When to Ignore the Law of Supply and Demand

The law of supply and demand is a powerful force, but Nobel-Prize-winning economist Richard Thaler explains in the New York Times that there are times like the Covid19 panademic when a smart business ignores that law (The Law of Supply and Demand Isn’t Fair). Thaler, along with another Nobel-Prize winner Daniel Kahneman and Jack Knetsch wrote the classic 1986 article, “Fairness as a Constraint on Profit Seeking” in the The American Economic Review. They found that customers rebel against firms which raise prices in what is seen as an emergency (their study asked Canadians what they thought of firms which raised prices for snow shovels after a blizzard).  This explains why big retailers like Home Depot and Walmart will, after a hurricane, give away bottled water and sell plywood at or below list prices, while quick-sale ‘entrepreneurs’ will sell those goods for whatever price they can get.  As Thaler put it, “The large companies are playing a long game, and by behaving ‘fairly,’ they are hoping to retain customer loyalty after the emergency.  The entrepreneurs are just interested in a quick buck.”  

Pricing based on fairness outrages some economists.   For example, Tyler Cowen at George Mason University argues that letting prices rise allocates scarce supplies most effectively as well as giving an incentive to increase supply (see Greg Rosalsky, Are High Mask Prices The Problem Or The Solution?).  That may be so, but the fact is that consumers punish companies which are perceived to price-gouge, as Uber found out after Hurricane Sandy.  That market pressure is much more effective than the laws on the books in most states against price-gouging.  Perhaps consumers are not being rational, but as we at Mobus Creative Negotiating point out often, human beings are creatures of emotion feeling as well as rational thought.

The lesson for negotiators is: taking the other side for everything you can get is not always a good idea, especially if you expect to be doing business with that firm for years to come.  It is important to appear to be fair.