So here's an interesting topic my wife and I discussed while driving to the in-laws for the holidays:
Is "price gouging" a real thing, or a made up term by those dissatisfied with price fluctuations in a capitalist society?
This was brought to my attention by the recent venomously negative reviews of Cheaper Than Dirt after they dramatically raised their prices to match (or sometimes exceed) the prices that items are being commanded on the secondary market (eBay, GunBroker, etc.).
I am a competitive shooter (Steel Challenge, Friday Night Steel, USPSA, Bowling Pins, etc.) so I need high cap mags and guns to compete in my preferred classes. While I don't like the recent increase in prices any more than other folks, I think it is important to understand that prices convey 2 important pieces of information:
1) Prices convey the relative cost to manufacture
2) Prices convey the relative equilibrium point between the supply and demand
While I think most folks understand and appreciate the first item (cost to manufacture), it sure seems like a lot of folks are outraged that demand has rapidly outpaced supply, thus driving up the current value of mags and firearms. I'm sure we've all heard the rumors about how much demand major stores have experienced; the unconfirmed rumor I had heard was that Brownells sold the same number of mags in several days than they normally sell in 3 years. I heard another claim of a business having as many transactions in one day as they normally experience in 73 normal business days. While I can't confirm those claims, clearly the surge in demand has put extraordinary pressure on our favorite suppliers, and has made it difficult or impossible for them to fulfill orders in a timely manner, if at all.
In order for manufacturers to be able to "tool-up" their production to meet the current supply, they will need to do the following:
1) Rapidly procure raw materials, which may exceed their current purchase contracts.
2) Increase manpower through overtime, hiring new workers, and hiring temporary workers.
3) Purchase new production equipment (presses, molds, milling machines, metal finishing equipment, etc.).
4) Pay for increased utilities (water, sewer, electrical, natural gas, etc.) and get them connected to new equipment.
I am involved with industrial water treatment, so I am often involved in the "behind the scenes" planning involved in production like this. When I started in the industry over a decade ago, I was shocked in the hundreds of thousands or even millions of dollars that businesses invested in order to expand their manufacturing plants. Needless to say, if businesses are going to take this big of a financial risk, they want to be assured that they will get a payback on their investment.
It would seem to me that financing an expansion like this could be tricky at this time. Most banks would want to reasonably guarantee a return on their loan, and a looming "assault weapons ban" (their term, not mine) combined with potential negative publicity from anti-gun groups could make financing hard to get even if the short-term business outlook is extremely positive.
So, after taking into account the difficulty of production expansion, and still considering the HUGE demand, we run into supply and demand. Since demand greatly outpaces supply at this time (and likely will for the foreseeable future), we have 2 options:
1) Maintain old prices
2) Allow prices to meet the new supply and demand equilibrium point
Here's what will I think will happen if we maintain old prices, and don't adjust to the new demand:
A) Shortages.
B) Black / gray market
C) Limited production increases (don't want too much risk, likely have to self-finance).
D) Less money going towards manufacturers that could put it towards increased manufacturing, and more money towards intermediaries that can get supply.
Here's what I think will happen if we let manufacturer's pricing come up to reflect the new (and hopefully temporary) reality:
1) Suppliers would charge more
2) Less panic buying would occur because people couldn't afford as many mags, and because supply would be more predictable.
3) Diminished black / gray markets and less speculation
4) Suppliers would profit, which may help them prepare for potentially tough years to come.
5) Suppliers would be able to pay higher prices to manufacturers, which would encourage more production and investments in new equipment.
6) Indirect competition would be diminished. Plants that can make multiple items (plastic cups versus plastic mags in a simplified example), would have additional financial incentive to make gun parts and magazines, thus boosting untapped production potential.
Summary: I think complaining about short-term "price-gouging" is an idea rooted in Communist philosophy ("each according to his need") and that is destructive to a free market. I think that allowing prices to come up to the current supply and demand equilibrium encourage our favorite manufacturers to produce more of the goods that we enjoy so much, while stamping out a self-destructive black market that benefits speculators and encourages the very panic buying that we are trying to discourage.
Is "price gouging" a real thing, or a made up term by those dissatisfied with price fluctuations in a capitalist society?
This was brought to my attention by the recent venomously negative reviews of Cheaper Than Dirt after they dramatically raised their prices to match (or sometimes exceed) the prices that items are being commanded on the secondary market (eBay, GunBroker, etc.).
I am a competitive shooter (Steel Challenge, Friday Night Steel, USPSA, Bowling Pins, etc.) so I need high cap mags and guns to compete in my preferred classes. While I don't like the recent increase in prices any more than other folks, I think it is important to understand that prices convey 2 important pieces of information:
1) Prices convey the relative cost to manufacture
2) Prices convey the relative equilibrium point between the supply and demand
While I think most folks understand and appreciate the first item (cost to manufacture), it sure seems like a lot of folks are outraged that demand has rapidly outpaced supply, thus driving up the current value of mags and firearms. I'm sure we've all heard the rumors about how much demand major stores have experienced; the unconfirmed rumor I had heard was that Brownells sold the same number of mags in several days than they normally sell in 3 years. I heard another claim of a business having as many transactions in one day as they normally experience in 73 normal business days. While I can't confirm those claims, clearly the surge in demand has put extraordinary pressure on our favorite suppliers, and has made it difficult or impossible for them to fulfill orders in a timely manner, if at all.
In order for manufacturers to be able to "tool-up" their production to meet the current supply, they will need to do the following:
1) Rapidly procure raw materials, which may exceed their current purchase contracts.
2) Increase manpower through overtime, hiring new workers, and hiring temporary workers.
3) Purchase new production equipment (presses, molds, milling machines, metal finishing equipment, etc.).
4) Pay for increased utilities (water, sewer, electrical, natural gas, etc.) and get them connected to new equipment.
I am involved with industrial water treatment, so I am often involved in the "behind the scenes" planning involved in production like this. When I started in the industry over a decade ago, I was shocked in the hundreds of thousands or even millions of dollars that businesses invested in order to expand their manufacturing plants. Needless to say, if businesses are going to take this big of a financial risk, they want to be assured that they will get a payback on their investment.
It would seem to me that financing an expansion like this could be tricky at this time. Most banks would want to reasonably guarantee a return on their loan, and a looming "assault weapons ban" (their term, not mine) combined with potential negative publicity from anti-gun groups could make financing hard to get even if the short-term business outlook is extremely positive.
So, after taking into account the difficulty of production expansion, and still considering the HUGE demand, we run into supply and demand. Since demand greatly outpaces supply at this time (and likely will for the foreseeable future), we have 2 options:
1) Maintain old prices
2) Allow prices to meet the new supply and demand equilibrium point
Here's what will I think will happen if we maintain old prices, and don't adjust to the new demand:
A) Shortages.
B) Black / gray market
C) Limited production increases (don't want too much risk, likely have to self-finance).
D) Less money going towards manufacturers that could put it towards increased manufacturing, and more money towards intermediaries that can get supply.
Here's what I think will happen if we let manufacturer's pricing come up to reflect the new (and hopefully temporary) reality:
1) Suppliers would charge more
2) Less panic buying would occur because people couldn't afford as many mags, and because supply would be more predictable.
3) Diminished black / gray markets and less speculation
4) Suppliers would profit, which may help them prepare for potentially tough years to come.
5) Suppliers would be able to pay higher prices to manufacturers, which would encourage more production and investments in new equipment.
6) Indirect competition would be diminished. Plants that can make multiple items (plastic cups versus plastic mags in a simplified example), would have additional financial incentive to make gun parts and magazines, thus boosting untapped production potential.
Summary: I think complaining about short-term "price-gouging" is an idea rooted in Communist philosophy ("each according to his need") and that is destructive to a free market. I think that allowing prices to come up to the current supply and demand equilibrium encourage our favorite manufacturers to produce more of the goods that we enjoy so much, while stamping out a self-destructive black market that benefits speculators and encourages the very panic buying that we are trying to discourage.
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well put.
