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Price Gouging: How to Know and What to Do

This article was written by in Consumer. 15 comments.


Price gouging is often a problem after natural disasters, but what appears to be gouging might not always be a plan by unscrupulous business owners to take advantage of needy consumers.

During regular operations, there is rarely a need for a business to increase prices sharply for its customers. Businesses generally, but not always, pay for their inventory in advance or agree to pricing terms in advance. Even in times of crisis, the cost to a retailer for existing inventory didn’t increase as suddenly as the prices they’re charging their customers. Businesses do, however, need to think about the future costs. Profit from items sold today finance their next restocking, and if the wholesalers or manufacturers increase costs, retailers have to meet that.

When you’re not talking about restockable inventory, the world of pricing is a little different. Supply and demand play a huge factor. If everyone in the area is suddenly looking for a hotel room, there’s no way to ship additional hotel rooms in from other areas. Supply is limited, and demand increases. Normally, the amount of demand changes gradually, and hotels can adjust their prices to fit demand slowly. In times of crisis, demand increases sharply. In a free market, hotel operators would be able to increase prices sharply to take advantage of increased price elasticity — the fact that if people need a room, they’re going to rent one regardless of the price.

Even though the cost of operating a hotel room did not increase, the market bears higher prices. There is nothing that prevents hotel operators or gas station owners from sharply raising prices in times of greater need. There are regulations, however, that penalize retailers in certain circumstances. Most consumer complaints about suspected price gouging never result in legal action or penalties, and that stems from a very narrow definition of what qualifies as price gouging as well as the government’s disinterest in prosecuting.

Although the federal government investigated price gouging at gas stations following Hurricane Katrina, the situation was unique. For example, Hurricane Sandy is a different situation. With the disaster in the gulf coast, oil supply and refineries were devastated, making supply of gasoline difficult. In New Jersey, problems with fuel extend to delivery routes and power at the stations.

Nevertheless, the New Jersey state government is being proactive in telling consumers how to report suspected incidences of price gouging. In New Jersey, an increase in prices of over 10 percent above normal in an emergency situation is considered running afoul of the law. The governor’s office has announced:

Consumers who suspect price gouging or any other violation of consumer protection laws, particularly as a result of Hurricane Sandy, are urged to call the Division of Consumer Affairs at (800) 242-5846.

In Nassau county, New York, consumers can call the Consumer Affairs Office at 516-571-2449, and in New York City, residents can contact the Attorney General’s office at 800-771-7755.

In market theory, however, price gouging should have positive effects on local economies. Putting aside the immediate needs of the consumer, allowing businesses to raise prices to meet demands solves some problems. If retailers raised prices immediately and automatically to meet demand, it would eliminate the incidence of empty shelves as people rush to buy supplies before an oncoming storm. It would ensure that the few supplies available after a storm are available for the most needy — those willing to pay the most to get what they need. Matt Yglesias offered his suggestion for this approach in an article in Slate recently.

This would only work as described if all consumers were equal in wealth and had the same amount of funds with which they could compete. That isn’t the case, an invariably, those with the most need for recovery are often those with the least amount of funds. We certainly saw that with Katrina several years ago; the areas hardest hit by the storm were places where home prices were low due to insufficient infrastructure, thus only people who couldn’t afford better living environments were domiciled in many of those locations. The Jersey shore is somewhat different; homes here vary from low-income housing to highly-prized beachfront property, and there is certainly a large amount of wealth in the southern end of Manhattan.

People of different wealth-based classes cannot compete equitably for the same resources when free market pricing is in effect. We do not live in a society where wealth is spread evenly across all citizens — for good reason — thus the theory of the economic advantage of an unfettered market based on supply and demand, eliminating barriers to what would be price gouging, would not work.

Have you seen any evidence of possible price gouging as a result of Hurricane Sandy?

Photo: brownpau

Published or updated November 1, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 15 comments… read them below or add one }

avatar Mary Kaplan

Sad to think that price gauging happens to people recovering from a disaster. I guess greed exists in certain people, and they are unable to feel compassion for the victims. Isn’t this the definition of a sociopath?

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avatar qixx ♦1,895 (Half-Dollar)

Working for a retail outlet i see this as a much different situation. One of our biggest sellers when storms come are generators. We can get these delivered very quickly after a storm. This however often requires these and other supplies be flown in to arrive in hours or a day that would normally take 6-7 days for delivery. After a storm like this any store that sells generators will likely be sold out in a matter of hours. To get more takes time or added cost. People without food or water don’t want to wait to get them for some reason. But they don’t want to pay the extra costs associated with them. I think the same would hold true for gas.

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avatar DonnaFreedman ♦85 (Newbie)

I’m with Mary Kaplan: It’s disappointing to think of people marking up the price of bottled water or whatever because they have customers over a barrel.
There was a big windstorm in Anchorage in September and power outages lasted up to almost three days. It got tense at the home centers and Costco as generators flew off the shelves. The only upside to this is that it’s gotten some people thinking about how complacent they’d become. Specifically: Anchorage is due for another big earthquake one of these days. Suppose it happens during a very cold spell? How well would they cope? Time to start preparing.
(I missed that windstorm. But on my drive up here I stopped at Harbor Freight Tools for a loss-leader generator.)

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avatar Thomas S. Moore

Kind of in between on this one. People who are just charging more simply because they know people are willing to pay or have too are just evil. But then there are times and places where you just cant help but to charge more to get things at a moments notice. These business are in business to make money and while there are lot of people willing to lose some money most cant afford to leave prices the same when other companies are making them pay more to get the same product.

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avatar SteveDH

Price gouging is a sad commentary on our society but there are an equal, if not larger, group that go out of their way to help. After Hurricane Wilma, Home Depot and many others opened their doors even though we didn’t have power for over three weeks. Because of liabilty concerns they had “runners” that would go back into the recesses of the darkened store to try to find what you needed. I had to buy a chain saw. More unfortunatley this is just the beginning – the bigger ripoffs happen when the area is flooded with crooked contractors/workers who will cheat you and your insurance company and then disappear. Palm Beach County (where my Mother lived and where Wilma hit) arrested many but only made a small dent in the number ripoffs.

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avatar Kurt @ Money Counselor

I think you may misapprehend how products are priced. Price does not equal cost + a fixed profit margin. Price equals the seller’s perception of the maximum value at which a product will sell the desired minimum number of units at a given point in time. If my product costs are extraordinarily low for some reason and I sell for cost + profit margin, then I may be ‘leaving money on the table,’ because the consumer may have been willing and able to pay more. If I raise my price on a product because my perception of the market has changed, that’s not price gouging–it’s capitalism. Evil, unethical, etc., it may be, but it’s naive to believe market pricing works otherwise.

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avatar Luke Landes ♦127,485 (Platinum)

I didn’t get into the particulars of product pricing in the article, but I certainly didn’t say products are priced with a fixed profit margin in mind. I agree with you, market forces as perceived by the seller indicate how most products are priced, and if retailers believe the market will bear higher prices in times of greater demand, that drives price increases. But you didn’t make it clear in your comment what you think price gouging actually is. If a gas station raises its price from $3.70 a gallon to $5.00 when the owner sees the line of cars stretching a mile (or expects that to happen) because of limited supply and increased demand, is that price gouging or responding to market changes? Or both? According to the laws in New Jersey, it could be price gouging. Perhaps you’re saying sharp increases of prices shouldn’t be illegal, with regulation yielding to pure free-market forces, which is something I addressed in the article.

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avatar jim

I’m honestly in between on this one.

Yeah I get that some evil capitalist gouging people to take advantage of a disaster is bad.

But on the other hand… would you rather have expensive gasoline and expensive drinking water or NO gas and water?

Qixx makes a very good point that it costs extra money to rush necessary items to disaster areas. That isn’t free. Should companies eat that cost or just avoid getting the items so as not to lose money or force needy customers to wait a week for slow shipments?

So while I do think there should certainly be limits and restrictions on gouging, on the other hand I don’t see a problem with prices going up around giant spikes in demand related to disasters.

I mean the New Jersey law would make $4.50 gas illegal if the average tas price is $4. That seems a bit extreme to me. Now if gas was $20 then thats stupid ridiculous and not warranted. But yeah it might cost and extra 10% or more to rush some gas out to a disaster area and I don’t think thats malicous gouging to pass that cost along to get stuff to the people who need as fast as possible.

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avatar Aaron

I drive past that gas station every day on Rock Creek Parkway. It’s a great picture for the post, but the funny thing is that their prices are always extraordinarily high, like $1-$2 a gallon higher than everyone else. I often wonder how they ever sell a gallon of gas and how it could possibly be more profitable to sell like that.

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avatar Investor Junkie

Simple it’s convenience.

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avatar Investor Junkie

This article presupposes that price gouging is bad. Two comments to make on this:
1. You as the consumer if you do not like the fact a company is gouging would you use them during regular times? You do have choices you know. If its an issue you won’t use them again.
2. So instead of gouging in LI where we still have lack of gas isn’t it better to allow for market prices? If the prices were high we would have companies with more incentive to get gas to areas in which there is more demand? So instead we have long lines just to wait for a possible tanker. Wouldn’t it be better if the ones who have them means and need pay that higher price?

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avatar mbhunter ♦139 (Cent)

If you disallow price gouging, you cause shortages. Why not give people the freedom to sell at what the market will bear?

The people who should win, do win: the gas station owners, and the highest bidders in the market.

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avatar Luke Landes ♦127,485 (Platinum)

That might be fine in most circumstances, but it causes problems when the resource is a public need, like fuel for heat, transportation, food, and shelter. The result of the free market when necessities of life become scarce could be death for those who are poor and can’t afford a bidding war, in an extreme circumstance.

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avatar Investor Junkie

Increases in prices cause an increase in profit which then allows others to get into the game they may of not before because the profit margin was so low. Therefore helping everyone. Or existing distributors to add more resources to make gas easier to pump (ie get a generator) in downed gas stations.

In addition, while you state the poor can’t afford, it’s not just a cost issue. It’s a supply issue. Just because you have more money doesn’t mean you can even get gas to begin with. Though the money does allow you to possible do legal and/or illegal means to acquire resources (ie bribe a gas station attenant).

The increase in price will cause individuals to conserve gas more, find alternative means, or bite the bullet and pay for it. Though there would be much shorter lines and more supply.

My governor made one of the dumbest statements ever heard from a politician. Gov Cuomo made the statement that people should stop hoarding gas?!?! Really? We can’t even find enough to hoard and if we did, it’s done so because it’s harder to find gas so therefore we don’t know how well the supply chain is. So therefore people are toping their tanks, going to refill than normal times because they don’t know when they can get gas next. People are “hoarding” so they can use it in the very short term.

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avatar Caroline

A new store opened in the Town of Bergen NY. I thought I would pick up a (1) Gallon of milk. I was Charged $3.99. I will not buy another gallon of milk there when I can go to Wegmans in Brockport NY and get 1 gallong for $1.99. So at $1.99 there is a PROFIT, what is the Bergen store making as a PROFIT.. lets see more then a 100%.Really

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