can go up. It's either a supply issue or a demand issue. (It can, of course, be both.) In the immediate aftermath of a disaster, the supply of certain items decreases and demand for those items increases. But if a number of large (competing) firms with nearly constant marginal costs and with vast distribution networks can move the supply from one area to another at a low cost, then prices will not rise very much... even if demand increases.

Suppose then that the supply of building materials in the short-run (say, a week, rather than a day or two) has become more elastic because of improvements in distribution networks. Where those networks extend easily thanks to roads, rail and airports, we should see an increase in demand met with an increase in quantity supplied, and a smaller increase in prices. But that does not mean the gougers will completely go away. Indeed, 'gougers' -- which are simply producers sharply increasing marginal costs -- are desirable as those willing to take risks in order to move needed supplies to hard hit, remote areas. They still produce a useful service, but their services are less needed now than fifteen years ago.

Do you call that "hooray for WalMart!" or "hooray for technology!"? I'd say both.