Reading response Price gouging is increasing the price of a product during crisis or disaster. The price is increased due to temporal increase in demand while supply remains constrained. In many jurisdictions, price gauging is widely considered as immoral and is illegal. However, from a market point of view, price gouging is a correct outcome of an efficient market. As shown above, crisis increases demand for the product leading to a shortage. Supply does not change. Equilibrium price now shifts to the right and increases. The market is now ready and willing to pay for the product or service at a higher price. Upon seeing long of people waiting for the product, sellers either hike the price or bring in more supplies if it were possible. If more suppliers are brought, equilibrium price goes back to normal. If supply cannot be increased, sellers increase the price of the product or service. In an efficient market, price increase brought about by a crisis of otherwise is natural. Due to surge in demand, people cannot get the same product at the original price during shortage. Without an increase in the price, the shortage will become worse as sellers will not have the incentive to avail more products in the market. A Price increase gives sellers an incentive to provide more of a product in the product and price goes down to an economically efficient price. Because price gouging is banned in most jurisdictions, rationing the product is done through bribing and first-come-first-served basis. Price gouging is opposed because in a crisis, supply in the short run is perfectly inelastic as shown below. In a hurricane, the infrastructure may be destroyed making impossible to get new supplies. Increased the price during this pe... ... middle of paper ... ...e. A price gouger needs to charge more in order to avail the product or service. In the case of Raleigh, the roads to the town were not accessible due to fallen trees and rocks. An entrepreneur would need to cut the trees and remove the rocks in order to take the product there. People who do that need compensation for all the trouble they take to bring products to the market. The youths who brought ice to Raleigh town had to cut down trees in order to access town. Instead of selling ice as the “right price” of less than 2 dollars, the youths charged more than 8 dollars. The price provided just there right compensation for all their efforts. Banning price gouging led to serious suffering of the people because the little food left went bad causing even more losses. For a few dollars for the price of ice, Raleigh residents could have saved millions worth of food.
The law of demand tells us that "Quantity demanded rises as price falls, other things constant, or alternatively, quantity demanded falls as price rises, other things constant (McGraw 2004). The XBOX 360 phenomenon that took place in 2005 is a good example of this economic principle at work. Microsoft's XBOX 360 gaming console was released into the U.S. market on November 22nd 2005. The release came after a great deal of advertising and media hype that ensured that the demand for the product would outweigh the supply. Quite simply, there were more consumers wanting to purchase the product than there was product available. The retail price for the gaming system with a hard drive was $399. Many consumers, however, paid a great deal more than the $399 sticker price to acquire the system. On the morning of the U.S. release, retailers across the nation sold out of the product within just a few hours of opening their doors to consumers. In the weeks that followed however, many consumers purchased the unit from sellers on on-line auction sites and even from individuals in parking lots for as much as $1500. The reason for this was that the supply was significantly less than the demand for the product. In some cases, parents who wanted to ensure that their children received and XBOX 360 for Christmas in 2005 were willing to pay well over retail for the hard-to-acquire system. In other cases, video gaming enthusiasts wanted to be among the first individuals to own and play the system. News reports across the nation showed footage of people lining up days ahead of November 22nd in order to secure a place in line at retailers that would have the product available on the release date.
If the price for one good increases, consumers will turn to a different good to satisfy their needs (Substitute Goods, n.d.), thereby decreasing demand for the original good and increasing the demand for the substitute good.
The quantity of a commodity demanded depends on the price of the commodity, the prices of all other commodities, the incomes of the consumers as well as the consumer’s taste. The quantity of a commodity supplied depends on the price obtainable for the commodity as well the price obtainable for substitute goods, the techniques of production, the cost of labor and other factors of production. It is supply and demand that causes a market to reach equilibrium. If buyers wish to purchase more of a commodity than that of which is available at a given price, then the price will to tend to rise. If they wish to purchase less of a commodity than that of which is available, then the price will tend to drop. Consequently, the price will reach equilibrium at which the quantity demanded is just equal to the quantity supplied.
Predatory pricing is the practice of selling products or services at quite low prices, in order to drive the competition out of the market, or to hinder the entry of the potential competitors. This involves pricing a product low enough in order to dampen demand. This pricing is generally used to end competitive threats. The company lowers the price with an aim of protecting market share from moving to the hands of the competitors. At times firms may reduce prices to sell off their outdated stock or to fill gap with their new line of products. Some vendors tend to set very low prices for new products while introducing them in the market with a view to inspire customers to try them out. However, this legal and ethical pricing strategy becomes illegal when a company uses unethical price cuts in order to squash the sales of its competitors by selling the same product at a lower price. Federal laws are made to protect the competitors from
Price Elasticity is the measure in responsiveness of consumers to changes in the price of a product or service. The evaluation and consideration of this measure is a useful tool in firms making decisions about pricing and production, and in governments making decisions about revenue and regulation. “Price Elasticity is impacted by measurable factors that allow managers to understand demand and pricing for their product or service; including the availability of substitutes, the consumer budgets for the product or service, and the time period for demand adjustments.” The proper consideration of Price Elasticity allows managers to set pricing such that the effect on Total Revenue is predictable and adjustments to production are timely. The concept of Price Elasticity is employed in the management of commercial firms and government.
In the article. “What’s wrong with price gouging”, by Jeff Jacoby, talks about, why it is not a good idea to increase prices at more than a higher expectation when there is a sudden shortage. This article is referring to the massive pipe break that more than dozens of town in Boston without drinking clean water over the weekend. After the aftermath, the prices of bottled water increased. Massachusetts Attorney General, Martha Coakley insisted the vendors not to increase the prices of bottled water since consumers would not be willing to buy at that given price. After hearing anecdotal reports of price gouging of water bottles. Martha Coakley stated
In the article “Disney Discovers Peak Pricing,” S.K. London explores the differences between price surging and price discrimination. Price surging is a system that is commonly known to be used by Uber. Uber claims that when demand goes up, price goes up along with it to make prices and demand proportionate (Diakopoulos). London states that an article published in Bloomberg claims that “Disney introduced surge pricing to its theme parks.” He counters Bloomberg’s claim by explaining that it is not actually surge pricing that Disney has introduced, but rather, price discrimination. Disney is not price surging, London argues that Disney is price discriminating, that is, capitalizing on high demand for entertainment when children/teens have no
At the new equilibrium you have a shortage of supply which pushes the price up which represents cost push inflation.
Predatory pricing “is alleged to occur when a firm sets a price for its product that is below some measure of cost and forfeits revenues in the short run to put competitors out of business” (Sheffet p.163-164). The reason firms take the short term loss is because they hope to drive out competitors and raise prices to monopolistic levels. By doing this, they covered their short term loss to make even greater profits in the long term than they would have by not using predatory tactics (Sheffert). Predatory pricing became illegal under Section 2 of the Sherman Act. It has remained one of the more difficult allegations for prosecutors to prove, due to the complexity of determining the company’s actual intent and whether or not it the strategy is competitive pricing. According to Areeda and Turner, there are three ways to determine if a firm is implementing predatory pricing. First, a price above marginal cost is presumed lawful; second, a price below marginal cost is considered unlawful, except when there is strong demand; and third, average variable cost is considered a good proxy for marginal cost. This is a reason predatory pricing is still important today. The courts must decide whether or not companies are engaging in competitive prices for the good of the consumers or are using predatory tactics for the good of their own company. The purpose of this paper is to focus on the current legislation regarding predatory pricing, determining when there is predation in an industry and the cause and effect relationship it has on an industry.
In conclusion, generally speaking the Law of Supply states that when the selling price of an item rises there are more people willing to produce the item. Since a higher price means more profit for the producer and as the price rises more people will be willing to produce the item when they see that there is more money to be earned. Meanwhile the Law of Demand states that when the price of an item goes down, the demand for it will go up. When the price drops people who could not afford the item can now buy it, and people who are not willing to buy it before will now buy it at the lower price as well. Also, if the price of an item drops enough people will buy more of the product and even find alternative uses for the product.
Definition & Workings of the Price Mechanism The Price Mechanism: The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply. The price mechanism works as follows, prices respond to shortages and surpluses. Shortages cause prices to rise, surpluses cause prices to fall. The price of a product will either encourage producers to supply more or less, the higher the price the higher their profit and the more they are going to want to supply. For example should consumers decide that they want more of a good (of if producers decide to cut back supply), demand will exceed supply. The resulting shortage will cause the price of the good to rise. This will act as an
With supply solely, factors involved with regulation of the supply also control some aspects of demand. Things such as production costs and desired net profit can determine whether a business succeeds or not. Having a balance between quantity and price is the greatest control any business can have. Pricing is obviously one of the most beneficial, or destructive, parts of a business. Pricing is the first and most valuable thing an individual will look at, which will overrule most other judgments based off of quality and detail. Balancing the price, however, helps to create a pristine product, with just the right amount of detail that will fuel the market, while still generating a steady net income.
Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the business charges a customer the maximum price that they are willing to pay. This practice is becoming more and more important for customers because of the discrete ways that businesses are finding to make it easier to implement them in many different ways. These are categorized into three forms: first-degree price discrimination, second-degree price discrimination and third-degree price discrimination. First degree price discrimination is where consumers pay the exact price that they are prepared to pay, and where the producer charges different prices depending on how much the consumer is looking to pay.
In the business world, price discrimination can be detrimental to small businesses trying to compete with larger organizations pricing. In the 1930s congress was worried about large multimarket firms using predatory marketing techniques in certain markets to bankrupt smaller firms in the area. In response, Congress enacted the Robinson-Patman act which prohibits larger forms conducting pricing strategies that contribute towards becoming a monopoly by getting rid of their rivals, the smaller family owned stores. With this measure in place the smaller mom and pop stores are better protected from the larger chains and can help to contribute more to the local economy. A downside of the act from a consumer standpoint is that the larger chain firm
Price discrimination is a corporate strategy where a seller offers the same product to customers at different prices. This practice is a technique where sellers appeal to a wide range of customers and capitalize on opportunities to maximize profits. The word discrimination often has a poor connotation. However, in terms of finances, the word discrimination merely denotes to how sellers can sway market price in order to meet the demand of buyers. In the United States, price discrimination generally is discussed and debated at the higher education level. In higher education, price discrimination denotes a scenario where academies charge unlike tuition prices to students for the same quality of education. This practice can be done at both the university and departmental levels as well. In order for price discrimination to occur, the seller must have the ability to adjust price. Price discrimination is also used by a seller that is offering a product that has a strong consumer demand with few alternatives. This is done because customers are willing to pay more for a given product. This entry provides examples of price discrimination in the private sector and in higher education.