Question

Pricing Before. During, and After Hurricanes The late summer of 2017 brought several devastating hurricanes that impacted large areas of Texas, Florida, Puerto Rico, and the Virgin Islands. As often happens during events like these there were several reports of stores, hotels, and service stations engaging in price gouging. Many states have laws against price gouging during natural disasters, but a Twitter photo of a Best Buy store charging S42 for a case of 24 bottles of water was widely circulated. Usually a case of water can be purchased for about $5 to $8, so the $42 price was thought to be an instance of price gouging. Best Buy quickly addressed the exorbitant price and issued an apology, stating they normally do not sell cases of water, and that an employee wanting to provide a service in advance of the hurricane simply multiplied the price of a single bottle they normally sell by 24 to arrive at the price-per-case total. Best Buy's response was clearly aimed at deflecting any negative public reaction to the pricing error." Another example of how companies might be accused of price gouging occurs with companies that use "dynamic pricing," which uses computer algorithms to analyze demand and automatically raises prices as demand increases. Amazon, the large online retailer, uses dynamic pricing, and consumers saw an increase in the price of things like generators and water in the days prior to hurricanes Harvey, Irma, and Juan in 2017. There are some economists and business thought leaders who believe that price increases during events like hurricanes is a good thing. Economists from the Chicago School of Economics state that regulating lower prices during natural disasters actually discourages consumers from purchasing essential supplies such as water and gasoline until the disaster occurs because they can anticipate regulated prices. In addition, let's say that a hotel usually rents a room for $50 a night and decides to raise the price during a hurricane to $100. A family might decide to stay in one room rather than rent two rooms, thus saving some money while at the same time increasing the supply of hotel rooms for people who need them the most. Critical Thinking Questions 1. What risks do companies such as Best Buy and Amazon face when selling a product that they normally don't sell and then are accused of price gouging, or when they using dynamic pricing? 2. Why is the use of dynamic pricing deemed acceptable for selling tickets to sporting events but not during a natural disaster? 3. Do you agree with the arguments in support of higher prices put forth by free-market economists?

Answer 1

1.

There are the following risks companies such as Amazon and Best Buy face when they sell a product that they don't usually sell and are made accused of price gauging or dynamic pricing:

i. A natural disaster is a time when everyone is expected to help others, companies taking advantage of such a situation may lower down the goodwill of the company.

ii. It can make the people outrage towards the company and the company may lose some loyal customer base.

iii. It could be regarded as an unethical practice of the company to be involved in such a practice.

iv. The angry mob might attack the store or company premises if the situation is severe.

2.

Dynamic pricing is deemed acceptable for selling tickets for sporting events but not for natural disaster because sports event is an amusing activity. It is not a necessity for the people to watch a sporting event to be alive, unlike a natural disaster where people have to rely on some specific products to be alive. It is the question of survival in case of a natural disaster not of amusement. Therefore, dynamic pricing is deemed acceptable for sporting events but not during a natural disaster.

3.

I agree with the free economists supporting higher prices in case of a natural disaster. However, I believe, the severity of the situation should be taken into consideration before following such a practice. This practice should make people's life easy and not to complicate it further. For example, if charging a higher price will make some needy people not to buy the product or this high price may lead to fighting or killing between acquiring and not acquiring parties, then it should not be considered as an ethically or morally right practice.