Economic Definition of Price Gouging

Raising of prices to an unreasonably high level after a demand or supply shock

Price gouging occurs when a seller increases the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair. Usually, this event occurs after a demand or supply shock. Common examples include price increases of basic necessities after natural disasters. In precise legal usage, it is the name of a crime that applies in some jurisdictions of the United States during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market or to windfall profits. Price gouging may be considered exploitative and unethical. Price gouging became highly prevalent in news media in the wake of the COVID-19 pandemic, when state price gouging regulations went into effect due to the national emergency. The rise in public discourse was associated with increased shortages related to the COVID-19 pandemic.

The term is similar to profiteering but can be distinguished by being short-term and localized and by being restricted to essentials such as food, clothing, shelter, medicine, and equipment needed to preserve life and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior. The term is used directly in laws and regulations in the United States and Canada,^[1] but legislation exists internationally with similar regulatory purpose under existing competition laws.

The term is not in widespread use in mainstream economic theory, but it is sometimes used to refer to practices of a coercive monopoly that raises prices above the market rate that would otherwise prevail in a competitive environment.^[2] Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.

Laws against price gouging [edit]

United States [edit]

In the United States, state laws against price gouging have been held as constitutional^[3] at the state level as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures.

As of March 2021, 42 states have emergency regulations or price-gouging statutes ^[4] Price-gouging is often defined in terms of the three criteria listed below:^[5]

Period of emergency: The majority of laws apply only to price shifts during a declared state of emergency or disaster.
Necessary items: Most laws apply exclusively to items essential to survival, such as food, water, and housing.
Price ceilings: Laws limit the maximum price that can be charged for given goods.

Some states that do not have a specific statute addressing price gouging, can nevertheless apply the law as an "unfair" or "deceptive practice" under a consumer protection act.^[6]

When the law goes into effect [edit]

Statutory prohibitions on price gouging become effective, thus protecting people from exploitative increases in the costs of essential goods, once a state of emergency has been declared. States have legislated different requirements for who must declare a state of emergency for the price protections to go into effect. Some state statutes that prohibit price gouging—including those of Alabama,^[7] Florida,^[8] Mississippi,^[9] and Ohio^[10]—protect against price increases only once the President of the United States or the state's governor has declared a state of emergency in the impacted region. California permits emergency proclamations by officials, boards, and other governing bodies of cities and counties to trigger the state's price gouging law.^[11]

What the law protects against [edit]

State laws vary on what price increases are permitted during a declared disaster. California has set a 10 percent ceiling on price increases.^[12] Florida prohibits a price increase "that grossly exceeds the average price" of that same item in the 30 days leading up to the emergency declaration.^[13] Some state laws do not define what constitutes a "gross disparity," making it difficult for either affected residents or law enforcement to determine when price gouging has occurred, while others merely limit vendors and landlords to price increases of less than 25 percent.^[14] Laws often include exceptions for price increases that can be justified in terms of increased cost of supply, transportation, demand or storage.^[15]

Enforcement [edit]

Enforcement of anti-price gouging statutes can be difficult because of the exceptions often contained within the statutes and the lack of oversight mechanisms. Statutes generally give wide discretion not to prosecute. In 2004, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder was handled by consent decrees, rather than prosecution.

California [edit]

California Penal Code 396 prohibits price gouging, generally defined as anything greater than a 10 percent increase in price, once a state of emergency has been declared.^[11] Unlike other states that require the President of the United States or the state's governor to declare a state of emergency, California permits emergency proclamations by officials, boards, and other governing bodies of cities and counties to trigger C.P.C. § 396.^[16] The price protection lasts for up to 30 days at a time and may be renewed as necessary.^[12] Since October 2017, then-California Governor Jerry Brown repeatedly extended the price-gouging ban for counties impacted by the October 2017 wildfires and subsequently for the counties impacted by the 2018 wildfires.^[17] One of his last acts as governor was to extend the price protections until May 31, 2019.^[18]

Even though California prohibits price hikes after an emergency is declared, the state, like many others, has virtually no price monitoring structure for oversight.^[19] Attorneys and law enforcement generally rely on news reports and word of mouth to learn about exploitative pricing practices. The District Attorney of Sonoma County has attempted to remedy this by creating its own task force focused on combatting and prosecuting price gouging.

In 2018, the California state legislature amended C.P.C. § 396 after the fallout from the 2017 wildfires. District attorneys reached out to legislators explaining how the current language of section 396 made it difficult to enforce. By the time the 2017 fires had been extinguished, the median rent had increased by more than 35 percent^[20] ^[21] and the rental vacancy rate was zero.^[18] News reports detailed renters being forced out of their homes to make way for those who could afford to pay more, either with their own money or their insurance company's.

The legislature completely rewrote sections 396(e)-(f). Prior to the revisions, those sections of the law had only specified that the prohibitions on price gouging could be extended for additional 30-day periods and that a violation of the law was punishable by imprisonment in a county jail no longer than one year, by a fine no greater than $10,000 dollars, or both.^[22]

The amended version went into effect on January 1, 2019 and aimed to reduce the exploitative practices that had ensued after the October 2017 fires. Section 396(e) stipulated, in part, that: "it is unlawful for any person, business, or other entity, to increase the rental price . . . advertised, offered, or charged for housing, to an existing or prospective tenant, by more than 10 percent."^[23] While the amendment reiterated that landlords may increase the rental price by up to 10 percent if they could demonstrate that the increase in costs were directly attributable to repairs, it also clarified what could not justify an increase in rent.^[23]

An increase in rent may not be "based on the length of the rental term, the inclusion of additional goods or services, except with respect to furniture, or that the rent was offered by, or paid by, an insurance company, or other third party, on behalf of a tenant."^[23]

Florida [edit]

As a criminal offense, Florida's "state of emergency" law^[24] is an example. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent.

In Florida, it is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator or hazard pay for workers, while California places a ten percent cap on any increases.^[25]

United Kingdom [edit]

Laws and regulations in the United Kingdom do not use the phrase "price gouging" in consumer protection regulation but has regulations that functionally protect consumers against exploitive pricing. Chapter II of the UK Competition Act 1998 prohibits businesses with market dominance from abusive conduct including unfair and excessive pricing.^[26] Market dominance is considered when a business has greater than 40% of the market share within their respective industry. In the case of a violation of Chapter II a business can be forced to pay up to 10% of global revenues.^[27]

European Union [edit]

Similar to UK regulations, the EU does not include "price gouging" explicitly in regulation. Article 102 of the Treaty on the Functioning of the European Union prohibits undertakings in a dominant position from abuse. As stated, "such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions…" In 2016, the EU Commissioner for Competition Margrethe Vestager stated that the EU Commission will "intervene directly to correct excessively high prices" specifically within the gas industry, pharmaceutical industry and in cases of abuse of standard-essential patents.^[28]

Price gouging and COVID-19 [edit]

On March 13, 2020, a national emergency was declared in the United States by President Trump in response to the outbreak of the COVID-19 pandemic; the declaration allowed for an initial $50 billion to be used to support states.^[29] As studied by the National Institutes of Health, the COVID-19 pandemic induced a panic as advisories put in place for Americans to stay at home, quarantine, and wear masks.^[30] The declared COVID-19 emergency made state-level price gouging laws and regulation to go in effect. Certain necessary and essential products to combat COVID-19 risks became high in demand and low in supply. Such products in short supply included surgical facial masks, N-95 facial masks, hand sanitizer, and toilet paper. Multiple publicized instances of exorbitant pricing on these products created a national conversation about price gouging and panic buying. Price gouging complaints have been filed claiming that e-commerce merchants have been using exploitative pricing tactics. More than 30 states' attorneys general urged Facebook, Amazon, Craigslist, eBay, and Walmart to restrict the selling of necessary products at unconscionable prices.^[31]

Online price gouging [edit]

E-commerce transactions account for 14.4% of US retail sales in 2020.^[32] The share of e-commerce transactions is expected to continue increasing yearly. E-commerce sellers and consumers in the US are often located in separate states. Concerns relating to the dormant commerce clause in the U.S. Constitution arise in litigation where the e-commerce seller is located in a different state than the plaintiff. The dormant commerce clause is the doctrine against extraterritoriality that prohibits states from passing legislation that "excessively burdens interstate commerce."^[33] Therefore, states should not regulate commerce taking place outside of state borders.^[34] Large e-commerce retail platforms, including Amazon and Walmart, do not require sellers and consumers to be located in the same state for transactions to occur. Questions regarding accountability and enforceability of price gouging regulations in relation to e-commerce transactions have been litigated.

Online Merchants Guild v Cameron, 2020 [edit]

This complaint relates to online merchants selling necessary products on Amazon platform during the US national state of emergency invoked in response to the COVID-19 pandemic. Amazon is a leading e-commerce platform that has seen an over $570 billion increase in market capitalization through the pandemic.^[35] The Online Merchants Guild, a trade association for online merchants, filed a case in Kentucky on the basis that state regulations against price gouging are unconstitutional in the online marketplace since online merchants are unable to control pricing by state.^[36] The U.S. District Court in the Eastern District of Kentucky sided with the Online Merchants Guild on June 23, 2020, and agreed that the Kentucky Attorney General cannot enforce the price gouging regulations on Amazon sellers. The case is set to be reviewed by the Sixth Circuit Court of Appeals.^[37]

Price gouging-related lawsuits during COVID-19 pandemic [edit]

In response to the issuance of emergency price gouging regulations, multiple state attorneys general and federal agencies have investigated potential cases of price gouging impacting consumers and agencies. Since regulatory measures vary by state, there is no uniform interpretation of price gouging violations, and it is left to state courts to decide.

People of the State of New York v. Hillandale Farms Corporation, 2020 [edit]

On August 11, 2020, New York Attorney General Letitia James sued Hillandale Farms, one of the largest U.S. egg producers, for allegedly price gouging more than four million cartons of eggs by increasing prices by almost five times during the pandemic. The lawsuit alleges that the price increases were an effort to profit off of higher consumer demand during the pandemic.^[38] To settle the lawsuit, Hillandale Farms agreed to donate 1.2 million eggs to New York food banks. The case was dismissed with prejudice.^[39] This suit was one of multiple against egg producers during the pandemic, with the Texas Attorney General suing Cal-Maine Foods,^[40] the California Attorney General suing Dakota Layers,^[41] and the West Virginia Attorney General suing Dutt & Wagner.^[42]

Southern District of Mississippi, 2021 [edit]

A Mississippi businessman purchased scarce personal protective equipment (PPE) including gowns, face shields, and masks through his pharmaceutical wholesale company. The indictment alleges that the business then solicited health care providers, including the U.S. Veteran's Association, to purchase the PPE at excessively inflated prices as part of a $1.8 million scheme. This case was investigated by the FBI, Veteran's Association, and Fraud Section of the United States Department of Justice. The charges brought are conspiracy to commit wire fraud and mail fraud, conspiracy to defraud the United States, conspiracy to commit hoarding of designated scarce materials, and hoarding of designated scarce materials.^[43] This case demonstrates the involvement of the U.S. federal government in investigating potential price gouging instances that defraud the government.

Opposition to laws against price gouging [edit]

In a survey of leading economists, only 8 percent agreed with a proposal to prohibit "unconscionably excessive" price gouging during natural disasters in Connecticut. 51 percent disagreed with the proposal, 15 percent were uncertain and 8 percent had no opinion. The economists opposing the proposal argued that such legislation would lead to a misallocation of resources and lead to lower supply and greater scarcity of the resources, or argued that the proposal in question was vague.^[44]

According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency. Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their most valued uses. In turn, those who value the good the most and are able to afford it will pay a higher price than those who do not value the good as much or who are unable to afford it.^[5] According to Friedrich Hayek in The Use of Knowledge in Society, prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.^[45]

References [edit]

^ "Provinces promised crackdown on pandemic price gouging. In fact, there have been few repercussions | CBC News". CBC . Retrieved March 15, 2021.
^ "Lawrence Kudlow". Jewishworldreview.com. June 14, 2000. Retrieved September 25, 2016.
^ "State's anti-price-gouging law upheld". Business First of Louisville. October 6, 2009. Retrieved August 19, 2010.
^ "Price-Gouging Rules, E-Commerce To Collide At 6th Circ. - Law360". www.law360.com . Retrieved March 15, 2021.
^ ^a ^b M. Zwolinski (2008). "The Ethics of Price Gouging". Business Ethics Quarterly. 18 (3): 347–378. doi:10.5840/beq200818327. S2CID 153570535. SSRN1099567.
^ "Spokane seller accused of price gouging coronavirus supplies on Amazon". KREM. March 31, 2020.
^ Ala. Code § 8-31-4 (2017).
^ Fla. Stat. § 501.160 (2017).
^ Miss. Code Ann. § 75-24-25 (2008).
^ Ohio Rev. Code Ann. § 1345.01 (2009).
^ ^a ^b Cal. Penal Code § 396 (West 2018).
^ ^a ^b Cal. Penal Code § 396(b) (West 2018) (stipulating that a person or entity may not sell any of the enumerated goods or services for more than 10 percent more than the price that vendor charged for that good or service "immediately prior to the proclamation or declaration of emergency").
^ Fla. Stat. § 501.160(b) (2017).
^ Id.; Ala. Code § 8-31-4 (2017).
^ See Cal. Penal Code § 396 (West 2018). California Penal Code Section 396 permits price increases greater than 10 percent if the vendor demonstrates that the markup results from "the seller's supplier or additional costs of providing the good or service during the state of emergency" and that the price represents no greater than 10 percent above the total cost to seller plus the customary markup. Landlords may also increase the cost of their rental units by an additional 5 percent if they are renting a previously unfurnished residence with furniture.
^ See e.g., Ala. Code § 8-31-4 (2017); Fla. Stat. § 501.160 (2017); Miss. Code Ann. § 75-24-25 (2008); Ohio Rev. Code Ann. § 1345.01 (2009).
^ "Governor Jerry Brown Extends Price Gouging Protections". December 2018.
^ ^a ^b Id.
^ Emily Bae, Note, Are Anti-Price Gouging Regulations Effective Against Sellers During Disasters?, 4 Entrepreneurial Bus. L.J. 79, 80 (2009).
^ ""The Fires in California Highlight--and worsen--the State's Income Divide"". Vox. November 15, 2018. Retrieved March 10, 2019.
^ Digitale, Robert (October 24, 2017). "Rents Rise after Sonoma County Fires as Luxury Vacation Homes Come on the Market". The Press Democrat.
^ Cal. Penal Code § 396(e)-(f) (West 2018).
^ ^a ^b ^c Cal. Penal Code § 396(e) (West 2019).
^ "Florida Attorney General - Price Gouging Frequently Asked Questions". Florida office of the attorney general. Retrieved September 25, 2016.
^ "The Problem with Price Gouging Laws" (PDF). Object.cato.org . Retrieved September 25, 2016.
^ "Competition Act 1998".
^ "COVID-19: UK Antitrust Authority Launches Investigation Into Suspected Excessive Pricing for Hand Sanitisers, and Warns of Further Investigations Against Pharmacies". JD Supra . Retrieved April 19, 2021.
^ "Chillin' Competition Conference, Brussels, 21 November 2016".
^ Higgins, Tucker (March 15, 2020). "Trump says 'relax,' urges against hoarding as coronavirus cases soar and Fed cuts rates to zero". CNBC . Retrieved March 24, 2021.
^ Nicomedes, Christian Jasper C.; Avila, Ronn Mikhael A. (November 1, 2020). "An analysis on the panic during COVID-19 pandemic through an online form". Journal of Affective Disorders. 276: 14–22. doi:10.1016/j.jad.2020.06.046. ISSN 0165-0327. PMC7362858. PMID 32697692.
^ Levenson, Michael (March 28, 2020). "Price Gouging Complaints Surge Amid Coronavirus Pandemic". The New York Times. ISSN 0362-4331. Retrieved March 24, 2021.
^ "United States: e-commerce share of retail sales 2024". Statista . Retrieved March 15, 2021.
^ "Commerce Clause". LII / Legal Information Institute . Retrieved March 15, 2021.
^ "Fourth Circuit Holds Maryland Anti-Price Gouging Statute Violates Dormant Commerce Clause". Wake Forest Law Review. April 18, 2018. Retrieved March 15, 2021.
^ Klebnikov, Sergei. "5 Big Numbers That Show Amazon's Explosive Growth During The Coronavirus Pandemic". Forbes . Retrieved March 24, 2021.
^ "Online Merchants Guild v. Cameron, No. 3:2020cv00029 - Document 36 (E.D. Ky. 2020)". Justia Law . Retrieved March 24, 2021.
^ "Court of Appeals to Decide Whether Kentucky Price Gouging Statute Violates Commerce Clause". JD Supra . Retrieved March 24, 2021.
^ "Attorney General James Sues One of the Nation's Largest Egg Producers for Price Gouging During the Coronavirus Pandemic". ag.ny.gov . Retrieved April 19, 2021.
^ "1.2 Million Free Eggs Coming to New York in Pandemic Price Gouging Settlement". NBC New York . Retrieved April 19, 2021.
^ "AG Paxton Files Lawsuit to Halt Price Gouging by Cal-Maine Foods, Inc". Texas Attorney General . Retrieved April 19, 2021.
^ "Attorney General Becerra Petitions Court to Require California Egg Distributor and its Parent Company to Comply with Investigation into Alleged Price Gouging Violations". State of California - Department of Justice - Office of the Attorney General. August 20, 2020. Retrieved April 19, 2021.
^ "W.Va. Attorney General sues over alleged egg price gouging". www.wsaz.com. Associated Press. Retrieved April 19, 2021.
^ "Businessman Charged in Scheme to Hoard Personal Protective Equipment and Price Gouge Health Care Providers". January 27, 2021.
^ "Price gouging". www.igmchicago.org . Retrieved December 27, 2018.
^ Hayek, Friedrich A., The Use of Knowledge in Society. 1945. Library of Economics and Liberty. 6 December 2010.

External links [edit]

Florida Attorney General FAQ Concerning Price Gouging
Condemning Price Gouging with Respect to Motor Fuels Following Terrorist Acts of September 11, 2001 in the Congressional Record

Economic Definition of Price Gouging

Source: https://en.wikipedia.org/wiki/Price_gouging