Why Don't Shops Raise Umbrella Prices When It Rains?

How ideas of fairness limit price increases even when demand jumps, based on a famous survey about snow shovels.

When a sudden downpour hits, demand for umbrellas jumps. Basic economics suggests shops should raise prices. Yet most shops keep prices the same. Why?

The snow shovel survey

In 1986, economists Daniel Kahneman, Jack Knetsch and Richard Thaler asked people about this scenario: a hardware store has been selling snow shovels for 15 dollars. The morning after a large snowstorm, it raises the price to 20 dollars.

82 percent of respondents said this was unfair.

Reference prices

People judge prices against a reference price, usually what they are used to paying. Raising prices because costs rose, such as higher wholesale prices, is generally seen as fair. Raising prices just because customers need the product more is seen as exploiting them.

Why shops hold prices

Customer anger: customers who feel exploited may never return.
Reputation: stories of price gouging spread quickly, especially on social media.
Long-term relationships: shops earn more over years by keeping customers’ trust.
Laws: many places have laws against price gouging during emergencies, and India’s Essential Commodities Act allows the government to control prices and stocks of essential goods.

Where prices do rise

Prices are more likely to rise when:

Sellers are anonymous or one-off, such as street hawkers during a sudden rain.
Pricing is presented as normal, such as airline and hotel dynamic pricing, which people have become used to.
Increases are framed as removing a discount rather than adding a surcharge.

The economist’s dilemma

Holding prices can cause shortages: the umbrellas run out, and people who need them most may not get them. Higher prices might encourage more supply. This creates a trade-off between efficiency and fairness.

The shop and the hawker

When a storm hits, a neighbourhood shop keeps its umbrellas at 300 rupees and sells out in an hour. A hawker at the station corner sells umbrellas for 500 rupees. Regular customers trust the shop more; the hawker, with no long-term customers, has less reason to hold prices.

Thinking businesses always charge what the market will bear

Fairness norms, reputation and relationships often keep businesses from raising prices when demand spikes.

Key takeaways

A survey found 82 percent of people thought raising snow shovel prices after a storm was unfair.
People judge prices against reference prices.
Shops hold prices to protect trust and reputation, and laws may limit gouging.
Holding prices can cause shortages, creating an efficiency-fairness trade-off.