[trebb]

Let's start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you'd sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I'm betting that you're going to charge me at least $5 a pound. Why? Because that's today's cost to replace your inventory.

However, if coffee then drops to $1.25 a pound, you will still pay the $5.00 a pound until it becomes obvious to customers that there is no way that any of the higher priced inventory is still in stock. Nobody wants to drop prices to take into account that the new inventory is going to cost less. Then it isn't called gouging, it's called smart business sense.

[thackney]

However, if coffee then drops to $1.25 a pound, you will still pay the $5.00 a pound until it becomes obvious to customers that there is no way that any of the higher priced inventory is still in stock.

In my experience, one supplier will first see the opportunity to increase his volume by selling at $4.50. And it continues to work the price down through competition. Supply and demand works.