Supply and demand, and the psychology of scarcity – how much are the sandbags?

The workings of markets play an impact on our daily lives in ways which we don’t even notice, for most of the time anyway. But procurement geeks may notice interesting aspects of normal life that are driven by those workings – the ‘invisible hand’ as Adam Smith put it. So here’s a question for today. When is it OK for suppliers to exploit the basic laws of supply and demand, and when is it not?

If there is a huge demand for tickets to a gig or a top football match perhaps, it seems OK for the supplier – the venue or the artist – to respond by pushing prices up somewhat, but probably not to the true supply and demand equilibrium.  A ticket for the FA Cup final is probably worth around £400-500 would be my guess i.e. Wembley could sell out at that price, but there would not be much of a secondary market (touts). That probably defines the true ‘market price’.

But the media and fans would be furious if Wembley and the FA did that – so we have shortages, reflected by the touts making a fortune in the secondary market. Now we get upset by that too, but not as much I suspect as if Wembley had simply upped the price. All rather illogical. And there was pushback at Prince charging £70 for tickets to his small secret gigs last week, despite the fact that the true market price would have been way above this.

What about holiday firms increasing the price during school holidays? Perfectly rational supply and demand, and the firms say they lose money for much of the year, so it all balances out. We still get complaints about that, there is a press feature somewhere every year about the issue, but there is no real campaign against the firms involved. Most people moan but seem to understand how it works.

Now, what about if you are a UK based supplier of sandbags, canoes, or amphibious vehicles to hire...? Presumably demand has gone up greatly in recent weeks in certain parts of the country.  But are we seeing price rises in these markets? I haven’t heard anything, and if anything, we expect people to all pull together in troubled times – maybe canoe hire firms are being asked for the use of their boats free of charge?

But logically, we should expect price increases – that would be no different conceptually to the holiday firms, or Wembley charging more for the FA Cup Final than for the Johnstone Paint Trophy final. Supply and demand, the invisible hand. But we apply very different moral standards when it comes to disasters and similar situations, which seems to have an effect on the way the laws of supply and demand apply, or how they are over-ridden in some cases.

Does that same paradox apply for conventional business procurement and suppliers? It probably does. I don’t like my supplier increasing prices but if it is down to a ‘normal’ demand increase or supply decrease in the market, I may in the end concede. But if a supplier knows I’m in a desperate position and exploits that, then I’ll remember that for a long, long time, even if in the short term I have to pay up.

Some interesting psychology in there somewhere.

First Voice

  1. Dan:

    Interesting article.

    I guess it just comes down to what something is ‘worth’ to the buyer.

    Consider Wayne Rooney’s contract talks as an example.

    Man Utd have agreed to pay him £300k per week. Now, according to conventional theory of the ‘invisible hand’, that shouldn’t happen. No-one else is going to pay him that much – the big clubs don’t need him that badly and the smaller clubs couldn’t afford it. So Man Utd faced no competition for his signature. Did they really need to increase his salary by that much?

    But of course, its not that simple. Man Utd, at this point in their decline, couldn’t afford to lose their best player when replacing him adequately is uncertain at best. And they needed to reassure their fans and investors that they are prepared to splash the cash to arrest their decline. Its part business and part PR. Rooney is simply worth more to them than he is to anyone else.

    The question is; has Rooney exploited their desperation? Or has he simply realised his worth?

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