Amazon faces complaints of price gouging ahead of Irma
By Aimee Picchi, Moneywatch
September 6, 2017
Amazon may be in hot water with consumers over the price of water. Some are reporting sharply higher prices for water on Amazon as Irma approaches the Florida coast. Customers were reporting packages of Nestle water selling for $25 on Amazon, yet, in the Northeast, a package of Nestle water was selling for $18.24.
Amazon said it doesn’t engage in surge pricing and denied that bottled water prices have changed recently. It could be that consumers are seeing higher-priced items that remain in stock after lower-priced items sell out, however, rather than merchants boosting their prices in response to the storm.
Amazon instead calls its prices “dynamic pricing.” In this model, items that are in demand receive price tweaks, thanks to Amazon’s pricing algorithms. As demand spikes, prices go higher. This model also responds to pricing at other merchants.
When CBS asked earlier this year about the practice, Amazon declined to speak on the record about how and when the site might hike prices, providing only a written statement that said, in part, "The world's prices fluctuate all the time."
That may be true, but fluctuating prices look like price gouging, especially in times of crisis. Best Buy apologized last week after a photo posted online showed cases of water on sale at one Houston-area store for more than $42.
Dynamic pricing isn’t illegal, although it tends to create a sense of outrage in times of crisis. Some economists defended the practice in the wake of Hurricane Harvey, with University of Michigan economist Mark Perry writing that it represents the market forces at work.
"A frequent claim we hear is that the laws of economics should be suspended, ignored or circumvented following a natural disaster like Hurricane Harvey, which then motivates laws against 'price-gouging,'" he wrote. "But you can make a stronger case that it's during the period following a natural disaster like a hurricane when we want market prices to prevail and market forces to operate as forcefully and powerfully as possible."
Nevertheless, there's another side to market forces: consumers also have the choice to snub retailers who engage in price gouging.
Questions:
- How would you define price gouging in your own words?
- Explain “dynamic pricing” in terms of supply and demand.
- If consumers are willing to pay $42 for a case of water, should retailers charge $42? Why or why not?
- Why does economist Mark Perry say that, following a disaster, “we want market prices to prevail and market forces to operate as forcefully and powerfully as possible.”?
- Is avoiding retailers who price-gouge an example of supply and demand in operation? Explain.