Wednesday, October 31, 2012

Disaster Pricing

Prices are shorthand communications between buyers and sellers. What's more, they're truth-generating communications. Both parties are made better off by voluntary trade, so to lie about the relative scarcity of what's being traded is pointing a gun backwards: you'd harm yourself.

When disaster strikes, BATNA disparities necessarily amplify. Plywood vendors can be expected (or imagined) to exercise lexicographic* consumption of their stock. Homeowners who don't get materials are up against sudden risk of dire property damage. What was once a mild, acceptable difference in BATNA disparity becomes situationally coercive when there's a typhoon bearing down. It can be understandable when folks see the price of gas shoot up as the barometer shoots down.

But what are the alternatives? People really want to fill their tanks up. If the price is the normal day-to-day price, maybe they'll buy more than just one tank. Maybe they'll grab some old gas cans and fill those up too. Maybe the first few thousand people will indiscriminately hoard more gas than they're actually likely to need and everyone else just has to do without. The problem of empty shelves when there's a disaster is more predictable than disasters themselves. What's closer to euvoluntary: higher prices or outright unavailability?

Prices find the truth. Prices force buyers to face opportunity costs. There are two ways we might not see prices rise: sellers voluntarily refrain from raising prices (perhaps with the intent to avoid charges of gouging or to preserve reputation) or third-party interference. Either way, we'll see non-price allocation, where the early bird gets the worm and everyone else just does without. Is it a reasonable tradeoff to have a few folks with hoards of emergency supplies gathering dust while others are exposed to the elements in order to preserve a sense of social justice? Is the clash between deonotology and consequentialism perhaps thrown into sharper contrast when Ma Nature is bearing down on the good folk of the earth? Is there a way to reconcile the two?

*this is a sort-of-fancy way of saying that they take what they need from their stock to secure their own homes and businesses before selling what they have left over. This may or may not actually occur.

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Do you have suggestions on where we could find more examples of this phenomenon?