Dear LA Times reporter: Your lack of understanding of economics doesn’t mean that ‘price-gouging’ is a bad thing

From Mark Perry.

"Harvard economics professor Greg Mankiw recently defended “ticket scalping” in his New York Times op-ed “I Paid $2,500 for a ‘Hamilton’ Ticket. I’m Happy About It.” Professor Mankiw’s defense of an active secondary ticket market at prices above face value was summarized as follows:

It was only because the tickets prices were so high that I was able to buy tickets [to the Broadway smash hit play “Hamilton”] at all on such short notice. If legal restrictions or moral sanctions had forced prices to remain close to face value, it is likely that no tickets would have been available by the time my family got around to planning its trip to New York City.

In a response to Dr. Mankiw, Los Angeles Times reporter Michael Hiltzik revealed the limitations of his understanding of economic principles and basic price theory in an article titled “Dear Harvard prof: Your $2,500 ticket for ‘Hamilton’ doesn’t mean price-gouging is a good thing.” According to economics novice Hiltzik, economics expert Mankiw “doesn’t recognize that it’s one thing to countenance whatever the market will bear when you’re talking about a luxury such as a Broadway ticket, and quite another when you’re talking about staples or public safety [in an emergency].”
Well, no, that’s an elementary and amateurish mistake. Just like natural disasters don’t change the fundamental laws of physics, gravity or aerodynamics, those disasters also don’t change the basic laws of supply and demand. Hiltzik is recycling a frequent but hollow claim that the laws of economics should be suspended, ignored or circumvented following a natural disaster, which then motivates laws against “price-gouging.” But you can make a stronger case that it’s during the period following a natural disaster when we want market forces operating as forcefully and powerfully as possible. Reason? It’s the period immediately following a disaster when efficient resource allocation and addressing scarcity become more heightened than during a normal, non-disaster period. Disasters typically create huge economic disruptions that usually make certain critical goods much scarcer (water, plywood, generators, chain saws, hotel rooms, etc.) than before. To address those serious economic disruptions and disaster-related shortages, we only have two basic choices: a) market prices that accurately reflect true scarcity and market fundamentals, or b) price controls that ignore scarcity and market forces and transmit false information about scarcity. As cruel as it may sound to those who are long on indignation and short on economics like Hiltzik, market forces and market prices will address the post-disaster shortages more quickly and more effectively than government-determined, non-market based prices.

Hiltzik demonstrates more of his economic illiteracy with this feeble attempt to “school” Dr. Mankiw about government price controls:

Price-gouging in an emergency doesn’t look like a case of the market working efficiently so much as one in which the market fails. In other words, it’s crying out for government regulation. Getting products into a crisis zone can be more expensive than normal, so higher prices might sometimes be warranted. But that can be accommodated by anti-gouging laws that allow some flexibility — restricting price increases to 10% or so, or requiring a showing that higher production or transport costs justifies a higher price. But allowing suppliers to raise prices sky-high just because they can get them serves no one except the profiteers.

Here’s some further economic schooling for Mr. Hiltzik about government price controls following natural disasters, taken from Chapter 4 (in the section on “The Economics of Price Controls”) of Professor James Gwartney’s Principles of Economics textbook (15th edition, highly recommended remedial reading for Mr. Hiltzik and others unfamiliar with Professor Mankiw’s economic reasoning on this topic), emphasis added:

It is a natural reaction [for Mr. Hiltzik and others] to think that the higher prices are unfair and that price controls should be imposed [following natural disasters] to prevent “price gouging.” State and local officials have often imposed price controls for precisely these reasons. After Hurricane Hugo, the mayor of Charleston signed emergency legislation making it a crime to sell goods in the city at prices higher than their pre-hurricane levels. Similarly, Mississippi’s attorney general announced a crackdown on price gouging after Hurricane Katrina and after Hurricane Sandy, Governor Chris Christie’s administration filed lawsuits alleging price gouging against more than 70 businesses, including hotels and gas stations that had raised prices; convictions are punishable by fines of $20,000 per transaction.
While price ceilings may be motivated by a desire to help consumers by keeping prices low, they exert secondary effects that retard the recovery process. At the lower mandated prices, consumer demand quickly outstrips the available supplies creating artificial shortages. The controls also slow the flow of goods into the area. Shipments that do arrive are greeted by long lines of consumers, many of whom end up without anything after waiting for hours.
The price controls result in serious misallocation of resources. Electric generators provide one of the best examples. The lack of electric power after a hurricane means that gasoline pumps, refrigerators, cash registers, ATMs, and other electrical equipment do not work. Grocery stores can’t open and thousands of dollars’ worth of food spoils. Although gas stations have gasoline in their underground storage tanks, it can’t be pumped out. ATMs and banks can’t operate without electricity, so people can’t get to their money, which is critical because almost all transactions in post-hurricane environments are made with cash.
Hardware stores that sell gasoline-powered electric generators typically have only a few in stock, but after a hurricane suddenly hundreds of businesses and residents want to buy them. In the absence of price controls, the price of these generators would rise and individual homeowners would generally be outbid by businesses, which can put the generators to use operating stores, gas stations, and ATMs. It is these uses that would yield enough revenue to cover the high price of the generators because they facilitate the provision of other goods and services that people desperately want. Given the large sums such businesses would be willing to pay, some with generators at home would even find it attractive to sell or lease them to buyers willing to pay attractive prices.
Market prices would allocate generators and other urgently needed supplies to those most willing to pay for them. Price ceilings keep this from happening. In the absence of price rationing people keep their generators at home, and it is commonplace for hardware store owners with a few generators on hand to take one home for their family and then sell the others to their close friends, neighbors, and relatives to run televisions and hair dryers. Moreover, the incentive of people to take action and bring generators in from other areas is slowed.
For example, John Shepperson of Kentucky and his family took time away from his normal job to buy 19 generators, rent a truck, and drive it 600 miles to the Katrina-damaged area of Mississippi. He thought he would be able to sell the generators at high enough prices to cover his cost and earn a profit. Instead his generators were confiscated, Shepperson was arrested for price gouging, held by police for four days, and the generators kept in police custody. They never made it to consumers with urgent needs who desperately wanted to buy them.
The dramatic change in conditions that often accompany a hurricane highlights the role prices play. It also illustrates how the secondary effects accompanying price controls can magnify the damage generated by hurricanes.

According to Hiltzik, “Mankiw’s win-win transaction was actually a lose-lose for everyone except the scalper.” In the case of Shepperson and the 19 generators he brought to sell to willing buyers in Mississippi, we can see that it was price gouging laws that guaranteed a lose-lose situation for everybody involved. The local residents and businesses lost because they were unable to purchase one of Mr. Shepperson’s 19 desperately needed generators in a voluntary transaction at a mutually agreeable price. Mr. Shepperson lost because his generators were confiscated and he was locked up in a cage for four days. Local residents lost even more because the efforts of law enforcement agencies were diverted to arresting and booking Mr. Shepperson for price-gouging instead of spending that time to help affected hurricane victims. So who gained by the arrest and jailing of Mr. Shepperson, and the confiscation of his valuable and much-needed generators? Well, nobody! So instead of a win-win outcome for Mr. Shepperson and his willing and satisfied buyers in voluntary win-win market transactions, it was the price-gouging laws that resulted in a lose-lose outcome for all of the parties affected.

Bottom Line: To those untrained and unschooled in basic economic theory and principles it might be easy to have one’s thinking distorted by emotion and side-tracked into a world divorced from economic reason, logic reality and basic price theory. But once equipped with even the most basic and elementary economic principles that one can learn from Professor Mankiw’s or Professor Gwartney’s principles of economics textbooks (or classes), it should be easy to understand that government price controls (rent control laws, minimum wage laws, ticket scalping laws, and price gouging laws) do a lot more harm than good. While market prices will always maximize the number of win-win transactions, government price controls like price-gouging laws are guaranteed to maximize the number of lose-lose outcomes – mostly from transactions that never take place, like the generators in the example above that never reached the affected area in Mississippi and the desperate residents willing to buy them.

Summary Score on Ticket Scalping/Price Gouging: Greg Mankiw, Ph.D. (MIT), Robert M. Beren Professor of Economics at Harvard University, and the Best-Selling Author of Several Principles of Economics Texbooks 1, LA Times Columnist Michael Hiltzik 0.

Related: See Don Boudreaux’s response to Hiltzik on Cafe Hayek in a blog post titled “The Price Is Right (Even When It Isn’t Agreeable).“"

The Price Is Right (Even When It Isn’t Agreeable)

By Don Boudreaux.

"Here’s a letter to the Los Angeles Times:

Michael Hiltzik ridicules economist Greg Mankiw for defending market prices driven high whenever the supplies of products fall relative to the demands for those products (“Dear Harvard prof: Your $2,500 ticket for ‘Hamilton’ doesn’t mean price-gouging is a good thing,” Oct. 25).  Arguing for government prohibitions on significant hikes in the prices of goods and services following natural disasters, Hiltzik acknowledges that such prohibitions cause shortages of staple goods and services and, thus, result in queueing.  But Hiltzik is willing to live with this consequence because, in his view, while poor people can’t outbid rich people for higher-priced goods, they at least have as good a chance of getting near the front of the queues as do rich people.

Overlook (as Hiltzik does) the fact that the higher and faster prices rise, the greater are the quantities of goods rushed to devastated areas by suppliers seeking handsome profits, and the faster do suppliers make these deliveries – and, hence, the greater the number of people provisioned with needed supplies in a timely fashion.  Overlook also the fact that the rich – having larger homes and more disposable income than the poor – are better able to store provisions in anticipation of natural disasters and, thus, are less likely than are the poor to desperately need to purchase staple goods in the aftermath of disasters.  Instead ask how likely are poor people to be the ones who actually secure goods and services that are in short supply.  Unlike rich people, poor people cannot afford to pay others to rush to stores and then wait in line for them.  And also unlike rich people, poor people have few political, business, and social connections that they can exploit to convince store owners to hold precious supplies aside for them.

One of the great benefits of allocation by price is that it is blind to social status and personal affinities.  By preventing prices from rising to reflect the short supplies of goods and services in the wake of natural disasters, the “anti-price-gouging” statutes that Hiltzik lauds turn political, business, and social connections into the currency of choice – and of this currency the poor are especially deprived."

Harvard Professor Greg Mankiw Paid $2,500 For A Ticket To See "Hamilton" And That Is Good

See I Paid $2,500 for a ‘Hamilton’ Ticket. I’m Happy About It.  Excerpt:

"It was only because the price was so high that I was able to buy tickets at all on such short notice. If legal restrictions or moral sanctions had forced prices to remain close to face value, it is likely that no tickets would have been available by the time my family got around to planning its trip to the city.

High prices are a natural reflection of great demand and scant supply. In a free market, in which private individuals can engage in mutually advantageous gains from trade, they are inevitable until demand subsides or supply expands.

The comedian Jay Leno learned this lesson some years ago. In 2009, while the economy was suffering through the Great Recession, Mr. Leno, a car enthusiast, generously performed two free “Comedy Stimulus” shows for unemployed workers near Detroit.

Yet zero is not, as economists put it, the equilibrium price to see a live performance by Jay Leno. Some of the unemployed who received free tickets tried to turn around and sell them on eBay for about $800. When Mr. Leno learned about this, he objected, and eBay agreed to take down offers to resell the tickets.

But why should Mr. Leno have objected? Some unemployed workers, presumably short on cash, thought that the $800 in their pockets was more valuable than an evening of laughs. Similarly, the ticket buyers would voluntarily give up their $800 for a seat. The transaction makes both buyer and seller better off. That is how free markets are supposed to work.

The only person made worse off by the sale is, perhaps, Mr. Leno himself. He wanted to be seen performing before an audience of the unemployed. Doing a show for higher-income residents of Michigan might not be viewed as altruistic, even if it left the unemployed better off. In other words, Mr. Leno’s objection to the eBay resale was arguably a rationally self-interested act in that the resale impeded his ability to appear selfless to others and, even, to himself.

Although I don’t object to ticket resales above face value, and I think it is pernicious when others do, I was saddened by my “Hamilton” transaction in one important way. About 80 percent of what I paid went to the ticket reseller, rather than to Mr. Miranda and his investors.

In the past, Mr. Miranda has objected to the automated software that quickly buys as many tickets as it can, so they can be resold at a profit. But there is an easy way to put these resellers out of business: The theater can charge higher prices to begin with.

Such a move would surely increase the show’s profitability. From my standpoint as a theater consumer, that’s a good thing. Future talents like Mr. Miranda would find it easier to fund their innovative theater projects. And with more projects funded, those consumers who don’t buy “Hamilton” tickets — perhaps deterred by its uniquely high prices — would find a greater variety of other shows from which to choose.

Those who run Broadway theaters clearly feel some unease about charging so much. That is one reason they often hold a few tickets back and offer them cheaply in lotteries the day of the show.

Yet Mr. Miranda and his investors could find better ways to give back to the community than vastly underpricing most “Hamilton” tickets and enriching ticket resellers. Maybe fund scholarships for theater students. Or maybe fill more seats with high school students (which is already happening to some degree, thanks to a grant from the Rockefeller Foundation)."

Ticket scalping: Musicians vs. Economists

From Mark Perry.

"Two recent articles on “ticket scalping” help to highlight the controversial issue of secondary markets for concert and event tickets by contrasting the viewpoints of musicians and economists.

1. Musicians’ Viewpoint. It’s pretty clear that most musicians hate ticket scalpers, as illustrated by this excerpt from the article “Analysis: what’s the real cost of secondary ticketing?”:

Earlier this month, Chance The Rapper took a fittingly unconventional approach to addressing secondary ticketing around his Magnificent Coloring Day festival in his hometown of Chicago. He bought up around 2,000 tickets (some of which were going for as much as $200 each) from scalpers and then sold them back to fans at face value ($45 and $75).
“I took back almost 2k tix from f**kboy scalpers and made them into physicals. And these are just floor seats,” he posted on Twitter, his disdain for secondary ticketing more than apparent. It was a fine gesture of solidarity with his fans and helped push the issue of scalping into the mainstream again.
It’s just the tip of the iceberg in terms of the industry and artists kicking back against secondary. It is both an ethical issue as well as a financial one, with billions of dollars going into this grey economy and where (most) artists or managers are not seeing the fiscal upside.
Adam Tudhope, manager of Mumford & Sons, estimates that the band “lost” $3 million to secondary markets on a recent US tour. This was money that went through secondary sites, none of which came back to the band. “Our point of view is that we set the ticket price and we don’t want it to be resold for anything higher than that price,” he says.

2. Economists’ Viewpoint. Economists generally support ticket scalping and oppose government interference in secondary ticket markets, as outlined by George Mason economist Tracy C. Miller in his recent article “Scalping Isn’t Scamming”:

Scalping certainly results in some consumers paying higher prices than they otherwise would. But in exchange for high prices, consumers can get the tickets they want, when they want them, without waiting in line or competing to be among the first to buy them online at a given time. Opponents mistakenly conclude that high prices are the fault of scalpers, when in fact prices are high because of a large demand and a limited supply.
Scalping benefits the scalper and the buyer, by getting tickets to whomever values them most highly. If someone decides at the last minute to attend a play, a concert or a game, they can find tickets at some price. Without scalpers, some people who value the event highly would be unable to buy tickets for seats of the quality they desire.
Scalping can also benefit ticket producers – the sports teams or performing artists who supply tickets – in two ways. First, it enables them to earn ticket revenue through face-value prices long before an event, while scalpers bear the risk that demand and prices might fall below the price they paid. Second, because of scalpers, the initial demand for tickets may be higher than it would otherwise be, enabling ticket producers to charge more.
Ticket producers incur expenses long before an event, such as the cost of renting an arena. They can keep their selling costs down by selling all or most tickets quickly rather than over an extended period of time. By buying tickets when they first become available and holding an inventory to sell at times that are most convenient to consumers, scalpers connect buyers with sellers and benefit both. They act as brokers, and the difference between the price they pay and the price they receive is their reward for doing this. The more scalpers compete to buy and resell tickets, the lower the markup that each will earn.
Laws preventing scalping are unnecessary and prevent mutually beneficial transactions. Scalping only occurs when original ticket sellers charge a price that’s lower than some consumers are willing to pay. If scalpers use software that’s efficient at buying and selling tickets, it will save time and effort and each party involved in the process benefits. In one way or another, the ticket producer, the scalper and the people who attend the event will each be better off.

MP: As I’ve argued many times before, the opposition to ticket scalping by musicians and their managers and promoters is unjustified and unfounded. Reason? An active secondary market for concert tickets can only exist in the first place because of important factors that the musicians and their representative have full control over: a) the face value prices of the tickets and b) the number of tickets supplied to the market. If Chance The Rapper wants to express his disdain for scalpers and demonstrate his solidarity with his fans, he doesn’t have to buy up his tickets on the secondary market at a premium above face value and then take a loss by re-selling them at face value. Instead, he can either: a) increase the price of his tickets and/or b) increase in the number of concerts on his tour. He is currently only doing one show in most cities on his tour, although he is doing two shows in Miami and Vancouver. I can guarantee that if Chance did 10 shows in each city instead of one (or move to a bigger venue), he would effectively eliminate the secondary market and could demonstrate his solidarity with fans by supplying enough tickets to meet fan demand. Alternatively, Chance could eliminate the secondary market by pricing his concert tickets closer to the market price, instead of under-pricing them as he is currently doing.

The economics of ticket scalping are very simple:

Ticket Scalping Theorem I: An active secondary market for re-selling tickets above their face value can only exist when the original tickets are: a) under-priced relative to the market-clearing price and/or b) under-supplied relative to fan demand.

Ticket Scalping Theorem II: An active secondary market for re-selling tickets above their face value can easily be eliminated by: a) setting ticket prices closer to their market-clearing value and/or b) supplying enough tickets to meet fan demand for the artist’s live concerts.

Ticket Scalping Theorem III: Musicians and their representatives control the price and supply of tickets, and they therefore have the power to eliminate ticket scalping.

Ticket Scalping Theorem IV: Musicians and their representatives should stop their whining and complaining about ticket scalping, since they have the absolute power to stop it by raising ticket prices and/or increasing the supply of tickets."