Charging Outrageous Prices Because We Can
July 17, 2007
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I spent a good part of the day today inspecting cars that were being loaded into shipping containers for export. The industry term for loading a container is “stuffing”. Taking cargo out is “stripping”.
So they were stuffing cars in containers for export. And I was there. Doing my thing.
Anyway. The coolest car of the day, I thought, was this brand new Mustang GT Cobra.
It was nearly enough to make me start drooling right there on the concrete. I’m not a big fan of the racing stripes. But I was digging pretty much everything about it.
Well except for the price on the sticker in the window, that is. Take a look at what I saw.
So the dealer charged some rich someone overseas an extra $20,000 just because it could. How’s that for capitalism at work! That’s adding like 46% to the cost of the car.
Takes a $43K car and magically transforms it into a $63K car. Because they could.
A Question
So here’s my question to you. If you found your market was willing to pay an extra 40 or 50% for whatever it is you do, would you charge it?
Is that a reasonable thing to do?
Or is that unethical? Gouging?
What do you say?
I don’t think you can gouge for a luxury item.
Andy beat me to what I was thinking when I read this in your feed. If it was food, shelter, medical supplies, etc., it would be different. But for a beauty like this, I say get whatever the buyer is willing to pay!
OK, I’m going back to stare at the photo again…
I think there are some product/service qualities that have to be addressed first - Necessity for product and availability and ability for services.
You can call gouge on gas prices but not on a Lexus (or a high speed/low drag Cobra).
For service professionals, hikes can come if they are of limited number or exceptional ability.
I am all for the market handling itself with the exception of basic needs providers and unlawful business practices.
So, if I hear y’all right, it is OK to mark luxury items up by 50% above retail if the market will pay it.
But what is a luxury item?
Where do we draw the line? Obviously it is some where this side of a suped up sports car.
Thing is most of define “luxury” as “something I can’t afford”.
Is a cell phone a luxury item? do we “need” that cell phone? Is it OK for folks in that industry to charge outrageous prices?
How about high speed internet access? Which side of the line should that be?
One person’s luxury item might be vital someone else’s daily life. When is it OK to charge extra high prices for those items just because someone will pay them?
Anything is worth what you can get for it. For all we know, th $20,000 markup may be cheap at the car’s destination.
Move a $40,000 house from a rural town to NYC and sell it for $1,500,000. Is that gouging?
In economic terms, necessity or luxury doesn’t enter into it. Even those things whose cost to the user are held down due to being deemed necessities, such as shipping medicines to developing nations, are paid for in other ways.
Interesting point, Rick. What about, say, hotel rooms during a hurricane? If the hotels jack up the prices then because they can, is that gouging?
Can something be a luxury item sometimes and a necessity at others? Or does it even matter when it comes to price?
Chris,
The free market system has plenty of problems (like your hotel rooms during a hurricane story), but the alternatives are usually worse. A great number of NYC rent-controlled apartments are inhabited by folks who could certainly afford more. Rate caps on energy and insurance have caused all kinds of problems in California.
Yes, there will always be short-term “gougers” in a free market, but in the long run customers and competitors will remember and repay those unkindnesses.
Mike
Basically, what Mike said.
One of the complaints about Jimmy Carter was the skyrocketing interest rates and inflation during his presidency, but those were a direct result of the wage and price controls Nixon instituted.
Sometimes the price gougers can be those who see the resource as a necessity. Take the emergency trailers FEMA has. They cost what, $80,000 each, vastly overpriced to you and me. To the actual occupants, they cost nothing, though they can mean their survival. But they’re being paid for one way or another.
Or look at oxygen. It’s free for the breathing here. Take it to the space station and it’s worth several hundred dollars a pound, minimum. Even though it’s a matter of life and death, it has to be paid for one way or another.
Common decency and long term societal stability require certain things be kept inexpensive for the individual, but that doesn’t mean they’re not paid for in other ways.
This is an interesting discussion, and I pretty much agree with Mike’s and Rick’s conclusions (and you’ve brought up some good questions too, Chris).
But going back to the initial question, is there something basic missing? Sometimes the upcharge is legitimate.
For instance, when we order engineered equipment from overseas for domestic use, there’s an upcharge “just because”. But this upcharge is usually there to cover things like customs duties and other things that normally wouldn’t be necessary if available domestically.
Just a thought.
Great post! I believe in capitalism but not gouging. Hotel room near Broadway, I figure they can charge whatever the market will bear. Hotel room in New Orleans during hurricane - not so much. Cover your costs should be the limit (the hotel operator should do it because it’s the “right thing to do” though. I don’t like legislation that tries to instill morality)
Cell phones - a basic phone is almost a necessity these days. An iPhone would be sweet, but in my opinion, they can charge whatever they can get for them, because to me, it is a “luxury” item.
Terrific conversation - thanks!
You guys are coming up with some good takes on this.
Doesn’t that old economic law of supply and demand say that as the demand for something goes up the price will rise until the supply for it is raised to equal demand or the demand falls back off?
If that is that case, then why wouldn’t we expect to see the price of a hotel room (fixed quantity item) skyrocket during a hurricane (outrageously high demand)?
Is that gouging?
Or is that a way for a free and open market to help limit demand naturally?
I think it becomes gouging when the situation is a crisis, like a natural disaster. If the hotel operator in NYC gets a sudden influx due to a smash show or huge convention traffic, raising the price makes good economic sense. The hotel operator who raises prices to hurricane victims is perhaps making more in the short term, but I think it is unethical and will create antagonism with the public. I certainly wouldn’t patronize in the future (and in fact would probably bad-mouth to the heavens - lol) someone who gouged me during a crisis like a natural disaster. Is the short term profit worth the long-term hostility?
But the public animosity consideration is a completely separate issue, isn’t Marti? Then it becomes a business decision weighing out which is better, the short term windfall profit, or the long term good will.
If I’m running to high ground from a hurricane (something I’ve done a few times here in the Southeast) an exorbitantly high priced hotel might be a good thing.
For example I might be more inclined to drive an extra couple hours up the road to a friends house if the hotels are charging $500/night. Whereas at the normal $100/night I might take that room and not leave it for someone who doesn’t have a friend to stay with.
Or a family of 4 might decide to share 1 room at $500 instead of taking up 2 or 3 rooms at $100, leaving more rooms for other people who have no where else to go.
Then there are the extra staff costs that the hotel is going to have to pay to keep their employees at work instead of off taking care of their personal affairs during a disaster. Perhaps the hotel would be operating at a big loss if they didn’t charge significantly higher than their normal rates.
Is it still gouging then?
Hmmm…
I still think it’s gouging to up the price of a $100 a night room, to $500. Often in a crisis situation like this, the hotels will ask folks to double up or share.
If I checked into a hotel during a natural disaster, I’d be more willing to extend a helping hand to a stranger if I hadn’t just been put in a bad mood by being gouged by the hotelier.
Regarding staff, they might stay put without additional pay, for their own safety or a sense of community/responsibility to the guests.
But I’m an old hippie who likes to see the world through utopian eyes - LOL
And I like having friends that help me out (or I can help) when there’s a need.
Personally, I would say that a $20,000 price increase is not an ethical decision. Yes, the same house would cost vastly different amounts in different locations, but a car is a mobile product that can be bought from anywhere.
Also, people who have the money to spend on $60,000 are likely to have the money to buy very nice cars much more frequently than the regular car buyer. Despite having the extra money, however, I doubt that they would be thrilled to find out how much they had overpaid.
The whole point of paying a lot of money for something is being able to show off the expensive thing. If they’re willing to drop $60,000 on a car, they want a car that lives up to the purchase price. Beautiful as the above car is, it’s still only a $40,000 car to many people.
I recently had a similar situation happen to me (although with a slightly cheaper product). I was about to sign-up for German classes on the school’s website, but decided to go into the school to ask them some questions in person. Once there, I found out that they had 2 sets of prices for the same class: $680 for an 8 week class when booked on the internet, but only $440/8 weeks when booked at the school.
Needless to say, I was furious. The school was gouging non-local students just it could. Luckily, I hadn’t paid yet and was able to get the cheaper price, but my trust and opinion of the school plummeted.
It turns out that the classes are decent, but I would never recommend the school to anyone. They sent a very strong message to me that they weren’t interested in helping me learn–they were only interested in getting as much money out of my pocket as possible.
I can’t imagine anyone feeling positive about a company that cheats them.
Nothing surprises me in this world… although my capitalistic side actually is impressed that the dealer was able to get away with it
It’s not gouging, it’s charging with the market can bear. As long as we’re not talking about necessary day-to-day items like food and water, I saw more power to them. Boo-hoo to the folks who can’t buy their non-essential 500 HP muscle car because the dealer is asking too much. If the dealer can get $20k over sticker then he should. By selling at sticker, he would be making an extremely poor business decision. Anyone in the business world is nodding their heads for sure.