April 13, 2020 4:51PM

Senators Harris and Warren’s Price Is Wrong

Plenty of evidence suggests Americans have gotten worse at correctly estimating market prices over the past five decades. Reviewing the history of the one‐​bid “Contestant’s Row” game on The Price Is Right since 1972, economist Jonathan Hartley found that contestants’ underestimates of prices have gotten larger over time. One potential cause, Hartley mused, was that new technologies, such as price comparison websites, mean people have less need to track closely nowadays. So we pay less attention to prices and how they change.

Which is curious, because, as this pandemic rolls on, lots of the public and politicians suddenly find themselves not just experts in what market prices are, but also what they should be. By all accounts, the Virginia Attorney General’s office has received more than 400 complaints about “price‐​gouging” during the pandemic – that is, instances where prices for “necessary goods and services” have been deemed by members of the public to be much higher than prior to the emergency. Twitter is full of complaints about prices being charged for hand sanitizer and masks, but also entertainment goods, with anger at Nintendo Switches being sold for as much as $900.

Lots of states already have anti‐​price gouging laws for emergency situations. But with stories about packets of Purrell Hand Sanitizers, usually around $10–12, selling for as much $350, national politicians are now keen to step in. Congressman Jerrold Nadler (D-NY) and colleagues in the House want a nationwide anti‐​price gouging law giving the Federal Trade Commission powers to punish companies if their product price today “grossly exceeds” either the price at the end of last year, their competitors’ prices, or a price sufficient to account for any increased costs the business faces. Democratic Senators Kamala Harris and Elizabeth Warren, meanwhile, want a national law that bans price increases of more than 10 percent during national emergencies.

The implicit message of such proposed laws is clear: market prices set prior to emergencies are good, fair and reasonable; market‐​set prices after the onset of one are bad, unfair and unreasonable. At least, that is, if they go up significantly. When prices plunge, as they have for flights, restaurant food, and clothing during this crisis, nobody seems to believe that consumers are gouging or swindling companies. Our politicians have very asymmetric thinking.

It is as if lawmakers such as Warren and Harris believe supply and demand cease to play a role in determining prices once a government emergency is declared. That changes in prices after that point cannot possibly reflect major changes in the availability or want and need for the goods but are completely determined by greedy companies or hoarders fixing prices in pursuit of a quick buck or to account for changing costs. That assumption shows a fundamental misunderstanding about what prices are and why they change.

Such thinking is especially misguided during COVID-19, of course, because shutdowns and changed consumer behaviors have seen dramatic shifts in supply and demand across many sectors. In some states, for example, governors have banned the sale of “nonessential” items, such as seeds for growing plants, within supermarkets. More importantly, in light of the virus itself, consumers want (or in some cases need) more masks and hand sanitizers to protect themselves. This surge in demand is the primary cause of apparent near‐​term “shortages” in stores, but also the reason why some sellers are able to charge much higher prices online.

Ordinarily, market prices would rise in light of such increased demand. This would discourage some purchasers from overbuying and encourage sellers or hoarders to bring more supply to serve the market. Overall sales would rise but, importantly, over time, the greater profitability from selling, say, face masks, would encourage other potential new suppliers to enter the market and ramp up production too. The higher prices, in other words, would encourage more face masks than there otherwise would be, at least after a while. This could be particularly important if this crisis rolls on for months and months.

Now, in reality, some major retailers do not like the reputational damage that comes with seeing prices of important goods rise in the middle of a pandemic. So, they keep them artificially low, sometimes even discounting the products. Hence why shelves lay empty in major stores and why, increasingly, we see small sellers able to charge extremely high prices to people who really value the products in the online market. Warren and Harris may wish this away, but these prices reflect the new reality of supply and demand – remember, to charge a high price, you have to have willing buyers.

By imposing anti‐​price gouging laws then, Warren and Harris aim to quash this escape valve through the force of law. The result will be greater shortages and sustained empty shelves in situations where new demand would have pushed market prices up by more than 10 percent. Instead, goods will be allocated not by willingness to pay, but to those in the right place at the right time. Hoarding will be encouraged. And most worryingly: fewer new entrepreneurs will serve the market or think about developing systems for “option ready supply” ahead of any similar future crisis.

In the Price is Right game, of course, contestants win if they make the closest guess to the real price, without going a cent over. Warren and Harris, in effect, want to tell us that anything up to 10 percent above a pre‐​crisis price is a “real” price and anything above that during a crisis is illegitimate. This arbitrary approach has no basis in economics and could do real harm to the ongoing availability of highly demanded goods.