Floods, price gouging & free market

When we moved from a state-owned and controlled economy to a market-based one, we forgot to think through a key part of the market system—a robust regulatory system


Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

To be stuck without an exit is scary. Especially for those of us who are so committed to controlling our lives, the loss of control of what lies ahead adds to the feeling of being helpless. That’s what happened in the face of nature’s relentless outpouring of water from the skies in end-November. I was stuck in Puducherry, which was relatively less affected than Chennai but was cut off for a while with some key roads and bridges washed away. As I managed to get a taxi to reach Bengaluru, I tried booking a flight out of the city to New Delhi. I must have left it a little late, for by mid-day there were no tickets left for the next day, or those that were available, cost 10 times the normal fare between the two cities. News reports said the same thing—some airlines were price gouging in the face of huge demand on connecting flights out of cities that could be reached by road from Chennai.

I remember feeling very upset. Angry. And frustrated by this spectacle of price gouging by some airlines. But then the rational part of the brain kicks in and I ask: Econ 101 says that when demand goes up, so do prices. Prices rise till increased supply comes in to restore equilibrium in the market. So why do we feel it is immoral for companies to make profits when there is a demand surge? I’ve been putting this question to everybody I meet and the common refrain is: this is not a normal time and the normal rules do not work for anybody. Why should they then work for just a few companies who happen to be in a situation to extract a surplus from the market? Other than for a delusional bunch of elitist Ayn Rand acolytes who pray at the altar of an esoteric idea that does not exist in the world, we know that even in ‘normal’ times, markets are not perfect and will never be. To the extent they can, market rules work when there is a level playing field—if sellers have the pricing power, buyers have the power to switch brands since there is enough capacity in the system to soak in the normal demand at a given point of time. But when a catastrophe strikes, it is not a normal situation and such situations need new rules of the game.

Who should make these rules of the game? This brings us to the other issue. In the face of an event where an inherently unfair thing is happening, we cry for government action. But on an average day, we want less government. We frown on salary hikes or staffing hikes in ‘government’. So what do we want? More government or less? Or, do we want government when we are in distress and not at other times? I think what we want is a regulator and not more government.

When we moved from a state-owned and controlled economy to a market-based one, we forgot to think through a key part of the market system—a robust regulatory system. Indian regulators have been created piecemeal without a consistent regulatory thought that is independent of the sector. Ideally, the regulator should preempt such events and have road rules in place. For instance, it is a no-brainer that some companies will try and extort in the face of a natural calamity. When the product is onions, it is difficult to monitor, but when the product is an airline ticket, the rules can be framed in advance. Some ideas that were bounced around go like this: take the average price for the last six months of a ticket in the same sector, same time and the disaster price (D-price) cannot be higher than that. Or, the D-price cannot be higher than the average price on the same date for the same time for the past five years. This takes into account the normal price surge during festivals and builds it into the D-price.

This would be a learning moment if the government understood the importance of robust regulatory thought and began thinking about the philosophy of Indian regulation.

End note

A deeper look at the issue will mean reading Harvard professor and political philosopher Michael Sandel’s book Justice: What’s the Right Thing to Do?, where he looks at the price gouging issue through the spectrum of justice. He writes: “The debate about price gouging that arose in the aftermath of Hurricane Charley raises hard questions of morality and law: Is it wrong for sellers of goods and services to take advantage of a natural disaster by charging whatever the market will bear? If so, what, if anything, should the law do about it? Should the state prohibit price gouging, even if doing so interferes with the freedom of buyers and sellers to make whatever deals they choose?.... These questions are not only about how individuals should treat one another. They are also about what the law should be, and about how society should be organised. They are questions about justice. To answer them, we have to explore the meaning of justice.”

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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