Yes, Price-Gouging Exists, and It’s a Sin

A look at the inherent sinfulness of the libertarian position that there is nothing immoral about price gouging.

From Catholic Stand

By Anthony S. Layne

Denying that price-gouging is a real and infamous practice, you would think, is like denying that gravity exists. However, Kyle Smith tries his best to defend greedy opportunism amid a supply crisis as a natural and normal, even admirable business practice. Inconsistent, shallow, and at times blatantly absurd, Smith’s essay is defective not only as moral philosophy but also as economic theory and business-management reality. Indeed, one would almost think his argument was satirical had not that sober bastion of free-market conservatism, National Review, published it. If it is satire, Smith isn’t ready for The Onion yet.

Fighting Over Toilet Paper

Smith’s argument waves a cheerful goodbye to reality fairly early:

Let’s say stores run out of toilet paper or hand sanitizer or diesel fuel because of panic buying during the age of COVID-19, and no one can find these items in stores. Why people are punching each other over the Charmin while leaving the Robitussin and Tylenol alone is a mystery, but that is of no moment. What matters is that toilet paper is suddenly more valuable simply because demand has surged. That means people are bidding up the price. Or they would be, if the stores allowed this. If Costco quadrupled the price of whatever item is selling out, there wouldn’t be any shortages of anything. Market pricing would restore normal functioning.

That the customers are fighting over toilet paper rather than medicine is significant: It indicates that rational buying behavior has left the building. But the customers aren’t “bidding up the price”; the irrational TP buyers are signaling that they think they need more rolls, not that they’re willing to pay more per roll. If Costco quadrupled their price, the TP buyers would take their fight to Walmart, who would be happy to sell out their inventory and take away Costco’s revenue. Competition helps keep prices reasonable, which is why we discourage monopolies.

Price and Demand in the Real World

Neither Costco nor Walmart has any incentive or responsibility to impose control on consumer demand. They want to sell as much of their product as possible. Their costs of goods sold haven’t increased, nor are they likely to increase. Under ordinary circumstances, they wouldn’t want bare shelves for fear of losing customer dollars to their competitors. But these aren’t ordinary circumstances — their competitors’ shelves are barren, too. And as the supply crisis deepens into a recession potentially worse than the Great Depression, they’ll soon have enough trouble getting customers’ dollars without chasing them off through price-gouging.

Because businesses want to sell as much of their products or services as they can provide, they won’t intentionally pursue a pricing strategy that loses their market. They’ll offer occasional discounts, coupons, and sales to stimulate demand but won’t hike their regular prices to reduce demand. Most goods are supply-elastic; that is, the merchants can buy more or less from producers as they need to maintain inventory. Where supply is inelastic, like hotel rooms, prices will fluctuate more with demand. However, so long as customers can choose to not buy from them, they won’t charge more than the market will bear.

To use one of Smith’s examples of market pricing against him:

Entertainment venues have fixed seating capacities (inelastic supply). It costs Bruce Springsteen a lot more to stage a show at an arena today than at the local music hall 50 years ago. Regardless of how Springsteen feels about scalpers, he still has to sell S number of seats at ticket price T just to break even. If only scalpers bought S or more tickets, Springsteen wouldn’t lose money. But if T is too high for scalpers, Springsteen risks selling < S tickets. Springsteen wants a sold-out house, so he’ll set the highest price that can still get an SRO crowd.

If that price still permits scalping, there’s nothing Bruce can do about it. Whether he likes it or not, Springsteen runs a business. Market pricing just doesn’t work the way Smith thinks it should.

Coercive vs. Non-Coercive: The Hobson’s Choice

Ironically, The Boss’ three-figure ticket prices mean this “blue-collar artist’s” live audiences now mostly consist of well-to-do Boomers and Gen-Xers. Higher prices depress demand because the consumer’s money supply is inelastic and paying more for one good imposes an opportunity cost of at least one other good the consumer can’t sacrifice. Successful scalping depends on would-be concertgoers who have surplus money. Successful price-gouging, on the other hand, depends on customers whose needs are closer to the base of Maslow’s hierarchy (physiological and safety): things they’re less likely to do without, regardless of their money supply.

“Free enterprise — sometimes called capitalism — is a wonderful thing in normal times,” Smith burbles, “because during every non-coercive transaction [emphasis mine], the buyer would rather have the thing he’s buying than the money, and the seller would rather have the money.” In a non-coercive transaction, the buyer has a free choice to not buy from the seller. They can buy from someone else, or they can do for themselves, or they can do without. This is true not just within a capitalist system but in any economic system. Ensuring non-coercive transactions is one reason a fair market requires regulation.

However, free-market libertarians like Smith often have trouble discerning coercion that doesn’t involve a gun or compromising pictures. To them, a Hobson’s choice is still a choice. While the ethical businessperson must build their pricing strategy in the light of the customer’s freedom to not buy, the price-gouger wants that freedom eliminated, or at least weakened. As with blackmail or its more legitimate cousin “greenmail,” the gouger wants their victim(s) more or less over the proverbial barrel. The Hobson’s choice makes the transaction essentially coercive and the inflated price unfair.

Case Study: Turing Pharmaceuticals and Daraprim

In the ideal price-gouging scenario, the seller has a real or virtual monopoly on a good or service that their target customers can’t reasonably avoid buying, creating a captive market. From history, we have the company towns of the late 19th and early 20th century which debt-enslaved their employees through company-owned stores and housing. A more recent example is Turing Pharmaceuticals, whose CEO, Martin Shkreli, limited distribution of the antiparasitic Daraprim to a single source, preventing competitors from developing a generic equivalent, then inflated the price from $13.50 to $750 a pill.

Turing has presented Daraprim-dependent patients the ultimate Hobson’s choice: “Your money or your life.”

To say a patient dependent on Daraprim would rather have it than the money it costs doesn’t make Turing’s price-gouging non-coercive. As an analogy, a woman might rather be raped than killed, but her submission won’t make the sex consensual. Moreover, the 5,556% price inflation contributes to the spiraling costs of an already burdensome insurance market and healthcare system, making secondary victims of us all. But from Shkreli’s (and Smith’s) viewpoint, if $750 a pill is what Turing can legally get, that’s what Daraprim must be worth — the common good be damned.

The Illegitimacy of Price-Gouging

The guy who buys $70,000 worth of hand sanitizer and disinfectant wipes from Dollar Tree and Walgreens with an eye toward price-gouging does the same thing as a hoarder or a ticket scalper. That is, he lessens other buyers’ fair access to goods — and their fair-market price — by buying from their sellers more than he can reasonably need or consume. But while Smith scorns the mere hoarder as selfish and the scalper as a parasite, he celebrates the gouger as a virtuous “middleman,” even claiming that the gouger is sharing with his neighbors.

Turing Pharmaceuticals’ Daraprim price-gouging, though disgraceful and predatory, is unfortunately legitimate. Turing is a properly licensed, registered, tax-paying business; they simply haven’t added any value or incurred any costs sufficient to justify the extreme price inflation. The ordinary price-gouger, however, is rarely a legitimate business entity. They aren’t properly registered or licensed, and almost certainly won’t declare their gains or losses to the appropriate taxing authorities. Calling them “middlemen” falsely implies recognizable agency relationships with the original retailers. The price-gouger, like the scalper, is an economic parasite; Smith’s failure to recognize the equivalence is inexcusable.

Smith tries to make the practice respectable with a cool technical name: “price arbitrage.” Real arbitrage, to the extent it’s legal, is still seedy. It adds no value, takes no risks, and contributes nothing to the common good; the profits are economic rent. Price-gouging is also a rent-seeking behavior. However, the “price arbitrageur” doesn’t take advantage of information asymmetry between two different free markets. Rather, they pose as virtual monopolies to single captive/near-captive markets to exploit a supply shortfall. Calling it “price arbitrage” doesn’t get the stink off price-gouging.

Conclusion

In the real world, as opposed to Smith’s laissez-faire fantasyland, price-gouging not only exists but is a sin, an offense against fellow citizens (and therefore against God) motivated by the deadly sin of Avarice. The price-gouger isn’t an economic hero akin to Jimmy Stewart’s George Bailey, but rather a selfish, rent-seeking jerk, a “taker” who preys on misfortune and scarcity. Only uncoerced transactions reached in an open, competitive market can establish proper, fair pricing. Any money the seller leaves on the table — even during a supply crisis — belongs by right to the buyer, not to uninvited, superfluous “middlemen.”

Smith asks, “Why shrug at hoarding but be cross with the anti-hoarder, the reseller?” However, we don’t shrug at hoarding; the panic-buyers have built up a lot of animosity and contempt. But to paraphrase a point I made about Avarice, if we ought to scorn people who hoard water, hand sanitizer, or toilet paper, why should we make heroes out of people who hoard cash? Especially if their hoard consists of economic rent gained by activity that verges on the coercive, if not the larcenous? Why be cross with hoarding and scalping but shrug at price-gouging?