Yes, Price-Gouging Exists, and It’s a Sin

board room

Denying that price-gouging is a real and infamous practice, you would think, is like denying that gravity exists. However, Kyle Smith tries his best to defend greedy opportunism amid a supply crisis as a natural and normal, even admirable business practice. Inconsistent, shallow, and at times blatantly absurd, Smith’s essay is defective not only as moral philosophy but also as economic theory and business-management reality. Indeed, one would almost think his argument was satirical had not that sober bastion of free-market conservatism, National Review, published it. If it is satire, Smith isn’t ready for The Onion yet.

Fighting Over Toilet Paper

Smith’s argument waves a cheerful goodbye to reality fairly early:

Let’s say stores run out of toilet paper or hand sanitizer or diesel fuel because of panic buying during the age of COVID-19, and no one can find these items in stores. Why people are punching each other over the Charmin while leaving the Robitussin and Tylenol alone is a mystery, but that is of no moment. What matters is that toilet paper is suddenly more valuable simply because demand has surged. That means people are bidding up the price. Or they would be, if the stores allowed this. If Costco quadrupled the price of whatever item is selling out, there wouldn’t be any shortages of anything. Market pricing would restore normal functioning.

That the customers are fighting over toilet paper rather than medicine is significant: It indicates that rational buying behavior has left the building. But the customers aren’t “bidding up the price”; the irrational TP buyers are signaling that they think they need more rolls, not that they’re willing to pay more per roll. If Costco quadrupled their price, the TP buyers would take their fight to Walmart, who would be happy to sell out their inventory and take away Costco’s revenue. Competition helps keep prices reasonable, which is why we discourage monopolies.

Price and Demand in the Real World

Neither Costco nor Walmart has any incentive or responsibility to impose control on consumer demand. They want to sell as much of their product as possible. Their costs of goods sold haven’t increased, nor are they likely to increase. Under ordinary circumstances, they wouldn’t want bare shelves for fear of losing customer dollars to their competitors. But these aren’t ordinary circumstances — their competitors’ shelves are barren, too. And as the supply crisis deepens into a recession potentially worse than the Great Depression, they’ll soon have enough trouble getting customers’ dollars without chasing them off through price-gouging.

Because businesses want to sell as much of their products or services as they can provide, they won’t intentionally pursue a pricing strategy that loses their market. They’ll offer occasional discounts, coupons, and sales to stimulate demand but won’t hike their regular prices to reduce demand. Most goods are supply-elastic; that is, the merchants can buy more or less from producers as they need to maintain inventory. Where supply is inelastic, like hotel rooms, prices will fluctuate more with demand. However, so long as customers can choose to not buy from them, they won’t charge more than the market will bear.

To use one of Smith’s examples of market pricing against him:

Entertainment venues have fixed seating capacities (inelastic supply). It costs Bruce Springsteen a lot more to stage a show at an arena today than at the local music hall 50 years ago. Regardless of how Springsteen feels about scalpers, he still has to sell S number of seats at ticket price T just to break even. If only scalpers bought S or more tickets, Springsteen wouldn’t lose money. But if T is too high for scalpers, Springsteen risks selling < S tickets. Springsteen wants a sold-out house, so he’ll set the highest price that can still get an SRO crowd.

If that price still permits scalping, there’s nothing Bruce can do about it. Whether he likes it or not, Springsteen runs a business. Market pricing just doesn’t work the way Smith thinks it should.

Coercive vs. Non-Coercive: The Hobson’s Choice

Ironically, The Boss’ three-figure ticket prices mean this “blue-collar artist’s” live audiences now mostly consist of well-to-do Boomers and Gen-Xers. Higher prices depress demand because the consumer’s money supply is inelastic and paying more for one good imposes an opportunity cost of at least one other good the consumer can’t sacrifice. Successful scalping depends on would-be concertgoers who have surplus money. Successful price-gouging, on the other hand, depends on customers whose needs are closer to the base of Maslow’s hierarchy (physiological and safety): things they’re less likely to do without, regardless of their money supply.

“Free enterprise — sometimes called capitalism — is a wonderful thing in normal times,” Smith burbles, “because during every non-coercive transaction [emphasis mine], the buyer would rather have the thing he’s buying than the money, and the seller would rather have the money.” In a non-coercive transaction, the buyer has a free choice to not buy from the seller. They can buy from someone else, or they can do for themselves, or they can do without. This is true not just within a capitalist system but in any economic system. Ensuring non-coercive transactions is one reason a fair market requires regulation.

However, free-market libertarians like Smith often have trouble discerning coercion that doesn’t involve a gun or compromising pictures. To them, a Hobson’s choice is still a choice. While the ethical businessperson must build their pricing strategy in the light of the customer’s freedom to not buy, the price-gouger wants that freedom eliminated, or at least weakened. As with blackmail or its more legitimate cousin “greenmail,” the gouger wants their victim(s) more or less over the proverbial barrel. The Hobson’s choice makes the transaction essentially coercive and the inflated price unfair.

Case Study: Turing Pharmaceuticals and Daraprim

In the ideal price-gouging scenario, the seller has a real or virtual monopoly on a good or service that their target customers can’t reasonably avoid buying, creating a captive market. From history, we have the company towns of the late 19th and early 20th century which debt-enslaved their employees through company-owned stores and housing. A more recent example is Turing Pharmaceuticals, whose CEO, Martin Shkreli, limited distribution of the antiparasitic Daraprim to a single source, preventing competitors from developing a generic equivalent, then inflated the price from $13.50 to $750 a pill.

Turing has presented Daraprim-dependent patients the ultimate Hobson’s choice: “Your money or your life.”

To say a patient dependent on Daraprim would rather have it than the money it costs doesn’t make Turing’s price-gouging non-coercive. As an analogy, a woman might rather be raped than killed, but her submission won’t make the sex consensual. Moreover, the 5,556% price inflation contributes to the spiraling costs of an already burdensome insurance market and healthcare system, making secondary victims of us all. But from Shkreli’s (and Smith’s) viewpoint, if $750 a pill is what Turing can legally get, that’s what Daraprim must be worth — the common good be damned.

The Illegitimacy of Price-Gouging

The guy who buys $70,000 worth of hand sanitizer and disinfectant wipes from Dollar Tree and Walgreens with an eye toward price-gouging does the same thing as a hoarder or a ticket scalper. That is, he lessens other buyers’ fair access to goods — and their fair-market price — by buying from their sellers more than he can reasonably need or consume. But while Smith scorns the mere hoarder as selfish and the scalper as a parasite, he celebrates the gouger as a virtuous “middleman,” even claiming that the gouger is sharing with his neighbors.

Turing Pharmaceuticals’ Daraprim price-gouging, though disgraceful and predatory, is unfortunately legitimate. Turing is a properly licensed, registered, tax-paying business; they simply haven’t added any value or incurred any costs sufficient to justify the extreme price inflation. The ordinary price-gouger, however, is rarely a legitimate business entity. They aren’t properly registered or licensed, and almost certainly won’t declare their gains or losses to the appropriate taxing authorities. Calling them “middlemen” falsely implies recognizable agency relationships with the original retailers. The price-gouger, like the scalper, is an economic parasite; Smith’s failure to recognize the equivalence is inexcusable.

Smith tries to make the practice respectable with a cool technical name: “price arbitrage.” Real arbitrage, to the extent it’s legal, is still seedy. It adds no value, takes no risks, and contributes nothing to the common good; the profits are economic rent. Price-gouging is also a rent-seeking behavior. However, the “price arbitrageur” doesn’t take advantage of information asymmetry between two different free markets. Rather, they pose as virtual monopolies to single captive/near-captive markets to exploit a supply shortfall. Calling it “price arbitrage” doesn’t get the stink off price-gouging.


In the real world, as opposed to Smith’s laissez-faire fantasyland, price-gouging not only exists but is a sin, an offense against fellow citizens (and therefore against God) motivated by the deadly sin of Avarice. The price-gouger isn’t an economic hero akin to Jimmy Stewart’s George Bailey, but rather a selfish, rent-seeking jerk, a “taker” who preys on misfortune and scarcity. Only uncoerced transactions reached in an open, competitive market can establish proper, fair pricing. Any money the seller leaves on the table — even during a supply crisis — belongs by right to the buyer, not to uninvited, superfluous “middlemen.”

Smith asks, “Why shrug at hoarding but be cross with the anti-hoarder, the reseller?” However, we don’t shrug at hoarding; the panic-buyers have built up a lot of animosity and contempt. But to paraphrase a point I made about Avarice, if we ought to scorn people who hoard water, hand sanitizer, or toilet paper, why should we make heroes out of people who hoard cash? Especially if their hoard consists of economic rent gained by activity that verges on the coercive, if not the larcenous? Why be cross with hoarding and scalping but shrug at price-gouging?

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15 thoughts on “Yes, Price-Gouging Exists, and It’s a Sin”

  1. The intent of this article and most of the comments (except as pertains to Obamacare which can not be defended as alternatives were available but not considered because of political motives) is noble. Turing is the most egregious example and thus the most inappropriate to use as a model. It benefited by other companies opting out. When the sudden need arose because of a massive price increase, others were not ready and it took time to start up production lines but the problem was addressed. I have seen genuine price gouging in third world countries but there the problem is two fold; logistical in getting the product there and incompetent governments that use roadblocks as a method of securing and retaining power. In todays free economic society, price gouging is simply not possible to the extent it was once. Of course, in an environment of truly dishonest merchants in collusion with self serving legislators, all bets are off.

  2. Lousy article. Calumny is a sin. I’d be careful about accusing someone of “greed” lest you be guilty of it.

    The practice of “price gouging” exists when for no justifiable reason, i.e. no threat of a shortage of goods brought about by panic buying, someone raises prices to excess. That’s not what has happened, rare exceptions aside, with retailers in the current crisis. They know far better than you do, or what a second guessing government bureaucrat does as to the extent of their stock and their resupply timetable.

    If there is a run on a product, the only practical way a seller has to maintain an adequate supply is to raise their prices, and to do so to whatever extent they deem necessary. Who knows better than they do what to charge? If there is a run on bottled water, I couldn’t care less if he quadrupled the price if it helped ensure that those who couldn’t get to the store until after their late shift at work, were able to get something rather than stare at empty shelves. I only wish that more stores weren’t bullied by the state and local officials from raising as high as possible goods such as hand sanitizer and anti-bacterial soap and cleaners. Are you happy that such supplies can’t be kept in stock?

    And by the way, what reason do you have to assume that retailers are getting rich off of this crisis? What reason do you have to assume that they’re doing anything other than trying to maintain an adequate supply for the foreseeable future? Can you read minds? Why would you presume that they’re doing anything other than trying to stay afloat in the midst of a crisis?

    And do you presume that retailer have a “crystal ball” that allows them to see at a moment’s notice exactly which products they’ll run short of and make on the spot decisions to limit purchases to a set number of items? They’re supposed to put a burden on their cashiers to police purchasers at the checkout line rather than having their managers make decisions as to pricing? How is that a better practice?

    I predict you won’t make the slightest attempt to answer these questions, but that you will double down on personal attacks against anyone who, thanks to common sense, doesn’t see it your way.

    1. Anthony S. Layne

      I find it interesting that people appeal to retailers to defend a practice very rarely used by retailers. As I pointed out, retailers rarely do raise their prices in the midst of a panic. It’s not in their best interests. They’re quite happy to sell out their stocks. No, they don’t have crystal balls, but they do have past records and trends to help them make reasonable guesses. Of course, no one can predict panics; but as I argued before, it’s still not in their interests or their jobs to control demand. Did you even bother to read the article? After all, I’d like to know where I said the retailers are getting rich off of this crisis. It certainly seems you’re responding to arguments I didn’t make while ignoring the ones I did make.

  3. It’s pretty simple. Increases in price due to shocks do three really good things. One, they transmit a signal to all potential buyers that this good is in short supply and you better need it. Second, it tells producers to make more of the good. Third, it tells future consumers and producers that this good is sometimes in short supply. So have a bit of stock. Stoped with “price gouging evil” nonsense.

    1. Anthony S. Layne

      In other words, it tells panic-buyers what they already fear, producers what they already know, and future buyers what they can figure out for themselves. In short, it’s unnecessary.

    1. Anthony S. Layne

      On a personal note, I’m on Obamacare; my income and health don’t permit anything else. Speaking as a quondam health insurance agent: Obamacare is a Band-Aid on a cancer lesion. It tried to marry the essentially socialist idea of universal health care with the quintessentially capitalist insurance industry and got a government-subsidized insurance industry. It didn’t go nearly far enough to address the business practices and economic oddities of the health care industry that contribute to the spiraling costs; instead, it mostly threw money at the problem.

      I believe that health care is a basic human need and a basic human right. I believe nobody should be driven into bankruptcy and poverty by medical bills. I believe poor people shouldn’t be punished, humiliated, or deprived of their basic human rights for being poor. You don’t have to be a communist or a socialist to believe those principles; you can find them in the Catholic Church’s social doctrine. And I believe that the economy as it’s structured and regulated(?) now conspires to keep the poor in poverty. I believed these things before the ACA was even introduced to Congress as a bill. Please ask me to write an article about this!

    2. President Obama was forced into compromise with a health insurance industry which had been lobbying against him from the start. It was the same lobby with the same misinformation (“death panels!!”) that sank Hillary Clinton’s plan in 1994. He bargained with Republicans (there are dozens of Republican amendments in that law) only to find they were dealing in bad faith and he needed 60 Democratic votes to break the Senate filibuster.

      What constituency was Obama fighting for? What powerful donors, what institutional or moneyed interests? Just the 40 million Americans without health insurance. What Obama did was a straightforward application of Matthew 25:40. And he had to do it during those four critical months when Democrats actually had 60 available votes in the Senate, when the country was in the middle of a financial crisis and lots of people in his party were urging him to use his energies elsewhere.

      In short: Obamacare was probably the most heroic, Christian act of any President in my lifetime.

      The result is hardly perfect. This is the real world, and there are still apathetic if not malevolent forces working to bring down even that patchwork stopgap (certainly there are no serious proposals coming from Republicans). But I would like to see you propose a more comprehensive idea which won’t bring accusations of “socialism!” here at Catholic Stand and elsewhere. Looking forward to that article.

    3. Anthony S. Layne

      You might as well have challenged me to build a perpetual motion machine. The malevolent forces that you speak of implicitly define a free market as “unconstrained by any sense of social or environmental responsibility.” Do you know Frederick the Great’s dictum about a teaspoon of sewage in a barrel of wine? That’s how they view the least hint of socialism. Here and there you’ll find a conservative like Tucker Carlson who questions certain aspects of free-market ideology (let’s be honest, it’s 19th-century laissez-faire capitalism rebranded). But in the context of our godawful polarization, they’re seemingly few and far between.

      My criticism of Obamacare wasn’t directed at the former president or ignorant of the political reality he had to face to get the ACA passed, although I’m reluctant to call the effort “heroic” since the Democrats owned both houses and could cram the legislation down the GOP’s throat. If anything, I was a little irritated by your assumption that I’m some kind of “Republican-rite Catholic.” On this issue, I’ll bet we agree more than you think we do. But the best I can say about ACA plans is that they’re better than nothing.

    4. It was indeed heroic.

      You strike me as old enough to remember the fierce log-rolling and compromising that it took to get every Democratic senator on board. (Look up “cornhusker kickback” for an example.) Also remember that Republicans were saying a deal had been struck, then they came back after recess and voted against it. This kind of thing happened over and over under Obama. In some cases, Republican senators voted against legislation they themselves had introduced, because Obama decided to support it. And remember Senator Hatch’s comments about Merrick Garland.

    5. Anthony S. Layne

      I’m middle-aged, my friend. Sometimes I’m lucky to remember what I was doing the day before. (On the other hand, I can remember just about every word of Arlo Guthrie’s “Alice’s Restaurant.”) The details of the fight slipped my mind.

  4. Agreed, price-gouging and hoarding are repugnant and motivated by Avarice. People who do that are jerks! Shoppers remember stores or services stations who jacked up the prices when times were tough.

    I think stores who allow people to walk through their doors with overflowing piles of toilet-paper, hand sanitizer, etc. are foolishly culpable. I think it is not a good business practice to allow a few to buy all when your bottom line might be better served by allowing all to buy a few. Shoppers may stay in your store and purchase many other items if they don’t just load up on one or two items and fly out the door.

    1. Anthony S. Layne

      Hi, Dennis! One thing stores can do without cutting their own throats is to establish per-customer purchase limits, which even in normal market circumstances is a common and accepted practice. I’ve also read where some stores in Europe will have normal prices up to a certain amount then an inflated price over that amount, discouraging hoarding. I think right now that the real panic is subsiding and that current shortages are simply the supply chain not having caught up yet.

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