GREED OR PRICE GOUGING

By: H. Malcolm Gibbs-Taitt

BELIEVING that each of us is like the proverbial link, which will form the chain that will be as strong as the weakest of these links, undermines the fact that conservative behaviour places limits on the performance of the very chain. This behavioural chain reaction is a hindrance to the natural tendencies of mankind to be good to each other as normal citizens and good libertarians should.

A department of the University of the West Indies (UWI) – Sir Arthur Lewis Institute of Social & Economic Studies (SALISES) – has just concluded a study, which it conducted on behalf of the Barbados Chamber of Commerce and Industry (BCCI). Like going into a corn field and not finding potatoes the results were as expected and suit the argument the chamber wants to advance.

That there is no price gouging by merchants in Barbados and that high prices are caused by external factors, are positions with which I am happy to agree. I do not need any study, even by persons as eminent as Dr. Winston Moore and Professor Andrew Downes, to tell me something already known by the informed.

This report would have more credibility if the correct thing had been done, in the first place: get to the sources from where commodities are bought and note the price of each item. These people are making the same mistake that some pander to, by confusing the greed of some unscrupulous merchants and, hence, the profiteering attitudes that are prevalent and confusing these with an aspect of trade – price gouging – which is legitimate and different from normal trading practices, once any excesses are removed.

Yes, price gouging is a legitimate behaviour in business. It is basically a quick fix during an emergency, such as a natural disaster. It deals with normal trading behaviours known as supply and demand. When the emergency ceases normal pricing resumes and, in some instances the consumer benefits, since prices may be fixed artificially lower than normal, to encourage trade in items no longer in demand.

Regardless of what principles economics teach, there is still distrust of the very people that keep the doors of businesses open. The bad practices that belong to a past era, like the many operatives that manipulate the merchant class should come to an end. Of course a system of distribution may take many forms, the most simple being a two-tier system of manufacturer selling directly to the final consumer.

A more complex arrangement is a multi-level system involving manufacturers, commission agents, wholesalers, retailers, each demanding his pound of flesh, and finally consumers. This latter method is the archaic method of trading, in Barbados, that places large sums of monies in some peoples’ pouches and, at a stroke, takes huge amounts of monies from the pockets of consumers, who are the eventual payers of everything, including the luxurious houses that these operatives own.

The distributive sector is an area of a total marketing system. A marketing system, in turn, is a system of production, distribution and consumption. The need for a distributive system arises out of a need to match supply and demand. The distributive system is responsible for getting the right products to the right places at the right times, in the correct quantities and in proper conditions at reasonable prices expected by end-users.

In looking at the distributive sector, which is the area of concern here, we are largely concerned with the structure of wholesaling and retailing. Let me be clear: bringing business people from outside to compete or teach our own is not the way to go. However inept our business people may appear, there is no problem too large that we, as sensible and educated people, cannot confront and overcome.

Let information be placed in our domain so that we know what characteristics are at hand; this is all we need on the one hand. Knowledge, on the other hand, is power and unity is strength. These are the two elements needed to deal with the problem of competition of the distributive sector.

In our society we need to take a leaf out of the book of business: the same way they may try to sell their behaviours similarly we need to sell our might by uniting for our own good. We should be able to compel the sale of goods at a price sufficient to maintain our household in an equitable manner. The merchants must understand that without us they can go fly a kite.

The true price reaching our ports must be known and that information will include the price at the factory gate, before the importer gets involved. It is not good enough for some merchants to inflate those prices by forming bogus companies abroad and after buying the same cheap purchases from themselves only to have artificially high prices arriving at our ports thus showing inaccurate information as this relates to imported inflationary prices. Others from our region buy the same commodities.

Conceptually, the amount people are prepared to pay for a good or service represents its value and, therefore, that should reflect the price. This is not to underestimate the important role prices play in the economic functioning of any country. In Barbados, this importance is overplayed. After all is said and done, the price of any good should be determined by the basic supply and demand of that commodity. So, the desires of consumers should count for something. It is time consumers in Barbados take themselves seriously. A house divided cannot stand.

The price mechanism acknowledges that if supply is excessive, prices will be low and production may be reduced accordingly; this will cause prices to rise until there is some balance of demand and supply. On the other hand, if supply is low, prices will be high thus leading to an increase in production; that increase in production will lead to a reduction in prices until both supply and demand are in some form of equilibrium. The simplicity of this system allows for the competing forces of both consumer and producer. It is worth noting that with excessive pricing Government revenues benefit too.

Measurement of price variations is done by the Retail Price Index (RPI). This is a measurement of relative price changes. The time has come for a form of multi-level indices of accounting of the areas of transactions, so that adequate comparisons may be viewed. There needs to be a Consumer Price Index (CPI), based on the Japan model. This would be a measurement of living costs based on changes in retail prices. Also, there is a need for an Import Price Index (IPI). This is self-explanatory. A Wholesale Price Index (WPI) would measure the changes in the prices charged by manufacturers and wholesalers. On this latter index, there needs to be a way of accessing information from where our wholesalers purchase so as to monitor any price differentials

One of the Consumer Protection Acts speaks to price discrimination where a merchant charges different prices for a similar product in his store. It is common, however, to see a similar product at different stores being sold at hugely different prices. This is cloaked under the heading of competition and, to a lesser extent, choice of the consumers.

What must not be overlooked is the fact that in this society peoples’ wages, for doing similar jobs, do not differ too much. For example, a general worker in the public sector will earn a similar pay regardless of the department being engaged. How then, will these people be able to pay varying upward prices for similar goods? The trades’ union movement need to factor this in their wage/income negotiations and leave politics to the politicians. There needs to be clauses protecting wage and salary earners from the ravages of inflation.

The cost-of-living continues to climb, uncontrollably. Amazingly, during a global recession we experienced some unbearable increases in general taxation. The price we pay for a good or service remains important as our buying power is controlled by our earning potential. Unemployment continues to rise at an alarming pace during the economic meltdown. This is bound to affect our social order. With slow revenue growth the fiscal position is not looking good. Then the foreign inflows are in decline as exports reduce and the slow-down in tourism continues. We continue to hear a lot of talk about social engineering but not a word about the economic cost that is required to implement such.

There needs to be a return mechanism that acknowledges the economic costs needed to implement social goals. I can think of no better solution than for the powers that be to seriously consider looking at the structure of the social partnership, which continues to ignore the most important people in any society – the consumers. Consumers are needed by Government, Businesses, the Trades Unions and consumers themselves.

Our contrast to the trade union movement could not be more analogous and, therefore, falls into the same hypothesis. The reason to exist for the trade union movement is about the rights of the workers; so must the rights and responsibilities of consumers be the concern of the consumer movement. I further submit that any sidelining will only continue for as long as consumers continue to ignore the real power they wield. When the sleeping giant awakens, everyone will take note and not before long.

Yet, the high price of goods or services – as an issue – will not go away anytime soon. It follows that price performs a major economic importance of enormous significance. So, it is safe to say that price represents a measure of value. It tells manufacturers that the research, if and when conducted before production, has had the intended effect. It acts as a good measuring tool and emphasises why artificially controlling price is not the perfect answer to high prices. Rather, an acknowledgement that incomes – and these are voluntarily negotiated – and prices are too closely related to be ignored. It is my contention, therefore, that some prices, like incomes, need to have a voluntarily negotiated settlement mechanism that acknowledges the maximum price of a good or service.

Price performs many, sometimes, conflicting roles, depending on who is the author:

  • The Economist: Price is a solution to a set of supply and demand equations that clears markets; it represents the value of foregone resources in other uses.
  • A Marketing Executive: Price is merely one of a group of dimensions that includes Product, Package, Price and Place.
  • The Philosopher: Price involves fairness and justice.
  • A Businessman: Price is the average revenue per unit, which must cover average costs and profits.
  • The Consumer: Generally, not known exactly, but has a general sense of cheap, moderate, expensive, all relative to income.
  • Investors: Price expectations are one indicator of potential return to risky investments.
  • Government: Price is a policy variable, like a tax that stirs short term political responses.

In any look at prices it would be folly to ignore the ramifications of incomes. This would be as negative as ignoring the consequences of productivity. If nominal average earnings were to increase more than labour productivity, labour cost per unit of output would rise and so would prices unless profit margins were reduced to compensate. The consumer must display street-smartness to understand that there are three (3) prices involved when buying anything:

  1. The price the seller is asking
  2. The price the buyer is offering to pay
  3. The price that the buyer and seller agree.

In dynamic economies the supply of capital has risen faster than the size of the labour force, and wage rates have risen faster than the price of capital. As a result there has been a marked tendency to substitute capital for labour in almost all industries. Yet there has been no long-term trend toward increased unemployment because real aggregate demand has tended to raise enough to absorb the growth of the labour force.

Moreover, whatever system of price determination we achieve the idea of having a more competitive marketplace is very appealing. Whatever system we obtain will not be able to eradicate externalities from our pricing system only because we import so much of what we consume. We, therefore, need to give every encouragement to those involved in efforts to produce home grown foods. It needs emphasising that any home production must harness the benefits of mechanisation and technological change for efficiencies to reflect good marketable produce at affordable prices.

Malcolm Gibbs-Taitt,
Founder, Consumer Analyst and Director-General