The Tale of Two Price Gougers, or Rent Seeking in the Age of Katrina and Coronavirus
Updated: Mar 16, 2020
In 2005, during Hurricane Katrina, a Kentucky man locally purchased nineteen generators for approximately $1000 each and drove them in a rented truck to Mississippi where he planned to sell them at double the purchase price. Instead, he was arrested for price gouging and forced to spend four nights in jail, with the generators retained by local Mississippi authorities.
In early March, 2020, two brothers drove across Tennessee and Kentucky, wiping clean small stores that still held stocks of hand sanitizer and related supplies, including anti-bacterial wipes. They then listed these items for resale on Amazon, selling sanitizers purchased at $3.50, bargained down from $5, for upwards of $40, along with similar offerings. The men scored massive profits before Amazon and Ebay shut them down for price gouging.
Despite the seeming similarities, these stories are not created equal. I have taught Law and Economics for many years, and one of the greatest challenges is persuading law students that some instances of apparent price gouging, instead, illustrate the proper functioning of markets. Most law students I teach are motivated by concerns for social justice, the plight of the poor, and figuring how to best to provide for those in great need. This is admirable, and those of us teaching law should, whenever possible and productive, encourage such enthusiasm, altruism, and empathy. Even so, not every claimed instance of market failure implies the market has necessarily failed. Sometimes market features appear as bugs to those unfamiliar with how functioning markets operate.
Yale Law Professor Anthony Kronman helpfully distinguished between benign investments in socially beneficial information, on one side, versus a pure drive to obtain what economics call “rents,” on the other. Rent mean a return to an income-earning asset above the normal, or generally expected, rate of return, which economists refer to as the asset’s opportunity cost. If, for example, an informed treasure seeker works her way through flea markets in search of highly valued rarities, typically mixed in with lots of valueless junk, that’s socially productive. Otherwise, such hidden gems risk falling into the hands of those who don’t appreciate their true value, where they might eventually be discarded as waste.
By contrast, if a would-be purchaser seeks to force the sale of a rare coin, with a faulty decimal mistakingly conveying $10.00, not $1000, despite the owner’s good faith error, the sale would not result from such a socially productive investment. Instead, it will result in a pure transfer of wealth—a rent—from seller to buyer. Without that forced sale, benefitting the buyer by $990, the seller will almost certainly become aware of the glaring mistake, either catching it on her own, or when another would-be purchaser brings the coin to her attention. (As a general matter, the problematic result in this situation is avoided by the rule treating advertisements as invitations to make an offer, not as offers themselves.)
Although students sometimes struggle with the implications, the Katrina case was mishandled. By contrast, the Amazon case was handled properly. The Kentucky man had specific information as to where generators were available and how to get them to where they were substantially more highly valued, and he invested in accomplishing the task. Had he been allowed to sell them, upwards of ten families would have benefited from the purchase, allowing them to power their homes in terribly challenging conditions. One hopes that these buyers would have helped others in their streets and communities. But even if they were less altruistic, media accounts of generators worth double the usual retail price in Mississippi, as compared with at other locations throughout the US, would encourage other would-be entrepreneurs to replicate the initial seller's socially productive behavior. Over time, the rents associated with the higher valued goods in such locations as Mississippi, as compared with where the good originated in Kentucky or elsewhere, would diminish. As more generators are brought in from where they are less valued to where they are more valued, the market price would eventually restore to one approximating the pre-hurricane levels.
The story of the two brothers is less compelling. They knew that the major cities, where hand sanitizers and related goods were most in need, were depleted of stocks. And so, they went from small store to small store, on back roads, hoarding the goods, including bargaining down the list prices, then seeking to sell them at a large profit through an intermediary. And they did so at considerable profit. But this did not result from socially valuable investments in information or even the sweat equity of moving goods from where they began to where they are truly needed.
These men knew something about which everyone was well aware: Throughout the nation, hand sanitizers were increasingly in rare supply, a problem the brothers exacerbated by hoarding tens of thousands of such items. By the time they were forced to stop, they had a back supply, unsold, sitting in a storage facility, of nearly 18,000 goods. This act of commodities arbitrage didn’t result from any special investments in knowledge or even from the simple task of moving goods from where they were low valued, such as Kentucky, during Katrina, to where they are highly valued, Mississippi. These goods were in demand quite literally around the globe, including throughout the US. And so, instead, these two men scoured small towns and rural areas, hoarded goods, exacerbated shortages, and then sought to profit from the very shortages they helped produce through on-line profiteering.
To be sure, smaller retail outlets in rural areas placed a lower value on such goods than did larger outlets in the city, but as the two brothers conceded, their shipment and handling costs for a $2 bottle of sanitizer ran upwards of $16. There is little doubt that established chains of distribution almost certainly could have, and likely would have, moved these goods from the lower to higher value locations at a far lower cost, thereby ameliorating supply imbalances about which virtually everyone was well aware.
I have little sympathy for the losses these men incurred. More generally, I am unsympathetic to to those seeking to profit unfairly from the suffering of others, whether in a crisis like Katrina or from the coronavirus. But it is mistaken to imagine that socially beneficial investments that signal opportunities for rents always, or necessarily, imply that such markups are unfair. Price markups are not always price gouging. Often they are socially beneficial market signals that help encourage the relocation of assets from where their value is low to where they are in greater need.
To be sure, Professor Kronman’s distinction can be difficult to apply in specific cases. Along with my students, I sometimes find specific applications uncertain. But the challenges become greater when we simply assume that all profitable opportunities, even in a crisis, are the product of illicit gouging.
A follow up comment:
The NYT article in which this was reported quoted one of the brothers: “He thought about it more. ‘I honestly feel like it’s a public service,’ he added. ‘I’m being paid for my public service.’” Thankfully, it goes on to report an apparent change of heart, with the man now seeking ways to donate these goods. I hope he finds them, and if he does, we should all be happy to give credit where it is due.
A final thought:
We are presently experiencing what, for many of us, might well be among the greatest challenges of our lives. The coronavirus, the financial meltdown, and the genuine crisis of leadership, most notably at the White House, are each stressful and frightening. Personally, for the first time, I will be completing my own instruction in my large Constitutionally Law class remotely. Two of my children’s schools, one high school and one large university, are on hold. No one knows when or how this will end.
My hope is that this all ends with communities drawn more closely together, with a greater sense of empathy and understanding toward those in need, and, perhaps, with renewed opportunities to do what is right, even when we don't get things right the first time. I hope to read more about the brothers' efforts to give their story a happier ending. It is never too late to do the right thing, and we should all recognize that when it happens.
One more follow-up (posted March 16):
These men have now donated the items, and criminal investigations are pending. See here: https://www.nytimes.com/2020/03/15/technology/matt-colvin-hand-sanitizer-donation.html?action=click&module=Top%20Stories&pgtype=Homepage If the NYT accounts are accurate, these men are now being threatened and harassed. That is absolutely wrong, and it must stop. If they have violated the law, law enforcement authorities can, and will, investigate. For now, they have done the right thing, even if they did not do so initially. Everyone outside law enforcement must leave these men alone.
For the rest of us:
Please do what you can to remain safe and healthy and to minimize the risk to those who are most vulnerable.
I welcome your thoughts.