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Storms are more like Super Bowl Sunday and less like Valentine's Day

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One more way the world is getting better (the Oregonian reports [2]):

Northwest employees of two big-box chains received e-mail
alerting them of a storm barreling toward their stores a
full four days before 100-mph winds whacked the Oregon coast
and murky floodwaters blocked Interstate 5 last week.

Behind a computer in Bentonville, Ark., Lucas McDonald,
meteorologist for Wal-Mart Stores Inc., tracked the weather
and notified colleagues that Oregon and Washington stores
could lose power and the retailer should consider
alternative truck routes.

McDonald’s counterpart at Home Depot Inc. — Jim
Schortal, the retailer’s director of crisis management
— coordinated more than a dozen recovery workers, from
hazardous-material cleanup crews to structural safety
assessors, to Portland. From his Atlanta office, he also
summoned trucks as far as Nebraska and Texas to hightail it
west with extra batteries, flashlights, heaters and
generators.

How cool is that? The earlier and more accurate storm forecasting becomes, the lower the cost of carrying more inventory and moving new supplies to the customer. That means prices won’t rise as much or at all in response to a catastrophic storm.

Prices for lumber and milk and flashlights and generators often rise after a hurricane because of the sudden and unexpected increase in demand. During "normal" times, stores use inventories to keep the shelves stocked rather than using fluctuating prices as a way of coping with the inevitable variation in demand on any particular day in a particular store. The result is that stores have stuff waiting for us and the prices don’t go up and down. Both availability and the price is pretty predictable. The average price is higher than it otherwise would be in a perfectly predictable world. The store bears a cost for carrying inventory. It’s worth it, though, to the consumer, who apparently is willing to pay a premium rather than find the store doesn’t have the good.

A hurricane that’s predicted well in advance is like Super Bowl Sunday. On Super Bowl Sunday, demand for beer and pizza are probably close to their annual peak. But the price of beer or pizza isn’t higher on Super Bowl Sunday. That’s because Super Bowl Sunday is predictable. Groceries and pizzerias know it’s coming and they stock up. And because beer (and pizza dough) can be stored pretty well, the cost of having too much on hand isn’t very high relative to the cost of not having enough and sending an unhappy customer to a competitor. This also explains why roses on Valentine’s Day are more expensive even though florists get a lot of advance notice that February 14th is coming.

A hurricane that’s a surprise (and that just means it’s too costly to get the extra inventory there quickly) will lead to shortages or higher prices. An unpredictable storm is like Valentine’s Day–prices rise unless anti-gouging laws or social norms keep prices fixed. Then you get empty shelves.

As we get better at predicting storms, their impact on prices becomes more like Super Bowl Sunday and less like Valentine’s Day.

(HT to Division of Labor [3] via Spencer at Angry Bear [4]. Note to Spencer–we here at the Cafe have more imagination than you seem to imagine.)

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