Q&A About Price Gouging

| 5 Comments

Here's a post in which I interview myself about anti-price-gouging (anti-PG) laws. It's on T&B for my amusement, and is subject to change at any time. I'm just not satisfied with how economists deal with the craven idiocy of price gouging and the mendacious idiocy of anti-price-gouging laws. Comments are appreciated.

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Question: What is price gouging?

Answer: Price gouging is the raising of prices 1) far above one's costs and far above competitors prices, 2) far above what many people think is just, 3) during a human crisis. I disagree with those that state that PG is a non-concept. It is an intentionally vague and deceptive, morally abstruse, and economically harmful concept, but for those very reasons, it must be taken seriously.

Q: Aren't price gougers insipid immoral fly-by-night cretons who prey on the helpless and desperate?

A: We are all part angel, part devil; and we all try to get the most money for our own resources, much of the time. Price gougers are regular people, except that they raise their asking prices for particular resources in times of human crisis.

Q: Isn't price gouging morally wrong and economically inefficient?

A: Here's what we know: price gouging is usually economically efficient but always morally suspicious.

Q: When is PG economically inefficient?

A: When any resource is controlled by a fool or an idiot, PG can yield potentially inefficient results. How? The resource owner sets his prices so high that valuable resources are undersold. Most of the time the market is so "thick" that one idiot doesn't really matter for overall efficiency, but if enough people controlling enough resources set prices too high, then there could be too few sold. But's that's highly unlikely, since most businessmen are not dumb enough to stick it to their customers today, knowing they won't be back tomorrow. They want to maximize profits!

Q: Doesn't price gouging maximize profits?

A: Hell, no! Not in the long-run!

Q: Then why do people price gouge?

A: Because they incorrectly believe that it will maximize their long-run profits! In short, they're idiots. And some gougers (like house contractors) really are fly-by-night operators, which is itself the problem, not the gouging per se.

Q: Why are markets so slow in identifying such bad businessmen?

A: Even fools know how to price competitively in stable retail environments, especially when a major corporation provides daily price points. But a crisis calls for creativity, sensitivity, and ruthless long-run calculation. It also calls for even sharper consumer skills today and vindictive behavior tomorrow.

While a resource owner might be able to guess what price will maximize today's crisis profits, it's really hard for him to identify the price today that will maximize long-run profits. Businesses rely on consumer trust and word of mouth to sustain themselves. So any resource owner better be able to justify price increases -- and very apologetically at that. This is done through surcharges or other indications of cost increases out of their control.

Even if a gasoline station owner could get $10 a gallon for regular unleaded, the cost in terms of reputation could nullify short-term gains. Hence, most far-sighted resource owners will not price gouge consumers.

But some will gouge to absurd levels, and lower their own profits accordingly, because inefficient results punish the price gouger!

Q: Shouldn't we use state law to stop businesses from making stupid pricing choices and taking advantage of consumers? Shouldn't price gougers be punished?

A: I think price gougers should be punished. And price-gougers are punishing themselves with lower good will and lower profits tomorrow. What anti-PG laws actually do is substitute a social, market-based form of punishment with a legislated, political form of punishment. I think the market -- combined with social pressure -- is a lot more severe and effective than the preening politicos who come in and slap merchants on the wrist.

Q: Why doesn't the existence of anti-PG laws stop price gouging?

A: Beat's me. I'm tempted to say that, to the gouger, the expected costs of punishment are worth the expected benefits, but I think that many gougers are so clueless that they don't even know the legislature has made their actions a crime.

Q: Shouldn't the rules of the economic game be different in extraordinary circumstances?

A: Perhaps, but just because the economic environment changes does not mean it is at all possible or desirable to repeal economic law. The fundamental premises of social, cooperative behavior remain the same in and out of crisis. While the price system doesn't work as well in times of rapid change as in more stable times -- nothing does --, in times of extraordinary change it works especially well compared to administrative fiat, forced queuing, and rationing in terms of both allocation and impetus for further production and influx of distribution.

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Q: Is this an example of price gouging?

A McMinnville, Tennessee station was the subject of the second suit after it charged $7.00 a gallon for gasoline. The posted price was $3.50, but gasoline pumps had notes on them saying "Doubled," which most consumers missed until after they had filled their tanks.

A:No, that's an example of deceipt and outright fraud. A price gouger has the temerity of openly quoting his prices; besides being an idiot, this gas station owner is a crook, a swindler, and a cheat. He's a bad, bad man. He should be fined, forced to refund all his customers, and possibly imprisoned. But he's not a real price gouger. Indeed, if he had just posted $7 a gallon on the big board, he would have been just an idiot and a price gouger, but not a crook. Either way, I hope locals will refuse to let their children play with his children.

Q: How can we clearly, simply, objectively determine when price gouging has occurred?

A: You can't. Price gouging is a matter of subjective perception, not objective measurement.

Just accept the fact that the forces that determine prices in markets are the result of individual subjective decisions working within frameworks of social and governmental regulation.

There is no such thing as a just price, or a just price range, because there is no such thing as an unjust price. There are moral obligations, but these are outside of the price system. Anti-PG is a muddle, conflating morality and markets in counterproductive ways. How? Tthese laws assume that one can use a products cost -- or previous market prices -- to determine just prices. But this is nonsense. For a clear counterexample, we find a man stranded in the desert for two days, dying of thirst. Luckily, he comes across a caravan with ample water; I would say that the caravan owner has a moral obligation to give him water. But under anti-PG law, if the caravan owner wants $300 a gallon, the price is not unjust if the caravan owner can prove this amount reflects his actual costs, or if he can demonstrate the willingness of his buyers to have already agreed to pay that much. So much for determining immorality and illegality through cost accounting.)

The difference between profiting and profiteering is entirely a matter of what some people with large political influence -- like politicians themselves who want to buy votes -- feel is "too much". Seemingly objective constraints on prices and profits do not address the underlying consumer objective: to increase supply, which will in turn decrease prices. There is simply no way for the government to lower quoted prices without adverse side effects on supply, or without turning prices into vectors of cash and noncash -- regulated and unregulated -- components. Anti-PG laws do nothing but slow down markets which use short-term prices to get back to their long-run norms.

5 Comments

Just curious if there are (or should be) any locational considerations in your definition where you say "during a human crisis." Does that mean anywhere on the planet during a human crisis? More to the point, was there a human crisis in McMinnville, TN? Was there a human crisis in Atlanta, GA? There was quite a panic in Atlanta, GA, but it was widely said that it was the panic *buying* that caused the local supply crisis and the wider panic. So do prices much higher than "cost" qualify as gouging when there is no real crisis? It seems that price is exactly what is called for to calm the market.

That question posed, I suppose that in the broader context of your remarks, it doesn't really matter whether it's gouging or not. Gouging is a fuzzy thing that people know when they see it in its full context. And whether it would qualify as some sort of legal gouging or not, people can and should react on their preceptions. In that sense, people imperceptive enough to go beyond acceptable limits will be punished by those customers who judge them to be gouging.

Q: Can high extremely prices foster a panic, as people think that they reflect actual scarcity conditions of a necessity like gasoline, when in fact the prices reflect unusal demand and gouging?

A: Possibly, but the deterrent effect of high prices makes this unlikely. 1) If I saw $6 a gallon on one corner and $3.50 a gallon on the next, I'd think gouging, and like people did in Atlanta, just not get gas there. 2) If I saw incredible lines for gas, I'd check out CNN , Fox News, and Lynne Kiesling -- not my local shock jock -- to find out whether or not I should join in.

And I'd ask myself, where did the gas lines form? At the expensive or at the cheap stations? All of them :)? I have found only one report on something so obvious:

Bremont, the gas-station comptroller in Catonsville, settled on prices ranging from $3.59 to $3.98. The latter price, at a station near Ravens Stadium in Baltimore, was "a controlled effort to calm people down" by discouraging lines, she said.

"Raising the prices is better than running out of gas," Bremont said. "The customer's perception is if you run out of gas, there's something really wrong with the station."

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I think that relevant human disaster locations can be hard to pin down for gouging. Gasoline is a good example, since 50¢ price increases have been spread across North America. So have reports of sporadic $2 price increases. It's clear though that the closer one is to a disaster, and the closer one is to exit routes from a disaster, one will see larger -- perhaps incredible -- spikes in demand, which will give some businessmen the urge to gouge.

That makes me wonder if there are cases of gasoline price gouging in Alaska due to a hurricaine hitting New Orleans... [Checking Google...]

Well, apparently the state can't wait to get their hands on the gougers, but haven't been able to find any yet (rr).

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Hmmm.... what if Denmark were destroyed by a natural disaster? Wouldn't the price of Lego blocks would go through the roof? From Australia, to the US, to Russia, we would see perhaps justifiable price gouging in plastic blocks (not due to cost increases, but to "collectibility value"). Should unconscionable prices and profiteering be illegal for Lego blocks? Isn't gouging wrong even when it's not for necessities?

My question is why do I run across so many people trying to deny that price gouging exist.

In our system it is extremely rare, but it does occur.

The right wing writer that tried to show it does not exist deserves no more respect then the left winger
that claims every price increase is gouging.

I just have a question. How can price gouging exist?

SUPPLY & DEMAND! Don't mess with it

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This page contains a single entry by Kevin published on September 8, 2005 1:18 PM.

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