What prevents companies from raising prices unless they really have to?

The simplest model of a market involves 2 things: supply and demand. The price and quantity of the appurtenances sold in the market are a function of both. When a natural disaster hits, the firsthand upshot tin be ii-fold. In such situations, it's not unusual that the need for sure products may increase. For example, if everyone is trying to leave an area, the demand for gas may rising.

The other consequence is that supply for sure products may decrease. For case, it may exist more costly to transport gas in areas affected by a natural disaster, thus reducing the supply of gas and, in turn, increasing the price.

How Does Supply and Demand Work?

The concept of supply and need is used to explain how toll is influenced past the supply of appurtenances and services available and the consumer demand for those products.

When supply decreases, the price of the good increases. Inversely, when the supply of the good increases, the cost falls. A similar relationship exists between toll and need. When the demand for the good increases, the price of the skillful as well increases. When the demand decreases, the price of the proficient falls with information technology.

In instances when the demand for a good or service all of a sudden increases, it'southward natural to assume the price of the product will ascent. But what about the price of essential items during a time of crunch? Does the booming demand always justify the increased rates? When costs ascension to unfair levels due to a lack of supply or heave in demand, it'southward oftentimes referred to equally "price gouging."

What is Price Gouging?

Price gouging occurs when companies raise prices to unfair levels. There's no rule for what qualifies as cost gouging, simply it's not an uncommon occurrence. For instance, EpiPen costs and Uber toll surges are both examples of price increases that accept been considered unfair.

Toll Gouging During Natural Disasters

Cost gouging oft occurs when in that location'south a sudden surge in need for a given adept, service, or article, such as in the case of natural disasters and emergencies. In times like these, the need for non-essential items and luxuries dwindles, leading many businesses to lose the sales they commonly rely on. To offset this loss, retailers might raise the prices of essential items in an effort to stay in business. On the other mitt, when the demand for essential items or services suddenly increases, the supply tin quickly become very limited, farther increasing prices.

Take the coronavirus (COVID-xix) pandemic, for case. To assistance limit the spread of the virus, governments are urging people to practice social distancing and self-isolation. An unintended effect is a shortage of essential supplies—similar paw sanitizer and disinfectants—due to the rush of people preparing to stay dwelling for the foreseeable time to come. As a result, at that place accept been reports of cost gouging for such items.

The phenomenon is not new or uncommon. Stories of price gouging in Florida afterwards Hurricane Matthew fabricated headlines in 2016 when prices for gas, hotels, water, and other essentials skyrocketed during a alleged state of emergency. The same issue arose in Texas post-obit Hurricane Harvey in 2017.

When demand reaches such loftier levels, information technology tin be difficult to tell the difference between supply and demand and price gouging. Policymakers and business concern professionals accept historically had mixed opinions on whether businesses should raise prices during a crisis for this reason.

Related: 5 Reasons Why You Should Study Economic science

The Price Gouging Argue

Price increases due to natural disasters are a classic example of toll gouging, and the government volition usually intervene and directly prevent companies from doing so. Simply there can be unintended consequences to such market interventions, which explains the ongoing fence amongst economists and policymakers regarding the proper response to natural disasters and price gouging.

For business owners, deciding how to adjust prices during a time of crisis is both a practical and moral question. In many cases, raising prices on high-demand items tin assistance offset the loss of revenue from low-demand ones and keep a company in business organization. At the same fourth dimension, business owners are morally obligated to provide customers fair access to essential items in times of need.

Should Businesses Raise Prices During a Crisis?

For managers and business owners, deciding what's best for both their company and its customers is a complex task, especially in a crisis.

There will ever exist those who try to intentionally benefit from these kinds of scenarios. Many economists argue that taking advantage of a boom in need is a reasonable aspect of a marketplace-based economic system. But professionals frequently find themselves walking the line between raising prices enough to stay in business organization and remaining fair to their customers.

With this dilemma comes questions of practicality:

• Will raising the price of product X make up for the loss in sales of product Y?
• Are there other ways to cut costs and make upward the departure?
• Does the increment in demand, or lack of supply, really justify an increase in toll?

On meridian of these are bug of morality:

• Will raising prices limit access to essential items for those in need?
• Volition making these changes inadvertently risk the health and safety of members of the community?
• Are at that place unintended consequences that raising prices could cause?

The answers to these questions are inappreciably ever straightforward. If a business possessor decides that raising prices is the best form of action, they must decide at what point the increase crosses the line of what's justified by the concept of supply and demand and becomes unfair. To further complicate the effect, many anti-price gouging state laws provide merely vague guidelines for businesses, making it even more hard to make up one's mind where the difference between supply and demand and price gouging lies.

Price Gouging Laws

Regardless of whether a business organisation decides to raise its prices during a pandemic, natural disaster, or other crisis, the professionals making that decision need to exist aware of what price gouging laws they're subject area to.

In the United states of america, 24 country governments and Washington, D.C. accept passed legislation prohibiting cost gouging during a declared land of emergency or market disruption. During the time of the coronavirus outbreak, this number has fluctuated. States without formal price gouging laws may enact emergency legislation in certain situations.

There is no universal standard every bit to what constitutes price gouging. In some states, price increases that are greater than a certain percentage of the price of the same or similar items earlier a market disruption occurred are illegal, only those percentages vary. Other states have a broader arroyo by prohibiting price increases of "unconscionably excessive" amounts.

The penalties for businesses charged with cost gouging also vary. In Due north Carolina, for case, courts can impose fines of up to $5,000 for each violation, and enforce refunds for the customers affected. Nether this law, manufacturers, distributors, and retailers can exist held accountable.

The Argue Continues

As the United States navigates a difficult economic time and surge in reports of price gouging, the contend of whether or not this practise is a justified response to supply and demand continues.

For managers and business owners tasked with adjusting pricing strategies in response to economic, social, and legal weather condition, creating a programme that'southward all-time for both their company and its consumers requires an intimate knowledge of business organisation, the economic system, and the situation at hand.

Non simply do they need to consider the moral implications of their decisions, merely know the fundamentals of economics in order to understand how the marketplace works and the intricacies of the different factors at play.

Want to read more about the price gouging fence? Here are several resources:

• The Problem with Toll Gouging Laws (Harvard Business Review)
• Mail service-Sandy Price Gouging: Economically Sound, Ethically Dubious (Fourth dimension)
• Why Economists Love Toll Gouging, And Why Information technology'southward So Rare (National Public Radio)
• Why Businesses Should Lower Prices During Natural Disasters (Harvard Concern Review)

Are y'all interested in deepening your agreement of economics? Download our free Guide to Advancing Your Career with Essential Business Skills to learn how furthering your business knowledge can advance your career.

This post was updated on April i, 2020. It was originally published on October 13, 2016.

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Source: https://online.hbs.edu/blog/post/supply-and-demand-or-price-gouging-an-ongoing-debate

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