Pricing and Shortages

I’ve seen various things about shortages and noticed shortages myself, in the sense that 1) there is some price a business is asking for a particular good, 2) people are willing to pay that price, 3) the good is unavailable for an extended amount of time. I’ve seen this personally regarding certain brands of clothes and other items, and I’ve seen it reported on in the media regarding various things, including most recently Starbucks, as I think Tim Pool mentioned in a recent video. Are businesses so afraid of the backlash from raising prices enough to adjust the quantity demanded to the supply available that the fear of a backlash from the public is acting similarly to an actual govt price control? Or is something else going on?

It’s hard to tell. Consumer backlash is an issue. Government backlash is an issue too – there exist some laws against market prices (e.g. anti-gouging). And I think a lot of businesses just aren’t prepared to adjust prices frequently in relation to supplies. They don’t know how to do that and have never set up the software, the knowledge in their people, the communications between the people managing store prices and the ones buying new inventory, etc. They lack experience and expertise with it.

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Uber varies pricing all the time based on supply and demand. Consumers have complained about that but not enough to stop Uber. But Uber actually knows what they’re doing with pricing. They’ve developed their pricing model over the years, automated it with software, etc. They created knowledge about how to make that work in their specific niche. Most companies, by contrast, do not have the skill/software/etc to do this that Uber has – not even close.

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Imagine you’re the CEO of Walmart. What do you do about supply fluctuations?

Do you tell all your store managers to start adjusting prices to local conditions? They aren’t trained for that. Some of them will do an awful job. Some will do OK, but others will alienate customers and you will end up in the news when one of them screws up in a dumb way.

Do you start a new program to figure out how to train your people to do it? First you have to find some experts who are good at pricing, then they have to develop a way to teach it, then you run a pilot program where they teach people in one area, then you see how that works out, then maybe you teach people nationally?

Alternatively, do you start developing software for automated pricing? Uber’s software took a bunch of work and it’s just pricing one thing: rides. Walmart sells thousands of different things. Do you need different algorithms for different products? Maybe you can divide your products into 25 categories and come up with 25 different pricing algorithms and that’ll work well. Maybe not. I don’t know. You could get some software made and start a pilot program in one store and iterate on the software until it works well. You could also try to iterate on the software using a simulation. Or you could get human pricers and compare the software prices to the human prices in some realistic scenarios.

Does your inventory management system provide all the data you need for the pricing software? Does it tell you what will be ordered in the future, when? How does it handle some orders not being fulfilled? Can you tell the inventory software that you have a 20% chance to get a shipment with your full order, a 50% chance to get a half-sized shipment, a 30% chance fo no shipment, and in any case some chance that any of these outcomes happens late? What about variable shipments where any amount of a product might show up? What about telling the system that there’s uncertainty about whether your order 6 months from now, that you haven’t even placed yet but plan to place, will be fully filled on time? And then having all that info available to the pricing software module in an effective way so it can forecast supply well? And then having any new information entered into the system quickly, and then the prices get updated quickly (daily?).

BTW when and how do you update prices for stores that are open 24 hours? Also how much work is it for employees to update prices? Do you give up on having physical price tags? Do you frequently put out new physical things? Do you code the software to minimize price updates? Like only adjust the price when it’s too far off the preferred price. Report to store managers the preferred price of everything but also a range of acceptable prices that mean you don’t need to reprice it? Should they get digital displays to put by all their products so they can update prices many times per day? Or at least daily? What if someone saw a price and the price updated before they got to checkout? Should there be a way to lock in prices or do you just update once a day at night while the store is closed? (But what about 24 hour stores? How can you ever update prices while customers are shopping without potentially changing the price of something that’s already in someone’s cart?)

If Walmart is doing some of this stuff, we might not hear about it yet. How long would it take? A few years? Depends how much they rush. Rushing makes it riskier.

What will market conditions be like a year from now? It’s hard to predict what will happen with COVID or government policy. The uncertainty makes it harder to embark on a long term plan to adjust the business.


Reisman defines a shortage as an “excess of the quantity of a good buyers are seeking to buy over the quantity sellers are willing and able to sell.” For some things I had in mind when making my initial post (like bicycles), there is a secondary market where a buyer could find a bicycle if he was willing to pay the price on that market. So even though the manufacturer is out of stock at the price they are asking, there still isn’t a shortage in the market on a whole, inclusive of the secondary market - you just have to be willing to pay the price required to obtain a bicycle on the secondary market and you can get all the bicycles you want.

Note that this specific analysis doesn’t apply to stuff like Starbucks drinks since there isn’t any sort of secondary market in those on account of them being 1) consumable items that 2) spoil or become unappetizing for consumption purposes very quickly