Knowledge Problem

Michael Giberson

The April 2009 Business Ethics Quarterly includes an article on price gouging by Jeremy Snyder, a response from Matt Zwolinski, whose article on the topic was published a year ago, and a reply from Snyder. (Zwolinski’s earlier article on price gouging was discussed here last March.  See related links below.)

Snyder (“What’s the Matter with Price Gouging?” Business Ethics Quarterly, (2009) pp. 275-293. Ungated version here.) is concerned with specifying the nature of the moral wrong associated with price gouging. Snyder asserts that markets generally do a good job of efficiently allocating resources, even following a disaster. He said, “If there is something morally wrong with price gouging, it is not that gouging causes direct harms or economic inefficiency. In fact, a critique of price gouging will need to confront the positive moral value of the efficiencies and rationing effect created by price increases.” He identifies the moral wrong associated with gouging as a kind of failure of respect for others because it impairs equitable access to essential needs of consumers.

He acknowledges that Zwolinski already addressed a related “lack of respect” point. In the 2008 article Zwolinski said that while gouging victims of disasters may reflect a lack of respect for the victims, laws against price gouging reflect and encourage similar or greater lack of respect because they interfere with autonomous decision making by potential sellers and buyers.  Snyder asserts that price gouging prices the poorest members of the community out of the market for essential goods, and contributing to this inequitable result is immoral.

Snyder also attack’s Zwolinski’s “nonworseness claim” and suggests rules for ethical rationing of necessary goods after a disaster.  The “nonworseness claim” asserts that because us gouging someone is better than neglecting them altogether (i.e. closing shop or refusing to sell at any price), and neglecting them is within our rights, it must also be within our rights to gouge them. In my view Snyder’s response, which gets into questions of motivation and long-range character, seems to have little to do with whether raising prices substantially on essential goods after a disaster is itself an immoral act. Snyder’s ethical rationing approach calls for merchants to limit price increases and impose limits on sales quantities (in order to counteract the excess demand at the below-market price).

Snyder said he hoped in the article, “to have shown that [his] account tracks well with widespread intuitions as to when and why certain price increases are morally problematic.” His method of “showing” is the traditional philosophical approach of appealing to the reader’s intuition, which has I think rather obvious limitations (here, of course, I’m appealing to the reader’s intuition about useful ways of demonstrating claims about factual matters).

There are better ways to study claims about “widespread intuitions” – as social psychologists know and philosophers are discovering – but at least Snyder is acknowledging that these intuitions are important to the analysis. Price gouging laws arise because of consumers’ emotional response to some kinds of price increases, the impulse to deem such price increases as morally objectionable, and the desire to legislate in response to that moral impulse. If lawyers, philosophers, and economists are going to make progress in understanding price gouging and appropriately reforming anti-price gouging laws, my view is we need to better understand these widespread intuitions.

Zwolinski, in his response (“Price Gouging, Non-Worseness, and Distributive Justice”  Business Ethics Quarterly, (2009), pp 295-303), notes many points of agreements with Snyder’s article, and noted that the response focused on the areas of disagreement.  His main effort is to reassert his “nonworseness claim” against Snyder’s attack and argue against Snyder’s proposal to limit both price increases and quantities sold per customer during emergencies.

Zwolinski agreed Snyder’s alternative approach to ration access to essential goods might change the distribution of goods during the emergency compared to the status quo, but Zwolinski doesn’t see reasons to claim the alternative distribution is more ethical. Further, like more general anti-price gouging laws, Snyder’s approach does not make the emergency conditions less desperate nor aid in the recovery. Price gouging, on the other hand, generates both information and incentives useful to aid recovery.

Snyder replied (“Efficiency, Equity, and Price Gouging: A Response to Zwolinski”  Business Ethics Quarterly, (2009), pp 303-306. Ungated version.) that Zwolinski’s defense of price gouging “sacrifices equitable access to these goods in favor of efficiency,” while Snyder believes that anti-gouging legislation to protect equitable access to essential goods during emergencies can be morally laudable.

Snyder notes that many discussions, including Snyder’s own earlier article, frequently conflate two points: (1) What kind of moral wrong, if any, arises in price gouging? and (2) Does anti-gouging legislation actually work to reduce instances of the moral wrong? Snyder reasserts his goal to address the first point, but suggests his work on the first point can help promote the appropriate reforms of anti-gouging laws.

It is a big step, but barely noticed in this discussion, to move from observing “X is not moral” to “the law should prohibit X.” It may be wrong not to call your mother on her birthday, but we don’t need a law requiring such calls. A variety of philosophical, legal, and economic theories can be called upon in the effort to justify imposing a law. Advocates of anti-gouging laws ought to do better than assert a law is needed simply because they believe the practice is wrong.

Earlier posts on price gouging studies:

• Price gouging and behavioral economics – more work needed
• Price gouging laws: emotions, economics, and policy
• Price gouging: At the intersection of emotions, ethics, and economics

Michael Giberson

I’ve been reading several price gouging articles lately. One, by G. C. Rapp in the Kentucky Law Journal, (“Gouging: Terrorist Attacks, Hurricanes, and the Legal and Economic Aspects of Post-Disaster Price Regulation”, 2006) makes a relatively novel reach to behavioral economics to try to justify an efficiency claim for anti-price gouging laws. In particular, Rapp claims an “availability heuristic” will lead merchants to raise prices too high after a disaster, because affected merchants will over-estimate the likelihood of a repeat disaster. An “anchoring heuristic” can then lead merchants to keep prices to be sticky at the higher level, Rapp said, even after the emergency is over.

Rapp said anti-gouging legislation, by preventing these behavioral biases from producing too-high prices, can help the market be more efficient. On first reading, the argument seemed almost entirely ad hoc and arbitrary. For example, why a story in which the availability bias strikes first, and then the anchoring bias comes second? Why doesn’t the “anchoring heuristic” overcome the “availability heuristic” in the first place, and keep prices sticky at the lower – and in Rapp’s view, more efficient – level?  About the best thing I can say about Rapp’s article is that he tries to find an efficiency benefit for anti-price gouging laws, which is more than can be said for most advocates of anti gouging policy.

Upon a little reflection it seems that an anchoring heuristic is playing an important role in price gouging, but not the role Rapp asserts.

Consider the first example provided in Kahneman, Knetsch, and Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” (American Economic Review, 1986):

A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.

Kahneman, et al., then asked respondents to rate the action as fair or unfair. In their survey 82 percent said it was unfair for the hardware store to raise the price in this situation.  The authors explain the sense of unfairness in relation to a “reference transaction” with typical or expected levels of price and profit.  The sense of unfairness diminishes if there is a cost-based reason for the increase in price.

But I think there is more than just this anchoring heuristic going on in this case. It isn’t just the price increase relative to a reference transaction, but a price increase during a period of presumed increased hardship – the “large snowstorm.” I’d bet if they posed this alternative version, they’d get a significantly different answer:

A hardware store has been selling snow shovels for $15. The morning after Memorial Day, the store raises the price to $20.

Or:

A hardware store has been selling snow shovels for $15. The morning after a new store manager arrives, the store raises the price to $20.

To me, these versions don’t seem to trigger a sense of unfairness. On this topic, I still think the Kling conjecture is right: price increases in times of increased hardship are perceived as morally wrong by some people (not merely unfair), because of an embedded moral principle that says it is wrong to take advantage of people in distress (and price increases on necessary items during times of hardship is seen as ‘taking advantage of people’ unless there is a cost basis for the increase).

Of course just because people (may) have an embedded moral principle that says price gouging is wrong doesn’t mean that anti-price gouging laws are necessarily right.  (It may not even mean that price gouging is wrong, but that raises questions to be addressed in a subsequent post.) Anti-price gouging laws limit economic freedom, hamper economic adjustment after market disruptions, discourage holding of precautionary inventories of useful items, and impedes the activities of persons who would otherwise seek to aid people harmed by disruptions. There are costs to indulging this moralizing impulse by turning it into law, and the question for students of public policy should be whether the benefits of anti-price gouging legislation can be expected to exceed the costs.

Rarely do public policy discussions of price gouging try to specify the nature of the benefits to be achieved by a ban, and at least Rapp’s article nods in this direction.

(FURTHER NOTE: David Skarbek critiques Rapp’s piece in an article in the Public Contract Law Journal, Market Failure and Natural Disasters: A Reexamination of Anti-Gouging Laws, 2007-2008. Skarbek picks on other problems in the Rapp article not discussed here – Rapp makes an odd attempt to justify anti-price gouging legislation on the grounds of a possibility of widespread electronic payments system failure – but parts of Skarbek’s counterarguments strike me as similarly ad hoc.)

Earlier posts on price gouging studies:

• Price gouging laws: emotions, economics, and policy
• Price gouging: At the intersection of emotions, ethics, and economics