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Price gouging

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Price gouging is a pejorative term used to refer to the practice of increasing the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair by some. This commonly applies to price increases of basic necessities after natural disasters. Usually, this event occurs after a demand or supply shock. The term can also be used to refer to profits obtained by practices inconsistent with a competitive free market, or to windfall profits. In some jurisdictions of the United States during civil emergencies, price gouging is a specific crime. Price gouging is considered by some to be exploitative and unethical and by others to be a simple result of supply and demand.

1904 cartoon warning attendees of the St. Louis World's Fair of hotel room price gouging

Price gouging 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.

It is sometimes used to refer to practices of a coercive monopoly that prices above the market rate by deliberately curtailing production.[2] Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.

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 resulting inflation after the pandemic has also been blamed, at least in part, by some on price gouging. During the pandemic, the idea of 'greedflation' or 'seller's inflation' also moved out of the progressive economics fringe by 2023 to be embraced by some mainstream economists, policymakers and business press.[3]

Laws against price gouging

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United States

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As of March 2021, Proskauer Rose counted 42 states that have emergency regulations or price-gouging statutes.[4][needs update] Price-gouging is often defined in terms of the three criteria listed below:[5]

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

Washington state does not have a specific statute addressing price gouging, can nevertheless have sought to apply its consumer protection act to argue that high prices during COVID-19 for PPE was an "unfair" or "deceptive" practice.[6]

When the law goes into effect

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Statutory prohibitions on price gouging become effective once a state of emergency has been declared. States have legislated different requirements for who must declare a state of emergency for the law to go into effect. Some state statutes that prohibit price gouging—including those of Alabama,[7] Florida,[8] Mississippi,[9] and Ohio[10]—prohibit 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 prohibits

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State laws vary on what price increases are permitted during a declared disaster. California has set a 10 percent ceiling on price increases.[12] The law includes exceptions for price increases that can be justified in terms of the increased cost of supply, transportation, demand, or storage.[13] 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.[14] Alabama state law does 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.[15]

Enforcement

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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.[citation needed]

California

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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 prohibition 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 prohibitions 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][verification needed] Attorneys and law enforcement generally rely on news reports and word of mouth to learn about price increases that may violate the law. The District Attorney of Sonoma County has attempted to remedy this by creating its own task force focused on combatting and prosecuting price gouging.[citation needed]

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.[citation needed]

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, or both.[20]

The amended version went into effect on January 1, 2019 and aimed to reduce future price increases similar to those 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.”[21] 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.[21]

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."[21]

Florida

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Florida's "state of emergency" law criminalizes price gouging.[22] A supplier of essential goods and services may be charged when it sharply raises prices 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. Though the effect of such laws have been proven to actually increase the risk of extreme shortages since the absence of increased prices replaces higher prices with an incentive for the earliest person to market to obtain all of a product about to imminently experience a period of very high demand.[23]

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.[24]

United Kingdom

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Laws and regulations in the United Kingdom do not use the phrase “price gouging” in consumer protection regulation but are similar to U.S. laws.[citation needed] Chapter II of the UK Competition Act 1998 prohibits businesses with market dominance from engaging in "abusive" conduct, including "unfair" pricing.[25] 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.[26]

European Union

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Similar to UK regulations, the EU does not include “price gouging” explicitly in regulation.[citation needed] Article 102 of the Treaty on the Functioning of the European Union is "aimed at preventing undertakings who hold a dominant position in a market from abusing that position." 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.[27][better source needed]

Price gouging and COVID-19

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In the early stages of the COVID-19 pandemic, there were shortages of some consumer goods like toilet paper due to supply chain congestion.

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.[28] As studied by the National Institutes of Health, the COVID-19 pandemic induced a panic as mandates were put in place for Americans to stay at home, quarantine, and wear masks.[29] The declared COVID-19 emergency made state-level price gouging laws and regulations go into effect. Demand for certain products increased while supply decreased. Such products in short supply included surgical masks, N95 respirators, hand sanitizer, and toilet paper. More than 30 states' attorneys general urged Facebook, Amazon, Craigslist, eBay, and Walmart to restrict the selling of necessary products at "unconscionable" prices.[30]

Online price gouging

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A 2018 appeals court overturned a lower court ruling, arguing that the dormant commerce clause of the U.S. constitution meant Maryland's anti-price gouging statute was unconstitutional.[31]

Online Merchants Guild v. Cameron, 2020

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This complaint relates to online merchants selling necessary products on Amazon during the US national state of emergency invoked in response to the COVID-19 pandemic. 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.[32] Judge Gregory Van Tatenhove sided with the Online Merchants Guild on June 23, 2020, saying that the Kentucky Attorney General cannot enforce the price gouging regulations on Amazon sellers. The Sixth Circuit Court of Appeals unanimously overturned that ruling in April of 2021.[33]

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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.

Eggs

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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.[34] To settle the lawsuit, Hillandale Farms agreed to donate 1.2 million eggs to New York food banks.[35]

Personal protective equipment

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A Mississippi businessman purchased scarce personal protective equipment (PPE) including gowns, face shields, and masks through his pharmaceutical wholesale company. An 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 were 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.[36][37][needs update]

Economic analysis

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Allocative efficiency holds that 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" (1945), prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.[38]

Economists such as Thomas Sowell (Chicago School of economics) in 2004,[39] Donald J. Boudreaux in 2005,[40] and Raymond Niles (Senior Fellow at the American Institute for Economic Research) in 2020 argue that laws prohibiting price gouging worsen emergencies for both buyers and sellers.[41]

In a 2012 survey of leading[non-primary source needed] American economists by the Initiative on Global Markets, only 8 percent agreed with a proposal in Connecticut to prohibit "unconscionably excessive" price increases during severe weather events. Those who disagreed stated that the wording was vague or unenforceable, and that restricting price increases leads to misallocation of resources.[42][non-primary source needed]

2020 to present

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In 2022, Federal Reserve Bank of St. Louis economist Christopher J. Neely said that "most economists believe broad price controls to be costly and ineffective in most situations" because high prices function to "allocate scarce goods and services to buyers who are most willing and able to pay for them, [and] they signal that a good is valued and that producers can profit by increasing the quantity supplied."[43]

A 2022 Working Paper by the International Monetary Fund explores the implementation of windfall profit taxes, which have gained renewed interest following the COVID-19 pandemic, the war in Ukraine, and subsequent surges in energy and food prices. The paper discusses the potential of such taxes as a tool for efficiently taxing economic rents, which are often a result of monopolistic power or unexpected events like pandemics, war, or natural disasters, and contribute to windfall profits. Such profits have raised public and policy concerns about price gouging, where firms are perceived to be profiting excessively from unforeseen circumstances.[44]

In Australia in 2023 and 2024, major supermarket chains Coles and Woolworths received criticism as price gouging, especially in less competitive markets.[45][46][47][48][49] Coles and Woolworths control 65% of Australia's grocery market.[50]

In March 2024, the Federal Trade Commission accused grocery chains in the U.S. of price gouging.[51] The Commission also sued to block the proposed acquisition of Albertsons by Kroger citing the need for more competition to keep prices down.[52]

A study from 2024[53] showed that oftentimes when allegations of "price gouging" are made, the profit margins of sellers and vendors is substantially lower than critics believe, such as in the case of grocers recently accused of "price gouging" who actually had a 1.2% profit margin after expenses; with Kroger having their highest profits in the previous 15 years occurring in 2018 at 3%.[54]

See also

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References

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  1. ^ Cowley, Jenny; Tomlinson, Asha; Matteis, Stephanie (November 21, 2020). "Provinces promised crackdown on pandemic price gouging. In fact, there have been few repercussions". CBC News. Retrieved March 15, 2021.
  2. ^ "Lawrence Kudlow". Jewishworldreview.com. June 14, 2000. Retrieved September 25, 2016. As such, Microsoft fails to meet the traditional standards of a coercive monopoly, i.e., one that price-gouges consumers by deliberately curtailing production. If there was a reason to justify trust-busting a hundred years ago under the Sherman anti-trust act, this was it.
  3. ^ Peck, Emily (May 18, 2023). "Once a fringe theory, "greedflation" gets its due". Axios.
  4. ^ Koenig, Bryan (March 8, 2021). "Analysis: Price-Gouging Rules, E-Commerce To Collide At 6th Circ". Law360. Retrieved March 15, 2021.
  5. ^ a b M. Zwolinski (2008). "The Ethics of Price Gouging". Business Ethics Quarterly. 18 (3): 347–378. doi:10.5840/beq200818327. S2CID 153570535. SSRN 1099567.
  6. ^ Carroll, Megan (March 31, 2020). "Spokane seller accused of price gouging coronavirus supplies on Amazon". KREM.
  7. ^ Ala. Code § 8-31-4 (2017).
  8. ^ Fla. Stat. § 501.160 (2017).
  9. ^ Miss. Code Ann. § 75-24-25 (2008).
  10. ^ Ohio Rev. Code Ann. § 1345.01 (2009).
  11. ^ a b Cal. Penal Code § 396 (West 2018).
  12. ^ 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”).
  13. ^ 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.  
  14. ^ Fla. Stat. § 501.160(b) (2017).
  15. ^ Id.; Ala. Code § 8-31-4 (2017).
  16. ^ 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).
  17. ^ "Governor Jerry Brown Extends Price Gouging Protections". December 2018.
  18. ^ Id.
  19. ^ Emily Bae, Note, Are Anti-Price Gouging Regulations Effective Against Sellers During Disasters?, 4 Entrepreneurial Bus. L.J. 79, 80 (2009).[verification needed]
  20. ^ Cal. Penal Code § 396(e)-(f) (West 2018).
  21. ^ a b c Cal. Penal Code § 396(e) (West 2019).
  22. ^ "Florida Attorney General - Price Gouging Frequently Asked Questions". Florida office of the attorney general. Retrieved September 25, 2016.
  23. ^ Bourne, Ryan; Subramaniam, Brad. "Longstanding Anti-Price Gouging Statutes Worsen Shortages". Cato Institute. Retrieved May 16, 2022.
  24. ^ Giberson, Michael (2011). "The Problem with Price Gouging Laws" (PDF). Cato Institute. Retrieved September 25, 2016.
  25. ^ "Competition Act 1998".
  26. ^ Murphy, Frances; Lewis, Morgan (July 2, 2020). "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.
  27. ^ "Chillin' Competition Conference, Brussels, 21 November 2016". Archived from the original on November 29, 2019.
  28. ^ 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.
  29. ^ 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. PMC 7362858. PMID 32697692.
  30. ^ Levenson, Michael (March 28, 2020). "Price Gouging Complaints Surge Amid Coronavirus Pandemic". The New York Times. ISSN 0362-4331. Retrieved March 24, 2021.
  31. ^ McCoy, Adam; Namet, Shawn (April 18, 2018). "Fourth Circuit Holds Maryland Anti-Price Gouging Statute Violates Dormant Commerce Clause". Wake Forest Law Review. Retrieved March 15, 2021.
  32. ^ "Online Merchants Guild v. Cameron, No. 3:2020cv00029 - Document 36 (E.D. Ky. 2020)". Justia Law. Retrieved March 24, 2021.
  33. ^ Pierson, Brendan (April 30, 2021). "Kentucky can enforce price-gouging laws against Amazon sellers - 6th Circuit". Reuters.
  34. ^ "Attorney General James Sues One of the Nation's Largest Egg Producers for Price Gouging During the Coronavirus Pandemic". ag.ny.gov. August 11, 2020. Retrieved April 19, 2021.
  35. ^ "1.2 Million Free Eggs Coming to New York in Pandemic Price Gouging Settlement". NBC New York. April 2021. Retrieved April 19, 2021.
  36. ^ "Mississippi businessman accused in scheme to hoard PPE". AP News. January 28, 2021. Retrieved August 26, 2024.
  37. ^ "Businessman Charged in Scheme to Hoard Personal Protective Equipment and Price Gouge Health Care Providers". U.S. Department of Justice. January 27, 2021.
  38. ^ Hayek, Friedrich A., "The Use of Knowledge in Society". 1945. Library of Economics and Liberty. 6 December 2010.
  39. ^ Sowell, Thomas (September 14, 2004). ""Price Gouging" in Florida". Capitalism Magazine. Retrieved March 9, 2022.
  40. ^ Boudreaux, Donald J. (April 1, 2005). "On Price Gouging | Donald J. Boudreaux". fee.org. Retrieved March 9, 2022.
  41. ^ Hersey, Jon (April 16, 2020). "Economists Petition Politicians to Repeal Laws against 'Price Gouging'". The Objective Standard. Retrieved March 9, 2022.
  42. ^ "Survey: Price gouging". Initiative on Global Markets. May 2, 2012. Retrieved June 5, 2022.
  43. ^ Neely, Christopher J. (March 24, 2022). "Why Price Controls Should Stay in the History Books". www.stlouisfed.org. Retrieved August 19, 2024.
  44. ^ Hebous, Shafik; Prihardini, Dinar; Vernon, Nate (2022). "Excess Profit Taxes: Historical Perspective and Contemporary Relevance". IMF Working Papers. 2022 (187): 1. doi:10.5089/9798400221729.001. Retrieved December 12, 2023.
  45. ^ Taylor, David (January 24, 2024). "Are you being gouged at the supermarket check-out? Here's what we know". ABC News. Retrieved August 20, 2024.
  46. ^ Taylor, David (February 27, 2024). "'No-one has to earn a 30pc profit rate': Coles accused of gouging shoppers as they struggle to put food on table". ABC News. Retrieved August 20, 2024.
  47. ^ Hurst, Bree; Richards, Carol; Johnson, Hope; Messner, Rudolf (May 8, 2024). "Yes, Australia's big supermarkets have been price gouging. But fixing the problem won't be easy". The Conversation. Retrieved August 20, 2024.
  48. ^ Barrett, Jonathan (June 19, 2024). "Typical Aldi grocery bill 25% cheaper than at major supermarkets, Choice research finds". The Guardian. ISSN 0261-3077. Retrieved August 20, 2024.
  49. ^ Staszewska, Ewa (January 10, 2024). "What to know about the looming supermarket price-gouging review". SBS News. Retrieved August 20, 2024.
  50. ^ Ainsworth, Kate (April 15, 2024). "Woolworths and Coles will be asked to explain their profits and higher prices today. Here's what to expect". ABC News. Retrieved August 20, 2024.
  51. ^ Davidson, Paul. "Did grocery chains take advantage of COVID shortages to raise prices? FTC says yes". USA TODAY. Retrieved August 20, 2024.
  52. ^ Ngo, Madeleine (March 21, 2024). "Large Grocers Took Advantage of Pandemic Supply Chain Disruptions, F.T.C. Finds". The New York Times. ISSN 0362-4331. Retrieved August 20, 2024.
  53. ^ Tuccille, J. D. (August 19, 2024). "Kamala Harris' dishonest and stupid price control proposal". Reason.com. Retrieved August 19, 2024.
  54. ^ Lancaster, Joe (January 12, 2022). "Elizabeth Warren Blames High Food Prices on Grocery Chains' 'Record' 1 Percent Profit Margins". Reason.com. Retrieved August 19, 2024.
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