In a nice post at Angry Bear, Spencer argues that higher prices are not needed to attract additional supply in disaster areas. I am not sure if Spencer advocates anti-gouging laws, but I would like to discuss how his reasoning affects whether anti-gouging laws are a good idea.

Spencer’s argument is essentially that short term supply curves are quite flat for individual stores even in disaster areas, because stores like Wal-Mart and Target have flexible supply contracts which let them buy more than they normally do at the same price and because supplies can be inexpensively redirected from other stores around the country (see Spencer’s very enlightening comments for a more in depth explanation and his earlier post for some anecdotal evidence).

This logic does not support anti-gouging laws, though, because it fails to explain why prices might rise in the first place; if supply curves are quite flat, as he claims, then even large demand increases should not lead to significantly higher prices. One possible reason for rising prices (I don’t have any evidence on whether disasters induce significantly higher prices any longer) is that stores have temporary effective local monopolies during disasters. During a disaster, the value of time goes up considerably because people have to attend to the damage done to their lives. Transportation costs can also increase considerably. This means that in many cases, it is much more expensive to go to stores besides the most local store. This means that the local store has a significant price advantage to other stores and can charge a correspondingly higher price. This logic does imply that price controls (in the form of anti-gouging laws) could be a good policy.

But perhaps stores are sufficiently close together that even consumer transportation cost changes are relatively unimportant, so that the price premium stores command are very low. I would be very interested to learn whether the ease of getting additional supplies to disaster area stores makes disaster induced price increases disappear altogether, even in the absence of anti-gouging laws. If disaster time price increases continue to occur, perhaps stores do have a significant temporary monopoly. If this is the case, anti-gouging laws, even though they are very blunt instruments, could potentially be good policies.