Topics: Miller College of Business, COVID-19

March 30, 2020

Steep price increases may occur in the coming weeks and months as supply networks undergo tremendous stress, forcing businesses to pay more for some items due to the COVID-19 pandemic, says a Ball State University economics professor.

Dr. Steve Horwitz

“Small businesses in particular are under incredible pressure,” said Steve Horwitz, Distinguished Professor of Free Enterprise in the Miller College of Business. “To the extent we see these sorts of price increases, it will almost always be small firms. Large firms like Kroger or Costco have such deep supply networks that they can just adjust their quantities by getting more product without having to change price.”

However, Horwitz points out that raising the price of an item signals to customers that they better make careful decisions about how much they buy and what they use it for.

“Imagine if this was bottled water. Raising the price means it’s less likely people will buy it to wash their dog. The higher price forces customers to ration their purchases. It means more of the limited supply to go around.”

Horwitz said higher prices also alerts the whole supply network that certain items are in high demand and there’s more than the usual money to be made by supplying it. But higher prices bring in more supply over time, which drives the price back down.

“I do think we’ll be seeing this sort of thing for a few months but not a lot of it,” Horwitz said.