Thread · HN Continuity

So I think there are a lot of good arguments to be made against price discrimination, and I don't think it is obvious what the best answer is.

However, I have to push back on the idea that increasing corporate profits during the pandemic means that the price increases were not market based, or that companies had the option to just keep prices the same and everything would have continued as normal.

I feel like this conclusion (that companies should not raise prices if profit is high) shows a fundamental misunderstanding of what a free market price means, and why prices are tied to supply and demand and not profit.

SO MANY people seem to think prices are (or should be) set to "total cost to create and distribute the good + a fixed profit margin", and that market competition means every company working to drive down the cost to create the good, which would mean they could sell for less than their competitor.

But that isn't how prices are set. Prices are only slightly related to the cost to manufacture and distribute the good, and are mostly based on the demand for a good and how much supply there is.

So why would profits go up during a shortage situation like the pandemic?

Well, imagine you are a company that makes widgets, and under steady market conditions you sell 1000 widgets a month for $50, and you have a warehouse that holds about 6000 widgets (a 6 month supply). It costs you about $45 to manufacture and distribute the widgets, so you make a $5 profit on each one you sell.

Now the pandemic happens. Let's suppose your supply pipeline is completely shut down, and you can't get the materials to make more widgets at any price. However, you still have the 6000 widgets in your warehouse that you have already made. Based on your experience and the situation, it seems like you won't be able to get any new raw materials for a year, and your competitors are all in the same situation.

Now, you could keep selling your widgets at your normal price, but in 6 months you will be completely out of widgets to sell, and you won't be able to make any more. So you would sell all your widgets in the first 6 months, and then people would be unable to buy any of your widgets for at least 6 more months, no matter how much they are willing to pay... you literally won't be able to make any more to sell.

Or, you could raise prices enough so you only sell 500 a month, which will make your 6 month supply last a year.

Since all the widget manufacturers are in your same situation, they all choose to do the same, and widgets go up a lot in price. Of course, your company doesn't have any extra expenses (you aren't buying any new raw materials), so the extra money you make per item is profit. Your profit increase a bunch during that time period.

Is this bad? Should the manufacturer just keep selling the product at the traditional price? If they do that, there will be no product for anyone in 6 months. Should they keep the same price, but only sell 500 a month? If they do that, then they are going to sell out very quickly every month, and half the people who want them won't get them.

Of course, half the people that would want them aren't going to get them anyway, but how should we decide who gets them and who doesn't? We could do a lottery, but that does not seem very efficient; not everyone needs a widget with the same level of need. Some people really need the widget, because it is vital to something they do, and some people just kinda like widgets but would buy something else if it was too expensive. Making it more expensive weeds out the "kinda want it, but don't need it" consumers and lets the consumers who REALLY need widgets get them (for a higher price).

Look, we can argue for a long time about whether this is the most fair way to distribute goods. While the increased priced does weed out people who don't REALLY need the item, it also weeds out people who need it but can't afford the higher price.

But you are going to end up with people not getting the item who want it no matter what, and having some mechanism to order consumers by who actually needs it the most is a much better selection mechanism than randomly choosing.

It also shows this isn't just companies raising prices for no reason.