Price Gouging and the “Dark Side of Cooperation”

Michael Giberson

At Overcoming Bias, Robin Hanson points out that the human instinct for cooperation has good and bad consequences.  A handful of recent articles in reaction to Frans de Waal’s new book, The Age of Empathy, and other writing on cooperation have treated it as a good thing, as a helpful counterweight to human instincts to act selfishly.  Hanson extends that perspective to point out that instinctive cooperation has a dark side, too.

His primary example refers to price gouging:

[I]n big disasters like hurricanes, certain goods like gas, wood, water, or food become especially valuable.  While natural selfish reactions lead to higher prices for these key items, humans clearly evolved to see this behavior as uncooperative; we resist such price rises, and want to punish those who allow them.

Perhaps this made sense for our distant ancestors, but today it is counter-productive.  If these goods are not allocated by price, they will instead be allocated by standing in lines, personal connections, etc., processes that are consistently worse at giving goods to those who value them the most, and do worse at creating incentives to prepare for such scenarios.

He continues with some speculation on why economists and others who point out the benefits of post-disaster price increases are met with scorn:

But even when some of us realize that disaster price rises are actually cooperative behavior, pro-“cooperation” instincts get in the way of acting on this insight.  If others mistakenly intuit that we are suggesting acts they consider uncooperative, they will punish us for such suggestions.  They will similarly punish us if their usual conformity rumor mill, not exactly designed for subtle analysis, tells them our suggestions are uncooperative….

The problem is that evolved cooperation instincts reward supporting behavior that most people feel is cooperative, and not what is actually cooperative.  In novel situations, where our ancient instincts and simple rumor mills are poor guides, ordinary folks can be quite mistaken about which actions help vs. hurt everyone.

This last part bears emphasis so I’ll repeat: “evolved cooperation instincts reward supporting behavior that most people feel is cooperative, and not what is actually cooperative.  In novel situations, where our ancient instincts and simple rumor mills are poor guides, ordinary folks can be quite mistaken about which actions help vs. hurt everyone.”

NOTE: Previous discussions of price gouging on Knowledge Problem.

2 thoughts on “Price Gouging and the “Dark Side of Cooperation”

  1. First, I am still waiting for a single, rational, objective definition of “price gouging”. “Feeling” someone is being uncooperative just doesn’t get it for me.

    In earlier times, when food was destroyed or water contaminated, there was little or no ability to obtain replacement supplies. That is no longer the case in the US and other developed countries; and, arguably, not the case globally.

    However, timely access to abnormally large quantities of incremental or replacement goods requires incremental effort, which involves incremental cost. In some cases, or to some degree, that incremental effort is provided by volunteers and the incremental cost borne by charitable donors. That is typically the case for food, water and emergency shelter. It is typically not the case for fuel, wood, emergency generators, snow blowers, chain saws, etc. Probably, the volunteers and charitable donors focus on the essentials of life, rather than the “engines of convenience”, though with sufficient time and funds they could potentially do both if they chose to do so.

    Currently, the opportunity (not the responsibility) to supply the “engines of convenience” falls upon the normal supply chains for those goods and on “spontaneous entrepreneurs”. In the presence of “price gouging” laws, there is precious little economic incentive for the normal supply chain participants to put forth the extra effort to move those goods from existing inventories in unaffected areas to the affected area in which there is a disaster-induced demand. There is no economic incentive to purchase such goods from competitors’ inventories in unaffected areas, move them into the affected area and sell them at zero margin.

    Enter the “spontaneous entrepreneurs”, if there is the opportunity to make a profit. However, the “spontaneous entrepreneurs” do not have the ability to offer the goods at the previously prevailing local or regional prices, both because they would, in many cases, have purchased the goods they would offer at retail and then incurred additional cost to transport them into the affected area. If the combination of purchase at retail plus incremental transportation plus profit is “price gouging”, or there is even the reasonable possibility that it could be judged to be “price gouging”, these spontaneous transactions would be far less likely to occur.

    This brings us to the ultimate question: “Are the people affected by the market disruption better off to have access to incremental quantities of the “engines of convenience” or not?” It would seem to be self-evident that those among the affected people who choose to pay more than the previously prevailing market price for those goods, rather than do without the goods until they are again available through the normal distribution channels, have decided that availability is more important than price.

    It seems to me that we are dealing with a transaction between a willing (if opportunistic) seller and willing (if option-constrained) buyer. Therefore, as long as the goods being transferred are not illegal goods or controlled substances, I am convinced that the government intervention, through “price gouging” laws, diminishes the freedom and the wellbeing of both the seller and the buyer, while enhancing nothing. I am unpersuaded by an argument that the affected population, on the whole, is better off when the entire population is roughly equally inconvenienced.

  2. Evolved instincts are poor guides.

    Very good insight. The evolution of technology and culture has outstripped our genetic evolution. Our memetic evolution must fill the void, but there are many who benefit populist beliefs, rather than rational analysis.

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