Knowledge Problem

Michael Giberson

Julio J. Rotemberg has a paper out about emotional reactions to prices and their policy implications. (“Behavioral aspects of price setting, and their policy implications.”) I think he is working on some interesting issues, but he comes up with such lousy “policy implications” at the end of the article that it ruined it for me.

In fact, the policy implications were so weakly presented, it made me mad for his having spoiled the article with it. You might say I had an emotional reaction to an article about emotional reactions to prices.

Rotemberg mentions that when people are angry, their utility is increased when the target of their anger is harmed. If we now jump to the conclusion that authors of articles with badly argued policy implications should be penalized, perhaps tossed into jail would be satisfactory, then we would be guilty of the same kind haphazard non sequitur as Professor Rotemberg. So rather than jump to that conclusion, let us move more cautiously.

Rotemberg discusses consumers’ cognitive and emotional reaction to prices in two different contexts in which restrictions on prices appear to have consumer support – laws limiting the terms of mortgages and price gouging laws. He also throws in a discussion of monetary policy for good measure. I’m most interested in the price gouging discussion and will focus on it here.

He notes that economists should be puzzled by support for the laws, which since they cap prices or otherwise interfere with the ability of consumers and suppliers to come to terms, can’t but work to reduce overall welfare. Success of the laws, too, appears to be a puzzle since the beneficiaries are presumably widely dispersed and unlikely to be organized: consumers who would have entered into a disadvantageous loan but for the protections offered by mortgage regulations, consumers able to obtain emergency goods without facing substantial mark ups. Weighed against such dispersed political beneficiaries are the mortgage industry and various retailers.

I raised the ‘emotional response to prices’ angle in March when I was writing about Matt Zwolinski’s article on price gouging in Business Ethics Quarterly. I liked his analysis, but decided it would fail to persuade his opponents because it failed to grapple directly with the emotional and moral aspects of support for price gouging laws. I wrote:

I think most proponents of anti-price gouging laws, even if they agreed point by point with Zwolinski’s analysis, would still feel that price gouging was morally wrong, and would not oppose anti-price gouging laws. I’m increasingly convinced that morality is fundamentally a social manifestation of emotions. Zwolinski’s point-by-point rebuttal of anti-price gouging positions barely touches on the emotional component. I suspect opponents of Zwolinski’s view would feel he just doesn’t “get it.”

So while Zwolinski is doing useful work … something more will need to be done before the anti-price gouging folks will finally “get it.” To understand the feelings behind price gouging, economists need to delve into the broader mysteries of emotional reactions to prices and allocations. Most economists don’t want to go there, and so they are left only to scratch the surface of the problem they want to resolve.

Rotemberg takes up the emotional reaction to prices directly in the context of price gouging laws, so I hoped he was going to get somewhere.

His basic idea is that consumers become angry at firms that accentuate feelings of regret, because firms that were minimally altruistic would refrain from doing so. “Firms that raise their prices in circumstances where this has a big effect on regret thus demonstrate their selfishness,” he writes.

An individual, who failed to buy a snow shovel in advance, regrets that action when a heavy snow falls. When the individual then discovers that the price has been marked up, the feeling of regret is accentuated and the individual becomes angry at the firm.

The policy implication that Rotemberg tags on to this piece amounts to this: if the anger experienced by consumers in the face of a price increase is counted sufficiently in social welfare, this anger (or at least the social welfare implications of the anger) can rationalize government intervention in the market.

Presumably before we reach a policy recommendation on economic matters, some sort of cost-benefit calculus is called for. Isn’t this a fairly basic idea in economics? Surely it can’t be enough to observe that some people sometimes get mad in response to price mark-ups, and these people would feel better if the party responsible were to be punished.

Zwolinski’s piece ultimately did not satisfy me because it failed to grapple with the core emotional issues motivating the desire of some consumers for price gouging laws. Rotemberg’s piece was more frustrating in its policy discussion. While Rotemberg recognizes that emotional reactions to price increases are at the core of the issue of price gouging, he seems to conclude on those grounds alone that price gouging laws can be rationalized. It isn’t enough.