“Evil corporations” are often charged with profiting unethically or from the misfortunes of others. Airlines collect an estimated $2 billion each year in ticket change and cancellation fees from fliers. Chain retailers often charge more for a certain products in one location than in another. Credit card companies charge “outrageous” fees and interest rates on their balances. Should we regulate these companies so they can’t profit from our bad circumstances? I discussed this topic earlier today on the Wilkow Majority, but I think it deserves a blog post as well.
Let’s start with a fundamental business principle: Profit does not come from the most visible sources, nor is it generated equally from all sources. A service station might break even on gasoline sales and make its money on hot dogs and Cokes. Grocery stores charge higher margins on candy bars in the checkout lines. Oceanfront hotels raise rates and make their money in the summers. Carmakers typically earn less on entry level vehicles than on their upscale models. The point here is that companies earn profits when and where they can.
There is a flipside to this reality we often forget. If the service station did not charge high margins for snacks, it would have to raise the price of gas to cover its overhead. If grocers did not earn a lot from selling products in the checkout aisles, they would have to raise other prices to make up the difference. If airlines were not allowed to charge $100-150 when customers change flights, they would have to raise fares to remain profitable. In the end, it all comes out in the wash.
IN MOST INSTANCES, REGULATING THIS TYPE OF BEHAVIOR HURTS CONSUMERS INSTEAD OF HELPING THEM. I once heard a guy complain that gas stations in the desert shouldn’t be able to “take advantage of customers” by charging more than those in cities. He was willing to allow a few cents per gallon to cover additional transportation costs, but nothing else. I asked him who would run a gas station in the middle of nowhere if he were not allowed to charge higher prices to compensate for getting fewer customers. “If they can’t make money charging a fair price, then they shouldn’t be in business.” I reminded him that if the specific station he was complaining about wasn’t there, he would have been stuck on a desert highway without any gas at all. He was arguing for his own demise.
The bottom line is simple. If you don’t want to pay more for gas, fill up in the city before you drive in the desert. If you think the interest rates and fees charged by your credit card company are too high, live within your means and you won’t pay them anything. There is no free lunch. If companies can’t earn profits in one area, they’ll try somewhere else. Authorize the government to regulate companies on your behalf and you will lose another piece of your own freedom.
agree with most of that….i can give you an area where regulation is necessary though- banks have decided to pay the largest debits to your account first every day….they CLAIM that what this does is pay your mortgage, car loan etc first because they should have priority, but why they are really doing this is because if your balance is low charging the large debit first may cause your account to be overdrawn immediately, and then the small debits will also allow them to charge you ~$35 overdraft fee on each…..i had this happen to me a few years ago by Wells Fargo- i knew i was going to be overdrawn and 2-3 small debits hit on a saturday(WF doesnt post until Tuesday), then a large bill hit on Sunday or monday to overdraw me…..on Tuesday they post the large bill FIRST and then hit me for 3-4 overdraft fees instead of the 1 overdraft that i actually deserved….
also if you have a debit card and say you go to supermkt and you think you have ~$30 in bank acct but one of the Visa charges that hit and then disappear from your acct for a few days before actually posting, say one of those hits and you were unaware- you go to supermkt and spend $30 when you only had $25- the bank used to decline these purchases if i remember correctly, but now they accept them so they can hit you with the $35 overdraft fee…
and what they also do – if you borrow from them via their Direct Deposit Advance they supposed to loan you up to $500 for ~30 days time at $20 interest per $100 (is that 2400% yearly int rate?, not sure) …i dont mind the rate as i was aware of it at the time i signed up, but what they do is grab ANY EFT deposit of $100 or more to your account, to pay themselves back immediately….so if you move $105 from your PayPal to your bank acct 5 days later, they grab it and youve borrowed the DDA for 5 days at 14,000% interest rate??? they could easily fix this in their software so that they dont grab any EFT for 28 days or so, but they just choose not to because i guess they dont have to….Also, i read recently that banks are spending millions on software programming so that they can absolutely maximize their Overdraft collecting profits…….this is the kind of cr@p that really gets me $#@%^$####…..
i am very pro-business, used to be self-employed, but anybody want to try to defend these practices???
Jeff: You can certainly argue that these practices aren’t ethical, but there’s a bigger point here. It’s not the government’s business to determine what companies should and should not be doing competitively. Taxpayers spend a fortune trying to enforce the regulations while companies spend even more trying to avoid them. Just think about the IRS. Yes, we need a coherent legal system that enforces contracts and basic right and wrong (ex. dishonest advertisements, bait-and-switch tactics, etc.), but we always get trouble when we think government is capable of looking out for us.
The best remedy for this problem is lots of educated consumers who insist on transparency from the companies they do business with. Firms need customers to survive, and we as consumers are not as powerless as many of us think. I’m not pro-business per se; I’m pro-liberty. Let businesses choose how to compete within a basic legal framework and let educated consumers decide how to spend their money. There will always be problems, but this is by far the best approach.
Dr. Parnell,
What is your opinion of anti-gouging as legislated in FL in relation to natural disasters? I know that supply and demand is the right answer and that normally markets will set themselves, but are there instances when our elected officials should intervene?
Aside from standard “decency” laws (extreme cases where life and death are at stake), there should not be any prohibitions. Businesses have the responsibility to be upfront in what they are charging, but they have the right to raise prices in the event of an emergency. Doing so is often in the consumer’s best interest anyway. Follow this simple example: Suppose the tap water is contaminated in a town and a single store possess all of the bottled water, say 100 bottles. At the regular price of $.50 each, the few people to walk in will buy all 100 and hoard them. If the price is raised to $10 per bottle, then each person will buy only what is absolutely needed, which means more people will get access to water during the emergency.
Keep in mind that if you don’t like a business that “gouges” you during an emergency, you can boycott it later. In this way the market takes care of itself, and no laws are needed.