![Cartoon warning World's Fair attendees of price-gouging](https://upload.wikimedia.org/wikipedia/commons/9/97/Cartoon_warning_World%27s_Fair_attendees_of_price-gouging.jpg)
Price gouging is a
pejorative
A pejorative or slur is a word or grammatical form expressing a negative or a disrespectful connotation, a low opinion, or a lack of respect toward someone or something. It is also used to express criticism, hostility, or disregard. Sometimes, a ...
term used to describe the situation when a seller increases the prices of
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...
,
services, or
commodities
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a comm ...
to a level much higher than is considered reasonable or fair. Usually, this event occurs after a
demand or
supply shock. This term is commonly used to describe price increases of basic necessities after
natural disasters
A natural disaster is "the negative impact following an actual occurrence of natural hazard in the event that it significantly harms a community". A natural disaster can cause loss of life or damage property, and typically leaves some econo ...
. In legal usage, price gouging is the name of a crime that applies in some jurisdictions of the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
during civil emergencies. In less precise usage, the term can also be used to refer to profits obtained by practices inconsistent with a competitive
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
, or to
windfall profits
A windfall gain is an unusually high or abundant income, that is sudden and/or unexpected.
Types
Examples of windfall gains include, but are not limited to:
*Gains from demutualization - this example can lead to especially large windfall gains. A ...
. Price gouging is considered by some to be exploitative and unethical.
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, 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
The market rate (or "going rate") for goods or services is the usual price charged for them in a free market. If demand goes up, manufacturers and laborers will tend to respond by increasing the price they require, thus setting a higher market rate ...
that would otherwise prevail in a
competitive environment. Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the
demand curve
In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...
.
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
In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply ( surplus).
Definitions
In a perfect market (one that matches a sim ...
.
Laws against price gouging
United States
In the United States,
state laws against price gouging have been held as
constitutional 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
Price-gouging is often defined in terms of the three criteria listed below:
# Period of emergency: The majority of laws apply only to price shifts during a declared
state of emergency
A state of emergency is a situation in which a government is empowered to be able to put through policies that it would normally not be permitted to do, for the safety and protection of its citizens. A government can declare such a state du ...
or
disaster.
# Necessary items: Most laws apply exclusively to items essential to survival, such as food, water, and housing.
#
Price ceiling
A price ceiling is a government- or group-imposed price control, or limit, on how high a price is charged for a product, commodity, or service. Governments use price ceilings ostensibly to protect consumers from conditions that could make com ...
s: 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.
When the law goes into effect
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, Florida, Mississippi, and Ohio—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.
What the law prohibits
State laws vary on what price increases are permitted during a declared disaster. California has set a 10 percent ceiling on price increases.
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. 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. Laws often include exceptions for price increases that can be justified in terms of the increased cost of supply, transportation, demand, or storage.
Enforcement
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
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.
[Cal. Penal Code § 396 (West 2018).] 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.
[''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).] The prohibition lasts for up to 30 days at a time and may be renewed as necessary.
[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”).] 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.
One of his last acts as governor was to extend the prohibitions until May 31, 2019.
[''Id''.]
Even though California prohibits price hikes after an emergency is declared, the state, like many others, has virtually no price monitoring structure for oversight.
[Emily Bae, Note, ''Are Anti-Price Gouging Regulations Effective Against Sellers During Disasters?'', 4 Entrepreneurial Bus. L.J. 79, 80 (2009).] 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.
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
and the rental vacancy rate was zero.
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.
[Cal. Penal Code § 396(e)-(f) (West 2018).]
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.”
[Cal. Penal Code § 396(e) (West 2019).] 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.
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."
Florida
Florida's "state of emergency" law criminalizes price gouging. 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.
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
"Hazard Pay" is the third episode of the fifth season of the American television drama series '' Breaking Bad'', and the 49th overall episode of the series. Written by Peter Gould and directed by Adam Bernstein, it originally aired on AMC in the ...
for workers, while
California
California is a U.S. state, state in the Western United States, located along the West Coast of the United States, Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the List of states and territori ...
places a ten percent cap on any increases.
United Kingdom
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. Chapter II of the
UK Competition Act 1998 prohibits businesses with market dominance from engaging in "abusive" conduct, including "unfair" pricing. 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.
European Union
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 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.
Price gouging and COVID-19
![Corona-deal](https://upload.wikimedia.org/wikipedia/commons/9/95/Corona-deal.jpg)
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. As studied by the
National Institutes of Health
The National Institutes of Health, commonly referred to as NIH (with each letter pronounced individually), is the primary agency of the United States government responsible for biomedical and public health research. It was founded in the late ...
, the COVID-19 pandemic induced a panic as mandates were put in place for Americans to stay at home, quarantine, and wear masks. 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 facial masks, N-95 facial masks, hand sanitizer, and toilet paper. More than 30 states' attorneys general urged
Facebook
Facebook is an online social media and social networking service owned by American company Meta Platforms. Founded in 2004 by Mark Zuckerberg with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin M ...
,
Amazon
Amazon most often refers to:
* Amazons, a tribe of female warriors in Greek mythology
* Amazon rainforest, a rainforest covering most of the Amazon basin
* Amazon River, in South America
* Amazon (company), an American multinational technology c ...
,
Craigslist,
eBay
eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became a ...
, and
Walmart
Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores from the United States, headquarter ...
to restrict the selling of necessary products at "unconscionable" prices.
Online price gouging
E-commerce transactions accounted for 14.4% of US retail sales in 2020. 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
The Dormant Commerce Clause, or Negative Commerce Clause, in American constitutional law, is a legal doctrine that courts in the United States have inferred from the Commerce Clause in Article I of the United States Constitution, Article I of the U ...
in the U.S. Constitution arise in litigation wherein 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." Therefore, states should not regulate commerce taking place outside of state borders. 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
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. Amazon is a leading e-commerce platform that has seen an increase of market capitalization of more than $570 billion throughout the pandemic. The Online Merchants Guild, a trade association for online merchants, filed a case in
Kentucky
Kentucky ( , ), officially the Commonwealth of Kentucky, is a state in the Southeastern region of the United States and one of the states of the Upper South. It borders Illinois, Indiana, and Ohio to the north; West Virginia and Virginia to ...
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. The
U.S. District Court for the Eastern District of Kentucky
The United States District Court for the Eastern District of Kentucky (in case citations, E.D. Ky.) is the Federal district court whose jurisdiction comprises approximately the Eastern half of the Commonwealth of Kentucky.
The United States Cour ...
sided with the Online Merchants Guild on June 23, 2020, and agreed that the
Kentucky Attorney General
The Attorney General of Kentucky is an office created by the Kentucky Constitution. (Ky.Const. § 91). Under Kentucky law, they serve several roles, including the state's chief prosecutor (KRS 15.700), the state's chief law enforcement officer (K ...
cannot enforce the price gouging regulations on Amazon sellers. The case is set to be reviewed by the
Sixth Circuit Court of Appeals.
Price gouging-related lawsuits during the COVID-19 pandemic
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
On August 11, 2020,
New York Attorney General Letitia James
Letitia Ann James (born October 18, 1958) is an American lawyer and politician. She is a member of the Democratic Party and the current Attorney General of New York, having won the 2018 election to succeed appointed Attorney General Barbara Und ...
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. To settle the lawsuit, Hillandale Farms agreed to donate 1.2 million eggs to New York food banks. The case was dismissed with prejudice. This suit was one of several against egg producers during the pandemic, with the Texas Attorney General suing Cal-Maine Foods, the California Attorney General suing Dakota Layers, and the West Virginia Attorney General suing Dutt & Wagner.
Southern District of Mississippi, 2021
A Mississippi businessman purchased scarce
personal protective equipment
Personal protective equipment (PPE) is protective clothing, helmets, goggles, or other garments or equipment designed to protect the wearer's body from injury or infection. The hazards addressed by protective equipment include physical, elec ...
(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.
Opposition to laws against price gouging
In a 2012 survey of leading American economists by the
Initiative on Global Markets The Initiative on Global Markets (IGM) is a research center at the University of Chicago Booth School of Business in the United States. The initiative supports original research on international business, financial markets, and public policy. The I ...
, 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 to lower supply and greater scarcity of the resources, or that the proposal in question was vague.
According to the theory of
neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, anti-price gouging laws prevent
allocative efficiency. 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.
According to
Friedrich Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...
in "
The Use of Knowledge in Society
"The Use of Knowledge in Society" is a scholarly article written by economist Friedrich Hayek, first published in the September 1945 issue of ''The American Economic Review''.
Written (along with ''The Meaning of Competition'') as a rebuttal to f ...
", prices can act to coordinate the separate actions of different people as they seek to satisfy their desires. Economists such as
Thomas Sowell (
Chicago School of economics
The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stigle ...
),
Donald J. Boudreaux (
Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...
and
public choice
Public choice, or public choice theory, is "the use of economic tools to deal with traditional problems of political science".Gordon Tullock, The New Palgrave: A Dictionary of Economics, 987
Year 987 ( CMLXXXVII) was a common year starting on Saturday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* February 7 – Bardas Phokas (the Younger) and Bardas Skleros, two membe ...
2008, "public choice," ''The New Palgrave Dictionar ...
), and
Raymond Niles (Senior Fellow at the
American Institute for Economic Research
The American Institute for Economic Research (AIER) is a libertarian think tank located in Great Barrington, Massachusetts. It was founded in 1933 by Edward C. Harwood, an economist and investment advisor. It is a 501(c)(3) nonprofit.
History ...
) argue that laws prohibiting price gouging dramatically worsen emergencies for both buyers and sellers.
See also
*
Extortion
Extortion is the practice of obtaining benefit through coercion. In most jurisdictions it is likely to constitute a criminal offence; the bulk of this article deals with such cases. Robbery is the simplest and most common form of extortion, ...
*
Hoarding (economics)
*
Just price
The just price is a theory of ethics in economics that attempts to set standards of fairness in transactions. With intellectual roots in ancient Greek philosophy, it was advanced by Thomas Aquinas based on an argument against usury, which in his ti ...
*
Monopoly
A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
*
Price fixing
*
Sherman Antitrust Act
The Sherman Antitrust Act of 1890 (, ) is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce. It was passed by Congress and is named for Senator John Sherman, its principal author.
Th ...
*
Ticket resale
Ticket resale (also known as ticket scalping or ticket touting) is the act of reselling tickets for admission to events. Tickets are bought from licensed sellers and then sold for a price determined by the individual or company in possession of ...
*
Unintended consequences
References
External links
{{Wiktionary
Florida Attorney General FAQ Concerning Price GougingCondemning Price Gouging with Respect to Motor Fuels Following Terrorist Acts of September 11, 2001in the Congressional Record
Pricing
Commercial crimes