Page 83 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Figure 5.8

Caselet Price Gouging takes you Home

icture this. It is raining and you are caught inside a mall after a long shopping
expedition. The auto drivers want twice the “normal” fare to take you home. Is life
Punfair? Or is pure economics at play?
You know that price is determined by demand and supply. If demand goes up with supply
remaining same, prices ought to go up. And we know that the rain has increased the
demand for autos — people who would have otherwise walked or travelled by public
transport now want to hire an auto. The increased demand ought to increase the hire
charges, considering the supply of autos remain the same.
This does not, however, consider fairness of the price. You may argue that several people
who cannot afford to hire an auto for the twice the “normal” fare will be priced out of the
market. That is, of course, partially true.
If the rates are way too high, very few will hire the auto. This denies the auto drivers a
good chance to make more money. The sensitivity to price (or elasticity of demand) will
ensure that there is no intense price gouging.
The question still remains: Should auto drivers charge higher prices during rainy days or
such other market conditions? Suppose autos ply only on metered rate. You will agree
that driving on rainy days is more difficult than driving on other days. The risk for the
auto driver is higher but his return (metered fare), the same. There is, hence, no incentive
for auto drivers to work on rainy days. This would drive several autos out of the market.
It means you can hire an auto at “normal” fare… if you are lucky enough to get one!
So, consider price gouging (or call it free market pricing if you will) as a means to keep the
autos’ supply high… enough to get you home, if you agree on the price. This does not, of
course, justify unfair prices on regular days as well!
Source: www.thehindubusinessline.com

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