An economics professor at Ball State University says while some small businesses may be forced to hike prices due to COVID-19, it may not necessarily be “price gouging.” Steve Horwitz, distinguished professor of free enterprise in the Miller College of Business, says steep price increases may occur as supply networks continue to feel “tremendous stress.”
In an interview with Inside INdiana Business, Horwitz said price increases, especially among small businesses, are not surprising.
“Part of the point is that small businesses who raise prices during a crisis, you know, people want to call that ‘price gouging,’ which by the way is a term that has no economic content to it; there’s no objective definition of it,” said Horwitz. “Part of the challenge for them is they don’t have the deep supply network and supply chains that we see with the larger firms like a Walmart or Kroger.”
Horwitz says when small businesses start running out of products, they find it more difficult to get new supplies in, which leads to a need to raise prices. However, he says raising the price of an item signals to customers that they need to be more careful about how much of a product they buy and how they use it.
“Imagine if this was bottled water. Raising the price means it’s less likely people will buy it to wash their dog. The higher price forces customers to ration their purchases. It means more of the limited supply to go around.”
Horwitz adds higher prices also alerts the entire supply network that certain items are in high demand, which could lead to more of those products being supplied. As a result, prices would eventually go back down over time.
Horwitz says he is also fascinated with how certain companies are changing the types of products they’re producing as a result of the coronavirus pandemic. He cites breweries and distilleries, some of which, like Hotel Tango Distillery in Indianapolis, have switched to making hand sanitizer to help fill a need for more supplies.
Horwitz says price increases, especially among small businesses, are not surprising.