In a letter in last Friday’s New York Times I argued that price increases following natural disasters, such as Hurricane Charley, accurately reflect the suddenly lower supplies of, and the suddenly higher demand for, things such as gasoline, generators, and tree-trimming services.
A retired economics professor writes in today’s New York Times a response to my letter, asserting that I mistake monopoly pricing for free-market pricing. I do no such thing. I believe, however, that I know what this gentleman has in mind – it’s the common error of taking the blackboard model of “perfect competition” too literally.
It’s true that those suppliers who, in Charley’s immediate wake, had undamaged supplies on hand for sale also had fewer competitors in their neighborhoods. Not only did the demand for their products increase, also the elasticity of demand for their products fell. For a blackboard-model literalist, this latter effect – the decline in the elasticity of demand that a seller confronts – gives that seller greater monopoly power. And the blackboard-literalist goes on to proclaim that such pricing isn’t the product of a free market.
Blackboard literalism is bad news. The fact is that with suddenly higher demand and suddenly lower supplies, the market value of available supplies rises. The higher prices charged by sellers are a simple reflection of this fact. These higher prices compel more careful resource use – economic triage, if you will. But they also attract other suppliers into this market, a market that is in especially dire need of greater supplies. Prices start to fall back as the situation returns to normal.
On this matter of defining monopoly I’m an unreconstructed Austrian (and Schumpeterian, by the way): monopoly exists only when force is used in a sustained way (usually by government) to prevent consumers from spending their money as they see fit. A significant problem with blackboard models of “competition” and “monopoly” is that, if taken too literally – as they often are – healthy market responses such as those following Hurricane Charley will be squelched by policies that are justified in the name of preventing the exercise of monopoly power.