ANDERSON — Continued closures and disruptions in supply chains may mean steep price increases in the coming weeks as businesses seek to mitigate the effects of the coronavirus pandemic, according to a Ball State University economist.
But those increases likely won’t constitute price gouging, he added.
“As an economist, I don’t have a definition for when a price is too high. There’s no objective way to answer that question,” said Steve Horwitz, Distinguished Professor of Free Enterprise at BSU’s Miller School of Business.
Horwitz says small businesses will continue to be among the hardest hit by the coronavirus-induced economic shutdown because largely, their supply networks are relatively shallow when compared to those of larger corporations.
“Small businesses, in particular, are under incredible pressure,” Horwitz said. “To the extent we see these sorts of price increases, it will almost always be small firms. Large firms like Kroger or Costco have such deep supply networks that they can just adjust their quantities by getting more product without having to change price.”
However, Horwitz points out that raising the price of an item signals to customers that they better make careful decisions about how much they buy and what they use it for.
“Imagine if this was bottled water,” he said. “Raising the price means it’s less likely people will buy it to wash their dog. The higher price forces customers to ration their purchases. It means more of the limited supply to go around.”
Higher prices should also alert the whole supply network that certain items are in high demand and there’s more than the usual money to be made by supplying it. Those higher prices should bring in more supply over time, which will ultimately drive the price back down.
“This is a problem of real scarcity,” Horwitz said.
“I do think we’ll be seeing this sort of thing for a few months but not a lot of it,” Horwitz said. “People are wanting toilet paper, and the stimulus package isn’t going to change that. We actually want prices to go up so they know that people want more.”
SOURCE: (Anderson) Herald Bulletin