Last I checked, James Kwak had 147 comments on his blog post on price gouging and the corrupting influence of Econ 101. Other bloggers have jumped into the fray: Adam Ozimek at Modeled Behavior, the Undergraduate at Observations of a Naive Undergraduate, and David Beckworth at Macro and Other Market Musings. Quite a firestorm of activity.
Kwak ignited this firestorm with commentary on Kahneman, Knetsch, and Thaler‘s classic question of the fairness of a snow shovel price increase the day after a snowstorm:
Today in class, the professor posed the first question from the paper:
“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.”
In 1986, 82 percent of respondents thought this was unfair. In class, it was about 50-50.
As the professor said, this is probably because there are a lot of business school students in this class. Business school students are classic Econ 101 robots.
What follows, in the post and in the comments and the other blog responses, is a delightful jumble of conversations over morality and markets (and rich people vs. poor people and WWJD and shortages of organs for transplants and sudden needs for vaccines and free market ideology and zero-sum games and more, more, more).
Most of the analytical problems in the post and in the comments comes from assuming a fixed supply of snow shovels and a zero sum game, as if the hardware store (vaccine producers, organ donors and transplant facilities, etc.) had no past and no future. Also, the moral analysis provided is lacking in subtlety.
So here is your test question:
Consider two hardware stores: one prices snow shovels at $15 when there is no snow and at $20 when there is snow; the other maintains a fixed price for snow shovels under both no-snow and snow conditions. In equilibrium, the second store will carry a smaller inventory than the first and offer it a price between $15 and $20. Which pricing policy is more moral?
(Yes, the problem is underspecified – so make any necessary assumptions about frequency of snowstorms, the distribution of income, desperately ill children, number of infirm widows living in the area, the costs of carrying inventory, etc. – that are relevant to your moral analysis and then get on with it. List your assumptions in your answer. Does it matter if the second store’s pricing policy is due to the owner’s preferences, due to the owner’s concern over patron reactions, or due to state law? Does it matter if the fixed price is closer to $15.01 or closer to $19.99? What if the fixed price were $25? Please note: your answer will fail to satisfy if it fails to address Zwolinski’s non-worseness analysis.)