Normally, prices in a free market are largely controlled by consumers. Prices will rise only as high as a consumer is willing to pay, and supply is dictated by consumer demand. However, this happy equilibrium is set askew during times of natural disaster. In the midst of hurricanes and floods, the demand for necessities such as bottled water, canned goods, and batteries sky rockets.
As it is in most companies’ best interests to generate as much revenue as they can, is it proper for establishments to raise the price of such necessities to capitalize on undeniable need?
Price gouging is the act of raising market price when no other retailer is available. From an ethics stand point, it is a low blow. With the stress of being displaced from their homes, losing a sizable amount of their possessions, and possibly dealing with illnesses, the last thing natural disaster victims need is an extra figure to weigh on their bank accounts.
But moral compass aside, there is an economic downside to the unethical price hikes.
As Freeman explains in this week’s video on his Stakeholder Theory, a company in decline is one that disappoints its community. And what better way to disappoint your community than to charge them a few extra dollars for their pain?
While the windfall temporarily pads their pockets, companies that practice price gouging will suffer in the long term, losing loyalty and consumers in the decline Freeman so vividly outlined.
http://www.cbc.ca/news/canada/calgary/story/2013/06/22/calgary-price-gouging-floods.html (Calgary Floods)
http://business.time.com/2012/11/02/post-sandy-price-gouging-economically-sound-ethically-dubious/ (Hurricane Sandy)