"Gouging"

People will occasionally point out how much I seem to "believe in" capitalism. Or the law of supply and demand, or comparative advantage, or some other part of economic theory. And I'll admit it's true.

I also "believe in" gravity, thermodynamics, and Newton's laws of motion.

Now what?

I'll tell you one thing I don't believe: that capitalists are angels or saints. My "belief in" capitalism does not mean I believe people are going to be generous to the poor and do good to their neighbors for the hell of it. It means that there are certain inevitable consequences of anything that has any kind of impact on the marketplace.

Just as every engineering project has to take the law of gravity into account, every social engineering project has to take the laws of economics into account.

Take "price gouging", for example.

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Now, greed does happen to enter into the equation, but if you blame the oil price increase entirely on greed, you need to find some way to account for the timing. Why did the oil companies wait so long to jack up prices? The answer is, they couldn't.

Many people think the recent spike in oil and gasoline prices was due to the oil companies' greed, and the recent fall was due to the threat of congressional action.

What businesses do is they try to charge as much money as they possibly can for all of their products. And the question for the economist is, well how can they do this? And under what circumstances can they do this? So each business is facing a dilemma. If they raise their prices, they get higher margins but they lose customers. And if they lower their prices they get lower margins but they gain customers. So you know you have the old joke, we’re losing money on every sale, but we make up for it on volume.

There are some industries that have figured out ways to keep customers from leaving for a cheaper competitor. Take, for example, "premium" products."

...if they could split their customers up somehow and identify the customers who are not willing to pay and the customers who are willing to pay, charge a high price to the customers who will pay it and a low price for the customers who won’t, you get the best of both worlds. You get all the high margins on those sales you are going to make. Plus you get the volume. ...<snip>... the cleverest way of price targeting is to get the customers to identify themselves as price sensitive or not. So if you offer them some choices you may be able persuade some of your customers to reveal themselves as not looking at the price.

Some examples:

...sometimes you just offer the same product packaged two different ways at different prices. And if a customer is looking at the price they will buy the cheap one. And if they are not looking at the price, well 50/50 chance they will buy the expensive one.

There are some coffee chains in the U.K. who are charging markups of about 20 cents on a fair trade cappuccino. And the natural assumption of the customer is that that 20 cents is going to go to some poor farmer in Guatemala. But actually hardly any of it does. It’s not because the company is stealing the money. It’s because there is just not that much coffee in a cappuccino. And while the farmer is getting much more money for his coffee, most of that 20 cents is markup. Just pure extra profit that goes to the cappuccino seller.

A lot of people like to buy organic food for various reasons. Some people say it is better for the environment. And some people say it is better for their health. Some people say it tastes better. I don’t have a strong opinion on any of this. I have not studied the evidence. What I do know is that the markup is higher on organic food. Substantially higher. Organic food is more expensive to produce. But most of the costs of getting something on the supermarket shelves – staff time, electricity, rent, distribution costs – they are not actually the raw cost of the produce.

If you dislike "corporate greed", you might consider a boycott of these premium-priced goods.