Price Gouging: What it is and What it Isn't
I wrote a previous article on price gouging, where my company did a free giveaway of cleaning products and Personal Protective Equipment PPE to those in need. It was closely followed by a series of sales on eBay in which customers were refunded in full after they paid an inflated price for the disinfecting product Microban. It had been a test to see what the general need level was and what people were actually willing to pay for a necessity item during an emergency situation. In the end each person was refunded the full amount of the order and given the product for free as a random act of kindness. It left me feeling very sad for people whom have been a victim of price gouging.
Fast forward 3 weeks and I receive an order of 2,000 Disposable 3 Ply Face Masks which, as it happens, are in very high demand. As a seller I battled with the obvious desire to earn profits, yet at the same time the moral compass which refuses to let me take advantage of people. After careful thought and consideration, I placed these masks on E-bay at 14.99 each for a 10 Pack of Disposable Face Masks. With average E-bay fees of $2.00 per sale, shipping costs of $3, a packing cost of $1 and a unit cost of $6 the total profit on one package is approximately $3.00, a profit margin of %50.
Immediately I sold these masks at a feverish pace, selling out in just over 24 hours with a whopping 1,500 views or more in that same 32-hour period. If you have sold on eBay you know that’s a ton of views in 24 hours. But of course, I get a message from one person who is irate because they believe that I am price gouging. After a very civil discourse we parted ways but I could not help but ponder the thought, “am I price gouging?”
Believe me, the last thing I want to do is to take advantage of my fellow people. So if you’re like me and you’re wondering what price gouging actually is, I did a little research to find out. As it turns out, each state has their own definition of price gouging and you should always review your states guidelines for price gouging before you sell an item. But in general price gouging means charging an unconscionable price for a good that is in high demand and that is deemed a necessity during or after a time of national crisis or emergency. In most states this means a profit per item of more than the cost of the unit plus %10. So for instance a good that costs $10 to buy can be sold for no more than $21 or else it may be considered price gouging. In the case of the masks the price per unit could be no more than 12.60 not including selling, shipping and packing costs in order to meet this criterion. In other words they could earn no more than 6.60 per unit at a unit cost of $6.
While I am confident that my price was fair it is worth questioning how we should treat providers of these types of items at a time like this. When you buy a pack of face masks from another American citizen, that person has had to risk their own money and spend their time to get the product to have for sale as well as bearing all the costs associated with selling the item. You as the buyer probably see the urgent need for the item so you might be happy to be able to get it. Many people were grateful that I had gotten the masks to sell because you can’t find them anywhere. But the risks that a seller has taken to bring an item to market may not be quite so evident.
My purpose was to make a wise investment with a fast turn around and a fair but relatively high profit margin. This is the same thing I would look for in any new product that I wanted to sell. At the same time I knew that many people would be happy to have access to the masks so I would be doing a good and useful thing for them as well. Since I am an experienced buyer in the Eastern markets and had offers from my current providers for these masks and other PPE items I knew that I could get them with a relatively low risk of the items being lost or damaged during shipment or not meeting product specifications for the order when they arrived. I thought that I could leverage these skills and the money that I had, which is not much, and do some good for people at the same time.
The truth is that almost every customer I sold to was happy and thought the price was fair. Most people do not consider the high seller fees, shipping and packing costs when they purchase items online. It is a great platform to start a business and there is worldwide audience for your products, but online selling has its drawbacks. But even without this consideration the price was not unreasonably high. In fact I would have given away some of the 10 packs of masks for free if someone told me they needed them and could not afford them. The corner store up the street from me sells these same masks for $2.00 each or $20 for the same package that I was selling for $14.99 and he doesn’t have to pack or ship the item nor pay seller fees based on the sale price. And so the buyers were mostly just happy to get masks at a fair price.
But as buyers we must understand that supply and demand do affect things like availability and market price for goods. Masks have become a necessary evil in the fight against the Covid-19 Pandemic. In many States masks have been mandated in public places and most stores will not let you enter without a face covering. So these items are in the highest demand they have ever been and this will probably last for some time. One can expect that if you begin to buy and sell these items that you will make a lot of sales at an asking price that is in the high end of the typical sale price for that item.
Increased prices for items like this have an effect of slowing the sale of the items, distributing them to customers based on need. The need of the customer can be effectively measured by determining how much of an item they will buy at a given price. The price can be raised to a point at which only those who need the product the most will be willing to buy it and they will only buy what they feel they truly need at the inflated price. It would have a similar effect as quantity limits but it is much less fair and kind. Inflated prices do not take into consideration those who have a budget that does not include overpriced Lysol. The best way to overcome this is to refund the difference between the maximum willingness to pay and the current fair market value of the item to the buyer after they complete the purchase
Quantity limits are similar to price inflation in the sense that they distribute the items more evenly and fairly. It is more fair in the sense that the price stays the same but the number of items allowed in a purchase is strictly limited. So like price inflation it forces these items to be spread out among more customers. But when the items have already been sold down to dangerously low levels, this method is much less effective. Walmart and Target like department stores would have been wise to implement these measures sooner to prevent the major shortages on toilette paper, Lysol, hand sanitizer and the long list of other items that went out of stock during this pandemic. These limits should become part of a policy that is implemented at some point leading up to a crisis situation like this to help prevent major shortages like this in the future.
Sellers should not be expected to risk their money and spend their time and effort for no reward. Likewise, as sellers we should not expect buyers to stand around and be hosed on necessity items in the middle of a crisis. It’s not a joke and no seller should be using the fear of others to engorge themselves in money at their customers expense. If they do they should face the wrath of the public scorn that comes with this type of unjust seller behavior. But if you’re a seller with a heart and a soul and a conscience and you believe in kindness and fairness and you practice this in the course of buying and selling an item such as masks in the Coronavirus Pandemic, then you can help a great many people and you can make some money doing it.
If you play by the rules then not only should you be allowed to sell necessity items but you should be encouraged to do it by the government and by the people looking for these items. Look at it from this angle; has Donald J. Trump provided you with a mask to wear to the store or out in public? Does Walmart have any masks for sale, or any other store that you know of for that matter? If you’re like many people who want to just buy a mask and wear it when needed and be done with the whole matter, don’t you want to be able to just buy a few disposable masks at a fair price? Odds are, if you go looking for some face masks or gloves right now, the person selling it will most likely not be a big box store, it will be one of the many brave entrepreneurs of this word who has sought out these items to buy and sell for their own benefit and for yours.
If you are familiar with world affairs, you know that China is very good at quickly creating the production lines needed to provide mass amounts of manufactured goods to people locally and across the globe. In this policy of creating a large network of small industries around the country they have set in place the ability to provide for their people with great speed an effectiveness. In this same way, the networks of small manufacturers and sellers throughout the United States and across the world has helped to ease the burden of providing supply chains for these much-needed items during this crisis. Through these small but agile supply chains have flowed millions of units of desperately needed items into the hands of people like you and I.
It is important that we have access to certain items in times of crisis. While price gouging is illegal and morally wrong, it is equally as wrong to scorn people so as to stop them from taking the opportunity to make lucrative investments to provide necessity items during times of crisis. Many companies throughout history have made financial gains while working to provide necessity items in times of war and crisis. From auto manufacturers producing military vehicles and plane engines to medical companies developing vaccines or providing equipment like ventilators, it is not uncommon for private for profit organizations to contract with the government to supply basic needs, and typically these organizations gain from these transactions. Governments are not historically successful in providing necessity items in times of crisis and big box stores cannot react quickly enough to provide them consistently. In the end the access to basic needs like this may very well provided by a regular person like you or I who sees an opportunity to make money and do some good for people at the same time and who takes that risk in faith. I thank god for those people, because otherwise I would have never found toilette paper in time.