Some people think it’s a good idea for retailers to hike the price of water just before a hurricane hits.  

Surge pricing – or price gouging as it’s less affectionately known – is supposedly a good thing; it’s the free market doing its thing.

In theory

Hiking the price of a life-saving product during an emergency is indicative of its scarcity, and thus puts people off from stockpiling it.

Consequently, this is more likely to leave more of that product available for other people.

Sounds good in theory, but it doesn’t hold true for very long, if at all.

Why?

Because a price doesn’t convey the actual quantity of stock available.

And since retailers do not always reveal how much stock they have, they can hike the price even if they have plenty in the warehouse.

Some retailers may even deliberately try to manipulate supply in order to drive up the price, giving the impression of scarcity but not genuine scarcity.

Currency, not availability

In any case, a price is never a quantity of stock. It’s a quantity of currency (pounds, dollars, whatever) that the seller wants before they hand over the goods.

Buyers might infer from a sudden and steep increase in price that a product is in scarce supply, but that’s not the same as their knowing a product is truly in scarce supply.

To know how much stock is available, the seller would need to display another message next to the price tag, “Only three left in stock” for example.

Trust

Some websites occasionally tell us how much product is available: airlines, hotels and concert halls for instance.

But even if retailers do display their stock levels, how can buyers trust it?

Sellers may not be able to, or be quick to, update their inventory in real-time. Some may not want to, for both innocent and less sincere reasons.

Scarcity of choice

When I take the train to London, if I have to buy a drink on board, I am forced to pay the advertised price.

Since the price always stays the same at every point on that journey, regardless of the amount of drink available, the price is once again not indicative of the scarcity of the stock. It is indicative of a scarcity of competition.

Multiple criteria influence the price

Retailers appear to use lots of different criteria to deliberately decide the price of their products too, rather than leaving it to the whim of demand from the market: the amount of stock is one criteria, profit margin another, whether the product is a loss leader and the number of competitors too.

Humans at the wheel

So no, price – and in particular surge pricing – is not indicative of scarcity. The price tag is the work of human hands, and it’s not set with much regard, if any, to the scarcity of the product.

Algorithms in control

Correction. It’s not just humans at the wheel. Algorithms, like the ones used by Amazon sellers, for example, can automatically hike the price based on sudden and huge increases in demand.

Whether that hike is a true reflection of low stock levels is highly debatable, because buyers don’t have unfettered access to sellers’ stock levels.

Some websites even run tests that result in the same customer being offered different prices based on whether they are using an app or a website to browse for the products. In other words, the customer isn’t being offered a different price because of low stock levels or because demand has suddenly rocketed.

Vampire algorithms

Uber’s surge pricing algorithm can automatically adjust the price of a cab ride according to demand and driver supply.

But this doesn’t mean it’s a good thing; buyers can’t know, independently of Uber, how many taxis are truly available and thus whether the fare is fair.

Uber might say demand is high and supply is low and use that to explain higher fares, as was seen during the Sydney hostage crisis, but how can a buyer know if that’s true?

Negative effect

Whether prices are hiked by humans or algorithms during an emergency, this points to at least two things: dumb programming and immorality.

Algorithms are built by us. We can control them, for now. They may not be smart enough yet to know what is causing a huge spike in demand, but they can detect it and can be programmed to ignore it, or to alert a human who can look into what’s causing the spike, before hiking a price.

Time to intervene

News of a terrorist attack tends to spread rapidly on social media. News of hurricanes too – which don’t arrive unannounced – so algorithms can be programmed to maintain a product’s price until a human has checked why demand is surging. Price controls and rationing of emergency products can be put in place to ensure people don’t stockpile them.

Don’t launch and leave

We need to programme smarter algorithms and we need timely human intervention when demand rapidly surges during emergencies.

Life on Pay As You Go?

We shouldn’t let prices of life-saving goods rise during an emergency because it’s immoral to only let goods get to the people who can pay, but not to those who can’t.