Teach Price Gouging Using Uber

I was talking with some young people in Boston about getting around during the severe snow. They commented that Uber’s prices would go up by a factor of 4 or more when things got really tough. But they were not angry. They were grateful that the could get transportation at all. And they understood the role that the higher prices played in helping the situation.

Perhaps one could discuss this phenomenon in class. And then ask why the young people did not complain about “price gouging.” Why is it that if a store were to raise prices on snow shovels during a snowstorm that would be price gouging, but Uber’s approach was not price gouging? Why would someone be inclined to favor a regulation to prevent the store from raising the price of shovels during a snow storm?

I suspect that the intuition is that the store’s supply of shovels is presumed fixed, but Uber’s supply of drivers goes up as prices rise. Since the higher price creates a supply response, people can see it playing a constructive role. But with the store and the snow shovels, all you see are higher profits.

Of course, there are two other benefits to higher prices for snow shovels. First, it discourages people who do not really need shovels from hoarding them (if you already have one shovel, you would not go out and buy a second one at a high price). Second, in the long run it encourages stores to keep extra shovels in stock. Knowing that they can make a good return from having a large inventory of shovels in case of a snow storm, the stores will be willing to hold larger inventories than if their profits are constrained.

10 thoughts on “Teach Price Gouging Using Uber

  1. I would guess that people feel different about the shovels and the rides because the cost of shovels in no way rises but the cost to driver in discomfort does go up in the snow. People do not like others to profit. Also the Uber driver is a known human, they do not know the store owners.

  2. But that wouldn’t be the case. Snowstorms themselves would encourage higher inventories and higher profits based on volume. Higher prices would encourage lower inventories for higher profits based on price, encouraging speculation rather than investment.

    • > Higher prices would encourage lower inventories for higher profits based on price, encouraging speculation rather than investment.

      I don’t get it. Speculators who expect higher prices *buy* the things that they expect will increease in price. So higher anticipated prices for shovels would lead to higher inventories, even for speculating store owners.

      I think the issue you’re groping for is that a store owner may speculatively hoard (not sell) his shovels at the beginning of the season because he anticipates higher prices later. But if he’s correct he’s just bringing the future lower supply into the present, thereby helping consumers, other sellers and maybe even manufacturers plan for the future.

      If there was a forward market in shovels, this kind of crude maneuvering would not be required. But it’s better than nothing.

  3. I thought price gouging was supposed to be taught out of the business school.

  4. The comparisons are odd.

    Consider what one is buying when one buys a “hard” asset as compared to a “service” (or other transient experience).

    The asset (shovel) incorporates a variety of costs (inventory, shipping, handling and risk of irregular demand). That may not (usually is not??) true of a service or experience. The latter involves variances of demand or desire (see, concerts).

    In the case cited, there was also the circumstance of “participation” a joint venture in a particular event.

  5. I think you just got lucky. Everybody I know (and I live in Boston) complains about Uber price gouging when they implement surge pricing.

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