Price gouging: Is it possible?

Price gouging: Is it possible?
Tags: Consumer Behavior, Marketing
June 1, 2011

There have been reports of price gouging on sales of the Chevy Volt and Nissan Leaf with dealers charging $10,000 or more over the manufacturer's suggested retail price. The phrase "price gouging" has a negative connotation, but does it really victimize buyers? The answer is ...

... it depends. It depends on whether the item being sold is a necessity or simply nice to have. The Chevy Volt and Nissan Leaf aren't necessities. There are other modes of transportation readily available. Those who feel that they must own one now gain are willing to pay huge sums of money to gain the satisfaction of being one of the first to own what is currently a limited edition model. It's a story they'll happily relate for years to come.

Let's contrast that with the gasoline shortages of the early '70s. Most people needed gasoline to get back and forth to work. Mass transit wasn't as readily available as it is today so buyers had fewer alternatives for getting to work. Some began car pooling, but for those juggling schedules to get kids to childcare or school, car pooling was an elusive dream.

In the former example of the Volt and Leaf, sellers are satisfying a buyer's desire to be an early adopter and profiting handsomely from it. There's nothing wrong with that strategy. It's not amoral even though you may believe the price obscene and the buyer's behavior absurd. The key is that the buyer isn't being forced to make the purchase from necessity. It's their desire that's driving the purchase.

That wasn't true during the gasoline shortage where a few sellers decided to profit from their customers' fears by charging significantly higher prices. While some buyers' fear was great enough to pay these inflated prices, most avoided these establishments. Later, as fear subsided, the owners that decided to profit from their customers' misery discovered the law of reciprocity. Their customers left them for competitors who didn't take advantage of them during the crisis.

What about price increases associated with temporary shortages? Is that price gouging?

Let's say that Florida experiences a heavy freeze which destroys a huge portion of its orange crop. Is it fair to raise prices on oranges and products derived from oranges? Of course it is. It's the basic supply/demand issue that's part and parcel of every buying decision. Oranges aren't a necessity, there are many other fruits that can be substituted for those who don't want to pay the higher price. For those who enjoy oranges enough to pay the extra price, they're paying for what they value. They'll forego other items that aren't as important to them to get the oranges.

Price gouging can only occur when buyers participate in the process. Even during the '70s gasoline shortage the vast majority of buyers drove past those stations trying to capitalize on others' fear. The reality is that when most buyers pay a higher than typical price for something it's because they value it that highly.