ECONOMICS: Kicking profits into touch

The World Cup was still more than year away in early May, when news media reported that accommodation providers in Auckland were ramping prices several hundred percent above usual rates and adding long minimum-stay provisions.
Property owners were asking for several thousand dollars week to rent out their homes to rugby fans. One Mt Eden bed and breakfast establishment asked $1600 night. But Bruce Robertson, from the Hospitality Association of New Zealand, told TVNZ’s Breakfast programme several major factors would make $1600 night in fact valid amount to charge. One was the close proximity to “one of the top four major world events”. Another
was that the B&B rate in question was the price for “a package”.
The rates being quoted for accommodation weren’t necessarily the rates that providers would get, of course. If prices were too steep, visitors wouldn’t pay and providers would be left with empty rooms.
“We will see the market sort itself out in terms of rates,” Robertson said. Rugby World Cup chief executive Martin Snedden similarly said organisers were confident the free market would result in anyone overcharging having to reduce prices or be left with empty beds.
Rugby World Cup Minister Murray McCully nevertheless wrote to the Hotel Association, asking it to persuade its members not to risk damaging New Zealand’s tourism reputation by over-charging for accommodation during the tournament. This would be an exceptional time for the country, we would have large number of visitors here, “and so while there is chance to charge premium, we need to balance that against the reputation for being welcoming destination and good place for tourists to come”, McCully wrote.
He said it was unacceptable for anyone to “rort” the system and some providers needed to understand the difference between charging premium and doing something that is “extortionate and harmful to New Zealand’s reputation from tourism point of view”.
Accommodation providers are breaking no laws by raising their rates, however, as long as there is no price-fixing and rates are advertised before purchase.
In some parts of the United States during civil emergencies, profiteering can become “price-gouging”, which is felony. Economists disagree (as they do on many matters) on the wisdom of making it illegal.
A pipe-break left dozens of Greater Boston towns without clean drinking water during recent weekend and consumers were rushing in thousands to buy bottled water. Before long there were anecdotal reports of price-gouging of store-bought water. Inspectors were dispatched, “spot-checks” were conducted, legal action was threatened against offenders who were caught, and Governor Deval Patrick warned: “There is never an excuse for taking advantage of consumers, especially not during times like this.”
“It never fails,” columnist Jacob Jacoby huffed. “No sooner does some calamity trigger an urgent need for basic resources than self-righteous voices are raised to denounce the amazingly efficient system that stimulates suppliers to speed those resources to the people who need them. That system is the free market’s price mechanism – the fluctuation of prices because of changes in supply and demand.”
Professor Mark J Perry pitched in to agree that sellers always try to take advantage of consumers, in the sense that they should always charge “whatever the market will bear”. The circumstances should not matter.
He suggested that the last time Governor Patrick sold one of his own homes, shares of stock, boats or paintings, he tried to fetch the highest price possible (“whatever the market would bear”), not penny less. He would do his very best as seller in every transaction to “take advantage of” the buyer.
Earthquakes, hurricanes, floods or massive price breaks didn’t change the fundamental laws of physics, gravity or aerodynamics. Nor did they change the basic laws of supply and demand, Perry contended. If sellers of bottled water in Boston were guilty of illegal price-gouging for selling water at higher market prices after massive pipe-break, then sellers of all products at all times were guilty of price gouging.
That’s because sellers always charged whatever the market will bear. Only in the world of politics, Perry argued, did “anointed elected officials” think they should be the price-deciders who determined whether sellers were gouging their customers. In the real world of the marketplace, the impersonal forces of supply and demand decided prices, “and we’re all much better off with those market-determined prices than with the artificial prices determined by politicians and bureaucrats”.

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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