Is price gouging a problem?
SYLVIE DOUGLIS, BYLINE: NPR.
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PADDY HIRSCH, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Paddy Hirsch.
WAILIN WONG, HOST:
And I'm Wailin Wong. After more than two years of pandemic, a supply chain crisis and a war in Europe, supply shocks have become commonplace in the global economy.
HIRSCH: With those supply shocks, of course, come shortages and rising prices and, more often than not, outraged accusations of price gouging.
WONG: Price gouging - when someone takes advantage of a shortage of supply to jack up prices to unfair levels. We've been hearing a lot about price gouging lately as the cost of everything from eggs to gasoline has been going up.
HIRSCH: And in the case of those two commodities in particular, prices have been going up so much and making consumers howl with so much pain that legislators have been getting involved.
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KATIE PORTER: Families across the country are struggling to keep up with rising gas prices.
HIRSCH: That's Democratic Representative Katie Porter of California.
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PORTER: In Orange County, Calif., the price of gas is nearly $6 a gallon, and the price has gone up $2 a gallon in just one year. These corporations are making record profits. The highest...
WONG: California's governor, Gavin Newsom, has called for a price gouging penalty to be imposed on oil companies. Meanwhile, in Rhode Island, Senator Jack Reed has demanded an inquiry into the possibility of gouging in the egg market.
HIRSCH: But what actually is price gouging? When does it happen? And who gets to decide who's been gouging and how they should be punished? This is a slippery topic. But today we're going to take a stab at explaining why price gouging is so hard to define and why many economists refuse to even use the term. That's coming up after the break.
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HIRSCH: We've all been gouged, and we know it when it happens. You've been gouged, right, Wailin?
WONG: I don't know if this totally counts, but I'm still not over the amount I paid for, you know, like, a souvenir light-up wand at a Disney on Ice thing. So mad about it.
WONG: I was like, how could it cost this much for a piece of plastic?
HIRSCH: I know how you feel. It's kind of like at the airport. You know, you've got those retailers that sell bottles of water for five bucks - the same bottle that costs less than a dollar at a supermarket just a half mile away. I mean, that's price gouging, right?
AMY SMITH: No, I don't think so.
HIRSCH: That killjoy is Amy Smith. She is an economist, of course, at Advanced Economics Solutions, a consultancy.
SMITH: I mean, there's other ways to get water at the airport without having to pay for that. You just make sure you bring a bottle with you that's empty. You go through TSA and then you fill it up. So that's the consumer decision you just made. You're like, OK, well, I just want a bottle of water. And if you didn't want to spend that extra five bucks, then you just take an empty bottle with you.
WONG: I know. But it just feels terrible because you know that they don't have to charge that much for that water. They're only doing it because they can.
HIRSCH: I know. And that's the thing about price gouging. It's kind of in the eye of the beholder or the gougee (ph) if you prefer.
SMITH: I think it's more emotion-based, perhaps. I think the initial emotion is like, well, that sucks, or that's bad or - you know what I mean?
SMITH: That sucks is not very economic. I don't know that price gouging is a specific economic term. I don't specifically remember talking about that relative to, you know, any of my economics classes.
WONG: So no, price gouging is not an economic term. In fact, a large proportion - maybe even most economists - say that price gouging isn't a thing at all.
SMITH: Price gouging, from an economist's standpoint, the opinion is that it couldn't exist because it's really all about supply and demand. I mean, you just go back to your Economics 101, right? If there's less of a good, then you got to increase the price in order to rationalize demand.
HIRSCH: In other words, the argument goes, it's not price gouging; it's the market. If demand is super high and supply is super low, then prices are going to rise just as night follows day.
SMITH: So say a hurricane hits the Gulf Coast. There might be an issue with sending in products like toilet paper or plywood or something to that effect, and that would drive prices because the demand on something like that is high while supply continues to dwindle.
WONG: Now, I know what you're thinking. If there's a natural disaster and people really need toilet paper or plywood, and a retailer charges a lot more for those things, that's kind of unethical or maybe even immoral.
HIRSCH: Yes, this is where Economics 102 comes in, and we learn about the power of a monopoly, which occurs when a company lacks any viable competition and can keep prices high, which is kind of what it feels like at the airport sometimes.
WONG: But a hard-line economist might argue that it's not good for the economy - not good for anyone, in fact - to forbid retailers from increasing prices. Goods often cost more in a store because the retailer's supplier is charging more, and all the store owner is doing is passing along those costs. Natural disasters can be an existential threat to businesses as well as to the people who need what they sell.
SMITH: You might see said business owner say, well, you know what, we're running low on X, but I know I'm not going to sell Y because it's not needed right now. So if I increase X because we're low on supply, that'll help me make up the difference in the margins that I'm not making on Y.
HIRSCH: Amy says that she is not in that camp of economists who refuse to admit the price gouging exists at all. She's felt gouged herself on occasion, like at the beginning of the pandemic when retailers of face masks and hand sanitizer took advantage of price shocks and supply shortages to increase prices to eye-wateringly unfair levels.
SMITH: And you would go on an internet outlet or something like that, and you'd see, oh my gosh, that's - I would pay that for a gallon of hand sanitizer not for a pint of hand sanitizer.
HIRSCH: The problem, Amy says, is that price gouging is hard to define. I mean, at what point did that internet retailer's price go from merely high to an outright gouge? Price gouging is a highly subjective concept. How subjective? Well, for starters, just look at that word - gouge.
WONG: Yes. The dictionary definition is to make a groove, hole or indentation with a sharp tool or blade.
WONG: Yeah, it's a pretty aggressive verb that implies someone doing injury to someone else. There is a judgment inherent there.
HIRSCH: Yeah, and who judges? Not economists, not the retailer, not even the buyer - OK, the buyer might judge. But it's the government that decides what price gouging actually is - and not the federal government, by the way.
SMITH: Each state has different laws on the books related to price fixing or price gouging or any of that. You certainly want to protect consumers from, you know, being taken advantage of, but then you also hope that the consumer is making a rational decision as well.
WONG: Every state has different laws on price gouging if they have laws at all, which means that in some parts of the U.S. price gouging doesn't exist. And where it does exist, it has a variety of definitions. In some states, retailers are allowed to pass on wholesalers' costs, and in others they're not. It's a random patchwork of guidance that uses words like exorbitant, excessive and unconscionable with regard to pricing without defining what those terms actually mean.
HIRSCH: You know, Wailin, this kind of reminds me of what Supreme Court Justice Potter Stewart said about pornography - I know it when I see it.
WONG: Yeah, like when you're buying concert tickets and you see what the fees are at the end, and you're like, that is obscene. That's when you know.
HIRSCH: Yeah. The fact is that price gouging laws and therefore the definition of price gouging are driven by politics not economics. And by the way, although most of the politicians complaining about price gouging right now are Democrats, this is actually a bipartisan issue. Gouging laws have been passed by both parties in response to public pressure.
WONG: Gouging legislation usually follows an outcry by the public after an event, like a natural disaster or a pandemic, during which prices have risen sharply.
HIRSCH: Seven states, for example, passed laws in 2001 and 2002 in response to consumer complaints of price increases following the September the 11, 2001 terror attacks.
WONG: And this is why right now you have a Rhode Island senator demanding an inquiry into egg prices and a California governor urging price gouging penalties on oil companies. Lawmakers in those states have been deluged with complaints about corporations charging exorbitant, excessive prices for eggs and gasoline over the last year.
HIRSCH: The egg gouging question has just gone to the Federal Trade Commission. The California gasoline gouging initiative just made it to the state Senate. Politicians will now try to untangle that old knot between economics and ethics, the same one that the philosopher Plato wrestled with in his republic more than 2,000 years ago. So this latest attempt to define price gouging, well, it might take a wee while.
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WONG: This episode was produced by Corey Bridges with engineering from Katherine Silva. Sierra Juarez checked the facts. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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