Should Amazon and eBay allow price gouging?

From Tyler Cowen.

"This one has been a big story (NYT):

Matt Colvin stayed home near Chattanooga, preparing for pallets of even more wipes and sanitizer he had ordered, and starting to list them on Amazon. Mr. Colvin said he had posted 300 bottles of hand sanitizer and immediately sold them all for between $8 and $70 each, multiples higher than what he had bought them for. To him, “it was crazy money.” To many others, it was profiteering from a pandemic.

The next day, Amazon pulled his items and thousands of other listings for sanitizer, wipes and face masks.

Colvin ended up giving them away to charity (NYT).  More analytically, here are three factors that matter when we consider whether a market-clearing price is better:

1. The traditional maximization of consumer + producer surplus that results from market-clearing prices.

2. People getting pissed off when they see the inequities and supposed inequities of price gouging.  That is a real economic loss too, though you have to wonder how much they actually would pay to make the gouging go away (and they might consider such a payment a “price gouge” too!).

3. There are significant social externalities to consumption during a pandemic.  So do the market-clearing prices or the rationing algorithms do a better job getting the relevant protective commodities to the most likely super-spreaders?  You might think poorer individuals are the most likely super-spreaders, but low prices and queue don’t seem to place the scarce commodities in their hands anyway.  Marginal allocation will be by privilege (e.g., do you have friends in China who can send you masks? etc.) if not by income.  So I do not see that this factor is going to favor rationing algorithms.

On net, the market-clearing prices are likely to be the better solutions.  I also am reluctant to eschew better solutions simply because some people do not like them from a distance, consider Sen on Paretian liberalism.

One interesting feature of this problem is that it points to a potential disadvantage from conglomerates such as Amazon.  Masks for instance are a tiny part of Amazon’s revenue.  Yet price-gouging on masks can hurt Amazon’s public image a lot.  So a fearful Amazon is unlikely to allow the welfare-improving price gouging to continue.  The company is too much an agent and too easy a target on social media.  That keeps them away from welfare-maximizing, politically incorrect decisions.

Alternatively, imagine you bought masks at a shop that sold nothing else — The Mask Store.  Perhaps their reputation rests on having masks always available, but in any case they are not afraid that bad PR will destroy their profits in other lines of business, as there are no other lines of business.  So The Mask Shop is more likely to allow prices to reach their market-clearing level."