Profiting from Harvey

By: Gavin Brown & Sajjad Meghani–Houston recently suffered from the onslaught of Harvey, a once-in-a-thousand-years flood which devastated large parts of the city. Given the dire situation in Houston and seeing an opportunity for profiteering, some individuals were quick to make money by taking advantage of those who had been adversely affected by this horrific natural disaster.  This was done mostly through price gouging on a variety of goods and services.

In contrast, Houston also had people, such as Mattress Mack, who stood up and opened their businesses to help the displaced victims. Mattress Mack, and the businesses that emulated his actions, are oftentimes viewed as price disruptors to those who seek higher prices during natural disasters. During the chaos, some people bought supplies of the scarce commodities, such as water and batteries, and then sold them with insane markups to make a quick profit. These people operate under many names, but can best be characterized as greedy degenerates.  Societies condemn such acts of “price gouging” and even fines businesses that attempt them. There are written rules and regulations about raising prices in times of distress.

Dynamic Pricing

While changes in prices in response to shifts in demand and supply conditions are generally warranted, such changes should be monitored closely lest they create opportunities for price gouging and profiteering.  In this connection, the concept of dynamic pricing, defined as the process of determining a product’s value in commercial transactions in a fluid manner to reflect current market conditions (businessdictionary.com, 2017), is of considerable importance. This philosophy of dynamic pricing, which was adopted roughly thirty years ago, is gaining traction with CEOs of today. The change in pricing strategy, or dynamic pricing, is said to occur anytime that a seller considers the impact of their pricing over the long term (Seetharaman, 2009). Therefore, this pricing schema may bring prices up or down within the same day of business, which allows businesses to react and reflect upon current market actions. For instance, if a hurricane is in the area or a disaster occurs then shop owners may adjust their prices to the new demand of goods and services.

The problem with dynamic pricing, however, is that it is a system that is easily manipulated by those looking to take advantage of the disadvantaged.  Thus, some individuals may use it to sell goods and services at the best available prices to their customers given the current outlook while others may victimize losers of certain socio-economic outcomes by engaging in what appears to be price gouging (Weiss, 2017). Weiss defined price gouging as a sharp increase in prices by sellers of necessary goods beyond the levels needed to cover increased costs in circumstances in which buyers are in a vulnerable predicament. Much of the controversy over price gouging in our current market society is due to the fact that there is no longer a “just price” set upon goods.

Houston, We Have a Problem

We find this idea disgusting, and we condemn those who participate in it at the consumer level. But what about the stock market, where the actions of buying and selling stocks do not affect everyday consumers, especially those affected by disasters. What we observe is the practice of some investors racing to buy stocks in companies such as Lowes which tend to profit from increased demand for construction materials during natural disasters. This in turn will allow such investors to make a quick profit.  Indeed, Naomi Klein has coined the phrase “Disaster Capitalism” to summarize the rush for profits amid catastrophes and wars. In The Shock Doctrine: The Rise of Disaster Capitalism, she compares disasters and conflicts with IPOs that set the stage for increased corporate revenues and profits. For example, the declaration of war in Iraq meant money for support, security, and reconstruction efforts contracted to private companies, many of whom lobbied for invasion leading to the ongoing conflict (Mont, 2011). This proposes the question as to whether there is a personal agenda for those investors who profit from human tragedies. Ultimately, that depends on one’s own moral compass. Wall Street is always a dog-eat-dog world with consequences investors may not realize (Mont, 2011).

Conclusion

Capitalism is built on the interactions of supply and demand forces that allow companies to make a profit. If you have an item that people are willing to pay for, who would you sell it to? Obviously, to the person who is willing to pay the highest price for it. Under capitalism, the goal is always to maximize profits, with no ifs and buts about it! There is nothing wrong with that, except when society starts to dictate for whom capitalism is supposed to work.  The question then becomes: why is it ethical for “investors” to benefit from speculation on the outcomes of natural disasters, while not for those benefiting from hoarding the needed goods.  The answer seems to depend on the nature of the goods in question as well as on the extent of the price changes.  For essential goods and services, whose scarcities may result in real human sufferings, price gouging is unfair and unethical, thus necessitating government regulation of the production and distribution of such goods and services.  In contrast, to the extent that increased sales of, say, building materials may result in higher profits and stock prices for some companies, this may be more acceptable.

 

Gavin Brown

MBA/MSF Candidate in the Cameron School of Business- University of St. Thomas

 

Sajjad Meghani

Master of Science in Finance and MBA candidate in the Cameron School of Business- University of St. Thomas

 

 

 

 

Seetharaman, P. (2009). Dynamic Pricing. In V. Rao, handbook of Pricing Research in Marketing (pp. 384-394). Cheltenham, UK: Edward Elgar

What is dynamic pricing? definition and meaning. (n.d.). Retrieved October 16, 2017, from https://www.businessdictionary.com/definition/dynamic-pricing.html

Mont, J. (2011, August 29). How They (And You) Make Money Off Disasters. Retrieved October 17, 2017, from https://www.thestreet.com/story/12789663/1/how-they-and-you-make-money-disasters.html

Weiss, S. (2017), The Ethics of Price Gouging. Jour. of Relig. Eth., 45: 142–163. doi:10.1111/jore.12171

 

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