Why Businesses Should Lower Prices During Natural Disasters | Harvard Business Review

It’s a longstanding debate that’s reemerged during Hurricanes Irma and Harvey: During a time of crisis, should merchants raise or maintain prices when demand increases for essential products such as water, gas, and bread? Now, due to the influence of social media, a new alternative is emerging: Why not lower prices during these critical times?

Economists usually lobby against implementing price-gouging laws that restrict large price increases during natural disasters. Instead, they advocate raising prices to bring demand in line with supply. By allowing the market to work, economists argue, products will remain available and sold only to those who value them the most. High prices also mitigate hoarding — customers buy only what they need instead of making “It’s cheap, so let’s buy a few extra” purchases. Just as important, a higher profit potential incentivizes companies to proactively procure additional supply to satisfy demand. The glaring downside is that this policy unfairly discriminates against lower-income people, who are less able to afford higher prices.

In contrast, many policy makers believe that prices should be maintained or raised only slightly (for example, by 10%) during disaster situations. They view this as an egalitarian, first-come-first-served method to allocate scarce goods. Drawbacks of restricting market prices include the inverse of the benefits above: quick sellouts, hoarding, and lowering the financial carrot to boost supply.

The recent hurricanes have highlighted a new trend in disaster pricing. Instead of raising prices, some companies are actually dropping prices on essential goods or services in high demand. Many managers realize that, while economists may believe it appropriate to jack up prices during a crisis, real-world customers view this practice negatively, seeing it as price gouging. As a result, long-term profits can be jeopardized if a company is viewed as taking advantage of a tragedy.

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Why Businesses Should Lower Prices During Natural Disasters.