Some people seem to believe that grocery prices exhibited evidence of price gouging because of the Covid pandemic.
Price gouging represents what people consider “unfairly high” or “excessive” increases of the prices of goods, services, or commodities in relation to the normal market price or the cost of providing those goods or services.
Such potential behavior typically occurs during emergencies or periods of market disruption when buyers have limited choices and are considered vulnerable. And the key is the notion of “unfair” or “excessive” increases.
Economists always predict price hikes when supply is constricted or demand inflates, especially unexpectedly.
Studies do show an increase in profit rates during the Covid supply chain problems, but some of us would also note that supply and demand also could explain all the increases.
There arguably was more demand for groceries as consumers were confined to their homes and restaurants were shuttered for “on premises” dining. Supply chain disruptions caused shortages--and shortages tend to create price pressures.
With plants shuttered and workers at home, production dropped. Transportation networks also faced slowdowns and materials shortages which, in turn, cascaded through the rest of the value chain. Measures to protect workers also slowed productivity, since time, cost and effort had to be shifted to “sanitizing” premises rather than producing.
One Federal Trade Commission report suggests grocery retailer profit margins rose from about 5.6 percent to as much as seven percent.
Other studies suggest profit increases because of Covid on the order of about 1.5 percent between 2019 and 2020, with margins declining afterwards.
“Demand for many retail grocery products unexpectedly spiked upward during the pandemic, just as the supply chain was struggling with a series of input, labor, and transportation challenges,” the FTC report notes.
Shipping demand increased while supply decreased, for example.
The point is that one need not assume any “price gouging” to explain temporary profit increases at a time when demand grows and supply decreases. That basic dynamic would lead to higher prices, and often higher profits in any market similarly affected.
And while there is no automatic and linear relationship between prices and profits, imbalances in supply or demand (less supply; more demand) almost always lead to higher prices. And temporary supply-demand imbalances arguably often lead to temporary profit gains.
