Price Gouging: How to Know and What to Do

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