Price gouging: the supply-demand disconnect

Hurricane Sandy predictably brought on instances of the old scarcity chestnut that is a favorite of populist pols: price gouging. The aftermath of the worst hurricane to hit the Big Apple in a couple of centuries saw over a 100 hotels lose power resulting in a dire shortage of hotel rooms among other items and services. The matter was compounded by the annual Marathon race (subsequently cancelled), generally a big demand generator for hotel rooms.

Singled out for attention by CNBC was Vornado Realty Trust's Hotel Pennsylvania. The hotel is reported to have increased its room rate by greater than 100% as Sandy swept through the city. It was not the only one to have done so although most hotels in the city did not ratchet up their rates.

The notion of price gouging is about as quaint and untenable as predatory pricing where a player in an industry (usually airlines) seeks to drive prices down to drive out the competition.  Few believe such a strategy is sustainable and fewer complain when prices are driven dow.  Outlawing or restricting alleged price gouging is a public-policy non-sequitur that essentially is a frittering of government efforts and resources.

Few economists believe in the idea of price-gouging as there is scarcely an element of extortion or coercion implied by the terminology. Most people believe in the idea of selling something at the highest level that the market will bear regardless of production costs. What moderates it is the presence of alternatives. In the rare and necessarily brief instances of supply constraints, elevated pricing serves to effectively distribute limited resources fairly as opposed to rationing, an oft tried but always failed economic concept.

Ultimately companies with a customer service perspective who indulge in "squeezing" their customers are unlikely to cross a self-set price rubicon for fear of alienating both current and potential customers. An example of the foregoing is the app driven limo company, uber, which introduced the concept of "surge" pricing on the Sunday before Hurricane Sandy struck.The company agreed hastily to withdraw the elevated pricing strategy a couple of days later thanks to a public backlash; at least that was what the San Francisco based website said it would do. In reality, the service continued with the plan as a 50 block ride sans traffic two days after the announcement on November 1st cost $88! Not only was surge pricing in effect when summoned but the rate exceeded the "surge" multiplier of 2.5 ending up as high as 4 times the actual rate!

Nevertheless,  it is unlikely that uber will persist with surge-pricing particularly with a misleading indicator of elevated prices. They, like market participants in a variety of fields, know that it will only hasten the arrival of alternative players offering the same service at a lower price even when demand levels are elevated due to exogenous factors.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.