Michael Eriksson's Blog

A Swede in Germany

Toilet paper, pricing, and market forces

with 3 comments

The toilet-paper situation continues: I again failed to find any and have, five minutes before starting this text, started on my last roll.

This raises the question: where are the market forces? This is a good example of where market forces on a free market could really be useful, e.g. in that the price of toilet paper is quadrupled, reducing* the trend towards hoarding, increasing the chance that a supply will be present, and giving those in a greater need** the ability to solve their issue through a greater expenditure. At the same time, it would give the stores and/or other parties greater profits and give them incentives to increase supply. (The same applies to similarly coveted products.) It would also make unnecessary the blunt, potentially unfair, and potentially ineffective attempt to regulate sales by a limit of one or two packages per household, tried in Germany.***

*With some reservations for human psychology. I would not be shocked if a sudden price hike was taken as proof, by the dumb masses, that there was a dire underlying toilet-paper scarcity, with even greater hoarding as a consequence …

**More strictly, those with a greater need relative their willingness to pay. This could be due to a greater scarcity, e.g. being on the last roll; it could be about a greater benefit, e.g. having a large family; it could be about having more money; … The positive effects, from my point of view, are obviously more on the needs-can-be-met than the is-price-insensitive side of the equation.

***Consider e.g. that I, living alone, am allowed (should there be a supply!) to buy the same one or two as the head of a six person household; or that preventing someone from showing up repeatedly, or having several members from the same household use different shopping carts, would be hard to prevent without costly counter-measures.

A partial explanation is demonstrated by the attitude of a press release by a consumer-protection agency: Apparently, toilet paper is sold for exorbitant prices on e.g. eBay, which has attracted the wrath of the agency. On the positive side, it does advice consumers to not purchase at these prices, and to trust in a coming improvement of the supply situation in brick-and-mortar stores. On the negative side, it also charges the consumers to complain to the respective platform and condemns the practice with words like “überteuert[en]” and “unseriös[e]”.*

*Both words are tricky to translate, but, respectively “overpriced” (with strong negative connotations) and “shady”/“dubious” come close.

However, having a product that is in demand, and selling it for whatever price one can get, is not inherently* wrong. On the contrary, it will often help society and the overall economy through better resource allocation and stimulation of production—not to mention that it gives those with a greater need a way out that does not involve spending four hours in a Soviet queue with no guarantee of success.

*However, there are a number of ways that they can become e.g. dubious, unethical, or even outright illegal, e.g. through emptying the shelves in a store by buying up the supply at regular prices and then selling at heightened prices, by making misleading claims, or by failing to pay VAT on the price difference. (Also note a later footnote concerning the first item.) Such problems were not mentioned in the linked-to text …

Nevertheless, such attitudes are quite common, especially in Left-leaning countries, where e.g. a price increase in the stores might be condemned as price gouging, usury, or similar, and where e.g. a change in the underlying price after a VAT change is condemned as unethical abuse, without considering the impact of market forces.* Indeed, the Swedish Left often has a cliche response to any suggestion that e.g. some medical procedure should be even partially financed by the individual instead of the tax bill: this-or-that must not be just for the “rich”. (Usually, not only cheap sloganeering but also a fundamental misunderstanding of the suggestion.)

*E.g. in that the presence of VAT drives the (resulting) price up, which drives demand down, which drives the underlying price down—and that a reduction in VAT will drive demand up and naturally allow the underlying price to recover a portion of what it has lost.

Similarly, the last time I went shopping, there was no milk. Today (different store), the regular milk brands had been replaced by others and prices were higher than I am used to*, but there was milk. Was I annoyed at the price hike and having to pick a different brand? Yes. Was I as annoyed as the last time around, when I found no milk at all? No. Would I have been much more annoyed, had I not found any milk, for the second time in a row, after already not finding any toilet paper, for the third time in a row? YES!

*Moving from 0.6x Euro/liter to either 0.99 or 1.15 Euro per liter, depending on brand. I note that I tend to buy low-price brands and that more expensive brands can land on the same order even on a regular day.

Moreover, I understand that this is not (or not just) the store trying to earn more money, that the real problem is the hoarders, and that the store too might have faced unusual costs, e.g. in that the normal channels were temporarily exhausted and other, more expensive, channels had to be used. I am better off paying more than going without.

If the people are unable to see clearly on such issues, then this is where the pedagogical effort would be better spent.

Market forces might not be perfect, but they are valuable and trying to overcome them usually leads to more harm than good, as evidenced by the problems faced by consumers in the old Communist Eastern Europe or during war-time rationing. (Notwithstanding that some rationing might be necessary in extreme circumstances.) For instance, if a farmer is told that he will get X Euro for a sack of potatoes, he will provide potatoes according to the limits imposed by X in addition to existing limits on time, grounds, whatnot. If X is too low or sinks, he is likely to cut back on production, because it does not pay for him to use all his fields. They might now lay bare, of no use to anyone, or be used for some more profitable, but paradoxically less wanted, product—or he might still grow potatoes, but move them into production of vodka. If prices are held extremely low, he might even be better off using his potatoes as animal fodder or even letting them rot in the ground—while people are screaming for potatoes. Of course, if production is cut back, he might have to lay off helpers, who will then be a further burden on society … Vice versa, if prices are too low, he might have to cut back production because he cannot afford the helpers.

In contrast, if X rises or the limit is abolished, the price might warrant additional measures to increase output, e.g. that his private lawn, or that piece of land with poor soil, is now used to grow potatoes. In the long term, he might even be willing to go through the hard work of cutting down a bit of forest, de-rooting and de-rocking it, and planting potatoes there. He might forego existing vodka production in favor of selling unprocessed potatoes for eating. Etc.

(Similar arguments apply to some degree to other steps in the supply chain, e.g. relating to what distances potatoes might be shipped or whether attempts are made to salvage potatoes after an accident during transportation.)

What use is there for a consumer in being guaranteed a low price for potatoes, when there are no potatoes on the shelves? (And what use is toilet paper at the “old” price to me, when there is no toilet paper on the shelves?)

Re-selling tickets to sports and music events is usually forbidden. But why? For someone to want to engage in professional* re-selling, he must perceive a profit opportunity. This opportunity can only exist if the pricing strategy of the original seller is sub-optimal. (If it does not exist, the re-seller will lose money on and, likely, interest in the venture.**) If the original tickets costs 20 Euro and the re-seller gets away with 25, then the original price is too low.*** If the original tickets are fixed at 20 Euro and the re-seller manages to sell one third at 30, one third at 20, and one third at 15, and still break a profit over his own efforts, then the original pricing scheme is too inflexible. Etc. In these cases, the original seller is throwing away money that the re-seller is willing to pick up. As to the consumers, some will be better off, some will be worse off.

*As opposed to private ad-hoc sales, e.g. because “I bought a ticket, but now I must go to an unexpected funeral.”.

**With some reservations for return policies. When it comes to ticket-sales, we are likely on the safe side, because refunds are unlikely to be possible after the event has started, while claiming a refund too early will reduce the re-sellers shot at profitable last-minute sales. For toilet paper, especially in combination with temporary fluctuations in demand and/or great consumer irrationality, this might be different. If someone loads up on toilet paper in a store for the purpose of re-selling, he will typically be able to return any surplus for a full refund of the original price at a later date—in an extreme case being the cause of an artificial shortage that allows outrageous prices. (In contrast, if someone buys toilet paper without a return right, having to take the loss on surplus himself, the situation is different. Ditto if quantities bought are too small or over such channels that it does not create an artificial impression of a supply deficit.)

***Note that there are other factors than just profit making that enters here. For instance, more revenue from a rock concert might lead to more rock concerts (in turn leading to not only more entertainment but also e.g. more jobs); for instance, more revenue from an opera performance might reduce the subventions needed to keep the opera house in business and ease the corresponding tax burden.

Or consider the cartoon cliche of the lemonade salesman in the middle of a dessert: Why should he not be allowed to charge the crawling, disheveled, and thirsty customer ten times what what the same product would cost in the nearest city? He could have chosen to sell in that city to regular prices. He could have chosen to go into some entirely different line of business. Instead he took additional costs and risks on his head in order to provide a product where it might be needed. The customer in turn, could have prepared better, brought more water, returned home sooner, brought spare parts for his jeep, whatnot. Selling very expensive lemonade at high prices in the dessert is a legitimate* business model—end of discussion. The lemonade salesman has brought himself into a position of leverage through providing a service that would otherwise not be there, and the customer can take it or leave it. (He cannot “leave it”, because he is dying of thirst? Well, without the lemonade salesman, he would have died of thirst anyway. His way out might be expensive—but he has a way out.) In contrast, those who create an artificial monopoly are on much shakier ground, e.g. in the context of a sports venue where certain merchants have a monopoly on certain products and the visitors are forbidden to bring similar** goods from home—that is a negative.

*If not necessarily one that would work in real life—this is just an illustration of principle. In real life, there might e.g. not be sufficiently many, sufficiently ill-prepared customers, and the chance of actually meeting anyone outside of commonly traveled routes is likely small .

**Note that some bans might be valid in some contexts, e.g. a “do not bring hot meals” in order to protect the seats—but if hot meals are sold within the venue for consumption in those very seats, it is obvious that this ban is not justifiable in this particular context.

From another perspective, one* of the most common differences between a Leftist and e.g. a Conservative, Libertarian, or Neo-liberal perspective is how they would treat a grasshopper-and-ants situation. Let us say that someone has prepared for the eventuality of a negative future event, has gone to great pains and costs to prepare for it, e.g. by stocking up on canned foods and suitable tools—while the rest of his village has not. Indeed, they might even have ridiculed him for being a weirdo. Disaster does strike—and now the villagers are banging at his door for food and help. The general Leftist attitude tends to be that he should be obliged to give this food and help for free (e.g. by the cliche of “showing solidarity”). Others believe that it is up to him whether and under what conditions**, e.g. in exchange for money or services, he doles out his food, possibly risking his own long-term survival in the process. As a special case, let us return to the desert: Two travelers are forced to travel the desert on foot. One has the wherewithal to bring water; the other does not. Half-way there, the first is in decent shape but has used half his supply, while the second is about to have a heatstroke—should the second have the right to demand water at will, or should it be the decision of the first what he provides? (Real-life examples are, obviously, often more subtle, e.g. in that taxation schemes rarely (if ever) consider why someone earns more than someone else or social-security schemes why someone is on the dole. Sometimes it is a matter of luck; more often, nowadays, it is a matter of one or more of industriousness vs. laziness, planning vs. not planning, delaying or not delaying gratification, being professional or unprofessional, saving in the bank or spending on entertainment, …—and, obviously, actual own ability.)

*Another, with some overlap, is that the former tend to focus on equality of outcome, while the latter tend to prefer equality of opportunity.

**Note that e.g. I would not say that he should sell his food as expensively as he can, with no regard for the well-being of others. I am saying that it is his choice. That choice might be profit maximization, it might be enough profit to just make the effort and future risks worth his while, it might be selling “at cost”, it might be giving things away—as he sees fit, not I, the villagers, Karl Marx, or Bernie Sanders.


Written by michaeleriksson

March 26, 2020 at 7:14 pm

3 Responses

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  1. […] a more personal note: By the time of my last text, I had managed to get hold of toilet paper (cf. an earlier text), but I might have failed again, had I arrived ten minutes later—so fast was the product moving. […]

  2. […] As I have noted in the past, governments seem to do their darnedest to sabotage market forces—to the detriment of almost everyone. (Cf. e.g. [1] and [2].) […]

  3. […] **Cf. e.g. [1] and [2]. […]

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