Apr 13, 2020

Amazon and Other Online Retailers Should Reexamine Pricing Policies for Products in High Demand Due to COVID-19

Anti-gouging policies may be better for customer relations than customer well-being
Michael Giberson

Online shopping has proven to be one of the not-so-hidden heroes of the COVID-19 pandemic. There are few better ways in America to acquire useful goods and services while avoiding personal interactions that may spread disease. Amazon, the world’s largest online retailer, and other online platforms are providing an immense public service.

Applications of Amazon’s Fair Pricing Policy, which prevents sellers from charging prices that are “significantly higher than recent prices offered on Amazon,” may be the exception to this stellar performance. Actions taken by Amazon to enforce this policy may be harming rather than helping customers as they have adapted to this rapidly changing environment. Other online sites such as eBay have taken similar actions and may also be harming their customers. These online platforms should review their policies to ensure they serve the public interest.

Most economists oppose state anti–price gouging laws. The reasoning is simple supply and demand. A sudden surge in demand pushes prices up. Higher prices encourage consumers to buy fewer products and use products more carefully. Consumers will seek out alternatives. A bar of soap is as useful as hand sanitizer at home, but it is sometimes less convenient. A higher price for hand sanitizer encourages consumers to use soap instead. This demand-side response helps extend currently available supplies and makes it more likely that goods will end up in the hands of persons with more urgent needs. At the same time, a higher price prompts a supply-side response encouraging greater production and faster delivery.

The reasoning applies straightforwardly to Amazon’s Fair Pricing Policy. The online retailing giant monitors prices online and reserves the right to block product listings or suspend sellers for offering products at prices significantly higher than those recently posted on the Amazon site or elsewhere. In late February, the company reportedly removed or blocked access to over 1 million items in high demand owing to the COVID-19 outbreak. eBay applied a similar policy, and by late March, the company reported it had deleted over 5 million listings of goods running afoul of its COVID-19 guidelines. Suppressing price changes and product listings as Amazon and eBay have done hinders productive responses to changing conditions.

Certainly, many consumers react negatively to sharp price increases on goods, particularly when these goods are helpful in responding to emergency conditions. Clamping down on COVID-19-related price increases may protect the brand names of online retailers helping consumers access these goods.

Many people cheered when a third-party reseller in Tennessee who was profiled in the New York Times saw his access to Amazon blocked and the state of Tennessee threaten to prosecute him for price gouging. The reseller donated the remaining goods to local churches and charities, but had Amazon not intervened, the goods could have been shipped as much as two weeks earlier to consumers in New York City, New Jersey, New Orleans, or elsewhere rather than sitting unused in a Tennessee garage. And of course, not just these few goods were kept out of use. Likely thousands and thousands of customers had access to needed goods delayed by Amazon’s, eBay’s, and other online platforms’ “consumer protection” policies. Policies that freeze prices or block products on online platforms have unintended and particularly harsh consequences for some buyers. Elderly and mobility-impaired consumers are particularly well served by convenient access to goods online and disproportionately harmed when that access is suddenly withdrawn. When emergencies come, some consumers are able to rush out and stock up. Winners from policies that suppress price changes tend to be able-bodied, have larger personal vehicles available, and have ready access to storage space. In short, physically fit, middle- and upper-income suburban consumers do just fine. Such consumers can hoard goods more cheaply when retail prices are kept low.

Meanwhile, mobility-impaired consumers, consumers with less flexible work schedules, those who rely on public transportation, elderly individuals, and consumers with less disposable income and limited access to credit are at a disadvantage. Online marketplaces equalize some of these disadvantages. Elderly individuals shopping online have similar access to goods as the SUV-driving suburbanites. That equalizing force disappears when products are no longer available online. Higher prices, while particularly challenging to low-income consumers in the short run, will discourage hoarding, encourage suppliers to ramp up production and distribution, and help keep useful goods available to online shoppers.

Economists’ defense of markets during emergencies is not a claim that markets always meet every need. As economist Dwight Lee has pointed out, a market free to respond to rapidly changing circumstances is one that aids, rather than hinders, the charitable response. The more money that passes through to distributors and producers, the sooner supplies will increase and people will be able to care for themselves and their neighbors without requiring charitable efforts or government assistance. A better-functioning market means charitable work and public programs can be focused on serving those who need them most.

The good news is that Amazon, eBay, and other online marketplaces have the data necessary to reexamine their fair pricing policies, and they ought to do so as part of their efforts to refine and improve their service to their customers during the pandemic. A simple examination of the ZIP codes associated with sellers and buyers would reveal whether third-party suppliers are aiding or retarding the movement of goods to consumers in high-risk areas. An examination of demographic data associated with customer accounts could show whether elderly customers were better served before or after companies began policing their sites for suspected price gouging.

Amazon’s Fair Pricing Policy is not the only well-intended but potentially harmful consumer policy out there. As noted, eBay and other online retailers have pursued similar efforts. Many states, too, have anti–price gouging policies with similar potentially harmful consequences. But Amazon is the world’s largest retail platform online, and it has extensive data on third-party sellers, transactions, and consumer demographics. It is uniquely positioned to offer comprehensive insights into the consequences of anti–price gouging policies. Amazon should undertake this analysis quickly and release the results broadly. The COVID-19 pandemic is ongoing, much remains uncertain, and a better understanding of Amazon’s Fair Pricing Policy and analogous public and private policies can be put to use immediately.

Michael Giberson is associate professor of practice teaching business economics at the Rawls College of Business at Texas Tech University. He can be reached at michael.giberson@ttu.edu.

Photo by De an Sun on Unsplash

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