Behavioral economics explains why we don’t see more surge pricing.
It seems like a no-brainer for Home Depot and other home improvement stores to double prices at stores in hurricane-ravaged areas. According to Economics 101, when demand goes up, prices should go up. But Home Depot does not raise its prices. As Neil Irwin writes in the New York Times, Home Depot’s response to a post-hurricane surge in demand is not only to keep prices steady, but to increase supply. Here is a link to the article:
Why would a giant corporation like Home Depot ignore this Economics 101 lesson? Home Depot takes something into account that was completely missing from Economics 101. It takes into account that some of its customers might be outraged by it charging higher prices to victims of hurricanes. Home Depot makes a rational decision to forego short term profits in order to avoid alienating customers. This is what Nobel Prize winner Richard Thaler and other behavioral economists address in their work.
Home Depot is not the only one ignoring the basics of Economics 101. In order to maximize profits, Bruce Springsteen and other performers should be charging much more for those seats that are sold on the secondary market for up to ten times face value. Why don’t they charge more? Performers may be taking the long view. The things that might maximize revenue for a single performance are not necessarily those that will maximize the devotion of fans in the long term.
“A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists,” says Richard Thaler. Wise words.
Thank you Neil Irwin and The New York Times. And thank you Richard Thaler!