Making sense of the 'evil' of price gouging, AKA price flexibility

The National Consumer Commission (NCC) has launched an investigation into major retailers such as Shoprite, Pick n Pay, Woolworths and the Spar Group, among others, regarding the alleged excessive prices for ginger and garlic the retailers. The allegations were encouraged by a public outcry over the prices of these goods. Thus again, we see public opinion, uninformed as it may be, influencing the Commission (is the Commission government) to interfere with voluntary transactions between individuals and businesses, and possibly attracting criminal sanction that could even result in imprisonment for entrepreneurs -  in this instance retailers - for simply providing a good consensually in the market.

The NCC says the law defines price gouging as an "unfair or unreasonable price increase that does not correspond to or is not equivalent to the increase in the cost of providing that good or service". The cost of a product in the market is less influenced by the 'cost of providing that good' but rather by the supply of said good in the market relative to its demand. The supply and demand of a product are what are largely responsible for its price in the market, not its 'cost'; a determination that would be impossible to ascertain objectively for purposes of a just ruling in law, since costs vary from company to company, even for providing the same good or service.

Garlic and ginger are considered to be two of the most effective ingredients in Covid-19 home treatments. Thus the demand of these products has seen an increase, yet the supply of these products is still the same supply that would be present under 'normal' conditions pre-Covid-induced demand increase.

Let us make a practical example. We presume that the supply of garlic and ginger -before it was widely acknowledged as an effective home remedy - is at a certain quantity. This is the set quantity that has been prevalent for the past year. An instantaneous increase in supply of agricultural goods is farfetched given that such an increase would be necessitated by the market, which communicates information in prices – this process unfolds. So, the quantity of supply would remain relatively the same even after the month, or months, where these products have been identified as good remedies, and thus seen an increase in demand from the market. More people want these products and at higher quantities, yet their quantity of supply is still relatively the same as it was prior to this spike in demand. This is when prices are increased, because on the demand side, an increase in prices makes consumers aware of their purchases, and to subsequently live within their means. It also signals to suppliers that they need to either increase prices, to retain some of the product over a longer term, or to very quickly procure, and make available, more of the product.

Presume that the prices of these products stay the same even with an increased demand; the available supply would be depleted quickly on a first come first serve basis, whereas an increase in prices serves as a natural hedge against excessive purchases. And for the retort that the rich will simply outbid the poor, that argument falls apart when thought about through a marginal utility rationale. The rich do not outbid the poor on every other resource, such as food for instance, simply because they do not need all the food in the world. Individuals purchase goods or services relative to the proportion that the perceived benefit acquired from such a purchase is worth more than the perceived benefit of keeping their money, hence their exchanging it for said good or service.  It is 'price gouging' that stops the rich from depleting the limited supply of a good or service.

If prices stay the same, individuals will likely purchase more than they need, resulting in shortages. Yet with an increase in prices the supply of these goods which is still relatively the same, will reach more people; rather than individual A purchasing a kg of ginger at price X, they instead purchase 500g at increased price Y, thus leaving more ginger for other consumers. 'Price gouging' enables the wide distribution of highly demanded products, a wider distribution than would not be possible without it.

On the supply side, the entrepreneurs who supply ginger and others with capital to do so, will see increased returns that are acquired from the market, and thus would also want to 'cash in' by increasing their production of ginger. This increase in production would be ill-advised, or rather a 'guess' without the information communicated by prices in the retail market for ginger. As a result, the supply of ginger would gradually increase, resulting in a drop of prices to levels probably even lower prior to the increase in demand.

This scenario was played out with hand sanitizers, which saw a steady decrease in prices from their peak in March/April 2020. Without any fine or threat of imprisonment to hand sanitizer suppliers, the prices of sanitizers went from being a topic of protest for the public on social media, to a non-issue presently - like all prices in general. This phenomenon of demand and supply and the effect the proses it has on price, is also reflected in the prices of liquor when banned, with a limited supply but the relatively same demand, compared to when it is unbanned with an increased supply.

There is no business owner that is on a vindictive mission to 'exploit' consumers, if there are, providing consensual voluntary services that those they want to exploit prefer, is quite the weird way of going about it. Rather, it is simply individuals and their interactions with companies, responding to market conditions. If they were to be given the freedom to simply operate their consensual and voluntarily patronized enterprises, the 'issue' of 'price gouging' would resolve itself. 

The minute a state institution such as the National Consumer Commission - that is an object of the Consumer Protection Act - gets involved in commercial matters (which are inherently premised on voluntary trade) problems are set to arise. In the market consumers are the kingmakers, they always have the eternal option of simply not patronizing a given business. The use of aggression in the form fines for businesses that have violated no natural rights is an injustice of the worst kind since its cloaked with the thin false veneer of 'justice.'

Companies should be applauded for increasing prices for the reasons mentioned above. The state and its various institutions have shown throughout the past year in particularly, that it is not interested in creating an environment conducive to business growth and prosperity. Given its actions, it is deliberately trying to strangle the business sector and broader economy. Price gouging, properly understood, is simply price flexibility - a normal market mechanism.

This investigation and the likely finding of guilt on the part of these companies - if the recent atrocious Competition Tribunal decision against Dis-Chem is anything to go by - will be another iteration of the South African state acting at odds with the individuals who provide goods and services voluntarily and consensually to customers. Indeed, through trying to 'control' prices, the state will end up more negatively affecting both small businesses and consumers, all of whom will not be able to respond effectively to pressures and changes in supply and demand. The best 'protection' that consumers need is the freedom to make choices without state interference in the market.

This article was first published on City Press on 16 February 2021.

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