[jariel]

He's speculating on a commodity, it's just not corn or potash.

Nobody expects that there's going to be an acute, worldwide shortage of wheat and that it will be unavailable anywhere.

Demand goes up, prices go up, same as anything.

Now - this kind of arbitrage has very, very limited value for society (there's an economic argument for price clearing), so we can think of it as 'gouging', but sometimes this is not the case.

I think at this scale, price arbitraging for normal household goods provides zero net value (in fact negative value because it involves work and effort without net value creation). Amazon, Wallmart etc. should probably clamp down on this because it's their customers who pay by having middlemen in between.

[eru]

Why would there be no net value creation?

People's willingness to pay for the service suggests otherwise?

[jariel]

"Why would there be no net value creation?

People's willingness to pay for the service suggests otherwise?"

No - 'willingness to pay' is not 'value creation'.

The net surpluses to society are the same with a middleman, it's just they've been distributed differently.

Assume: $1 cost to make good $5 average consume 'highest price point'

This means, a bottle sold for $2 to a consumer, means a $3 surplus for the consumer.

If there is a middleman who buys for $2 and then sells for $3 to the consumer, the consumer surpluses are reduced. Consumers only get $2 instead of $3 in surplus, because $1 went to the middle man.

The 'economic pie' is not increased by basic arbitrage.

Now, the caveats:

1) In large liquid markets, price clearing and discovery actually ads some financial value. Even providing liquidity has material value. So in some cases, there is some systematic benefit from arbitrage. There is some 'growing of the pie' and 'more surpluses' for everyone at this point.

2) If it's 'more than arbitrage'. If the 'middleman' was doing shipping, buying in bulk and selling in units, special shipping/packaging or anything else, then there's possibly value creation. Even buying ahead of time, sitting on inventory and smoothing out the supply during demand peaks - this is not so much arbitrage/middleman - this is actually wholesaling. Again, they are creating value.

3) The demand curve has shifted quite a lot over the last little while, but I don't think this changes the arbitrage, it's really just arbitrage. It has a 'caveat' in that this middleman guy may very well have not known the real extent of a supply shock.

4) Even when there can be 'value creation' it doesn't mean 'everyone wins' necessarily, for example, the wholesaler could increase the real value of a product by $X but then sell it for exactly that much more, so the 'net economic pie' is increasing, but they were able to 'grab all of the increase' meaning consumers don't win anything.

Most capitalism involves quite a bit of economic surplus for consumers, this is why capitalism works really well and makes almost everyone rich. That you are able to buy a 'dishwasher' for $500, saves you probably $10's of thousands of dollars in labor, i.e. there are massive surpluses to you. Similar for most commodity goods - consumers win big time, even if they don't get direct dollars to put in their bank account as a measure of that value capture.

[eru]

Your analysis is too simple.

Different consumers place different amounts of value on goods. Normally, market prices react to balance this out.

When prices don't move (or are not allowed to) this no longer works. Let's investigate the situation with an example: we have one bottle of sanitizer (produced for 1$) and two people willing to buy. Alice values the product at 5$ and Bob does so at 50$. The retail price is 2$.

Without an adjustment in the price, randomly Alice might snatch up the sanitizer. For a consumer surplus of 3$. If Bob had managed to snatch it, there would be a surplus of 48$.

If a 'price gouging' middle man came in and raised the price, the likelihood of the product going to the consumer who values it more goes up by a lot. 45$ (= 50$ - 5$) of value for the economy are created.

In addition, a common way people deal with these situations is by queuing. What queuing does is to add a time cost to the monetary costs of the purchase. Queues increase until the total cost of the marginal person who could join the queue is at something like a market clearing price.

Unfortunately, that price will mostly be made up of wasteful queuing effort that no-one benefits from.

(PS: I didn't downvote you. I actually upvoted you after I saw your comment was in the negatives. The HN crowd can be pretty knee-jerk with their votes. Any topic around economics (or politics?) is especially fraud with that.)

[jariel]

"Your analysis is too simple. Different consumers place different amounts of value on goods. "

My analysis is not 'too simple' because the 'averaging assumptions' I made are valid in the context of illustrating my point.

Obviously, there are 'supply and demand curves' and that everyone is going to gain different surpluses - but it doesn't matter, and just confuses the issue.

.. which is why I used an 'average consumer' with some arbitrary, made-up price points.

Your example is flawed:

"the likelihood of the product going to the consumer who values it more goes up by a lot."

This is not true, in fact, just the opposite (given the same supply/demand curves), when a middleman 'buys low and sells higher' there is definitely a lower chance that consumers will yield greater surplus on any given transaction, all things being equal.

Now - in any given random transaction, sure there will be greater/less surplus, but that's beside the point.

In fact, when the market clears fully there's a 100% chance that fewer surpluses are going to consumers with a middleman.

There is a special assumption in your example that's not overt which is 'when prices don't move' - I suppose you're hinting at a change in the demand curve, given the 'new calamity' of coronavirus. Whereas people valued Purell 'less before' and 'more now' there's the possibility that a 'middleman' has created 'value for society' by buying up Purell when the did not need it a lot, and selling it when they really did need it a lot more.

The problem with this argument is 'inventory'. There was already quite some inventory of Purell 3 weeks ago. The 'middleman buying it all' would have only decreased usage of Purell during 'nonessential' times very marginally, the overall supply really wouldn't change.

So even with a shifting demand curve, it's still no material value creation by a middleman.

If you were to expand this activity across time - for example, the US stockpiling of Oil reserves etc. - I would say this isn't really arbitrage, and the US is not acting as a 'middleman' - there are very real working capital costs involved in doing this, with measurable strategic advantages.

Finally - your note about 'queuing' is flawed as well:

"that price will mostly be made up of wasteful queuing"

No - it's not 'wasteful queuing' - they are queuing because they get better prices! They are 'playing with time' instead of 'paying with money' which is absolutely a choice many people might take, depending on how they value their time.

Again - pure arbitrage doesn't 'create value' for society, small caveats aside as illustrated in my previous note.

[ThrowawayR2]

> "He's speculating on a commodity, it's just not corn or potash."

Lives are not at stake because of corn or potash speculation.

[jariel]

If there are acute shortages, yes lives can be at stake because of major disruptions in the food supply.

Several weeks ago, nobody assumed that 'Purell' or 'toilet paper' was going to fully sell out everywhere, rather, simply that there would be increased demand for it.

All retailers who sell Purell have their buyers clamoring to buy as much as possible because they know their customers want it, and there's no reason to think that the price won't be increased somewhat.

In fact, given the excessive demand and challenges in production, Purell will probably be increasing its wholesale price ... and then some.

So are retailers - buying up as much Purell as possible and probably selling for a little bit of a markup considered 'hoarders'? So long as they have the intention of selling it for not-some-crazy-price, then it's just normal business.

There's no reason individuals can't do the same.

As long as this guy was not price gauging, and he was in fact selling, then what are they going to charge him with exactly?

It's reasonable that the government put restrictions on certain goods during a crisis, such as margin limits, the requirement to not hold inventory etc. but the same would have to apply to this guy.

If he bought his inventory before any emergency crisis or calamity ... then again, what's the legal crime? Buying Purell 2 months ago was normal, but 'having Purell inventory' now is illegal?

I have no lost love for this guy, but that he gave his inventory away is punishment enough.

[wilshiredetroit]

He stopped being "supply and demand" when the state of Tennessee declared a state emergency.

Upon the declaration of a state emergency, charging "grossly excessive" prices for food, construction services, emergency supplies, or other vital goods or services. Subject to civil penalty of between $1,000 and $3,000 per violation.

The definition of "excessive" or "unconscionable" pricing is generally determined by looking at average prices in the affected area over a given look-back period prior to the emergency, typically six months or so. If prices are 10 or 15 percent higher (some states have different thresholds), then it may be determined that price gouging has occurred.

*He was making good money while the going was good.. --BUT-- he should've known the laws the surround his entrepreneurial endeavor. He should've known that he needed to stop selling over 10% ~ 15% when the state declared an emergency.

--- The system worked.