What is price gouging and how is it different from typical inflation, dynamic pricing, or the economics of supply and demand?
In: Economics
Price gouging is an emotional assessment of market conditions. You typically see the term associated with inelastic goods and services (necessities), but the price is still driven by supply and demand.
Demonstrated recently when supermarkets in the UK dropped carrying Pepsi and Lays products because they knew that the suppliers costs had dropped but they did not lower their prices for consumers but actually continued to increase them! [https://www.wsiltv.com/news/consumer/pepsi-and-lay-s-pulled-from-supermarkets-in-europe-over-price-increases/article_ca402e22-3dd1-5c17-9e2f-a589240a320c.html](https://www.wsiltv.com/news/consumer/pepsi-and-lay-s-pulled-from-supermarkets-in-europe-over-price-increases/article_ca402e22-3dd1-5c17-9e2f-a589240a320c.html)
Price gouging is a very specific opinion of behavior considered bad enough to be illegal. Usually it’s a state or local law, so it can be different everywhere you live.
In my state, I believe there has to be a declared emergency by local or state officials for price gouging to even be possible, and the thing being sold has to be considered some form of “vital” supply. So if a gas station near my house just decides to try $10/gallon gas when nothing’s going on, that’s considered fine. But if there’s a tornado that affects the local area and it leads to a shortage of gas, and the mayor declares a state of emergency, then the gas station is now legally very limited in how they can set their prices. Setting it to $10/gallon will most definitely end with a lawsuit and fines.
But people today use words like “censorship” and “price gouging” liberally, so you’ll hear accusations for just about any scenario. For example, they consider “surge pricing” in Uber/Lyft to be gouging. Normally, it’s not. But when they were new, and they tried it after a serious ice storm in my area, they got strong reprimands from the state and since then when there’s a disaster like that they announce that they will NOT be using surge pricing for a few weeks.
So the increased price *is* natural supply and demand. But the economists who came up with capitalism also agreed there can be “market imbalances” and if the government doesn’t step in to regulate those it can be very bad for the whole economy. So it’s justifiable that the government can choose to step in and regulate prices in emergencies.
You’re a gas station operator in Kansas.
A tornado comes through town one fateful May evening, kills three people, demolishes 73 houses and 12 businesses (including the other gas station across town), and knocks out the power grid to the entire town.
The next morning you go to work and change the price of gas from $3.27 a gallon to $9.75 a gallon. You’re not going to miss a shipment or anything, you just know that desperate people might need to fill up cars and backup generators and you’ll have a demand spike today.
This is price gouging. It’s not a macroeconomic trend across the entire country like inflation, and it’s not surge pricing or widespread demand – it’s localized profiteering in a specific region in response to a specific event/situation that has made the market suddenly uncompetitive.
A company has been gifted a local monopoly, and they abuse it.
Price gouging is a very subjective term with no fixed definition in economics. It is usually used rhetorically to push some kind of narrative. Most businesses face decisions daily but in uncertain situations the risks rise dramatically. Questions like
1) Do I have enough inventory to meet projected demand?
2) Will my current supplier(s) encounter additional uncertainties? Can they continue supply at my requirements? Will their prices to me increase due to difficulties from their suppliers?
3) Will I have to consider purchasing raw materials from a new supplier? Will these alternates have supply? What prices will they charge me?
4) Are there other supply disruptions? Will my transportation costs increase? Will my delivery times increase?
5) Can I maintain production? Will my workers require more pay? Are workers going to need to stay home and productivity reduces at my factory? How do I cover fixed costs over lowered output?
6) What is my customer outlook? Will they cancel orders? Or will they order MORE because of increased uncertainties and they need my product just in case? Are there new potential customers because of supply disruption across my competitors?
7) What is my competitor going to face? Can I gain market share? Will they run into fewer difficulties because they have a better supply chain?
All these factors play into current and near future pricing of the products. As uncertainties mount, producers will increase prices to cover these unknown factors. In nearly all cases of uncertainty, producers will try to chart a “safe” path. If they do better than anticipated, their profits rise tremendously. If things turn out bad, their decisions might avert the worst case outcomes.
Few people understand the details of any business – so it is simple to make claims like “profiteering” or “price gouging”. The people running the business usually have a responsibility to maintain their business viability as a duty to their owners.
It usually has to do specifically with prices of necessities, during time of crisis… like if there’s a hurricane and stores jack up prices of gas and bottled water to 5x the usual price because they know people are desperate to fuel up to flee, need to stockpile water in case there are water shutoffs/lack of drinking water. It doesn’t relate to non-necessities and to spikes due to intrinsic demand, etc. like if a store jacks up the price for the hot limited edition Jordan shoes.
It’s an immediate jump in price due to a specific event/predicted event, while inflation is more gradual and not tied to a single specific event. Inflation is typically a more broad experience vs. on a few specific products. In some ways it is dynamic price, just predatory in its amount of increase. It also may be tied to supply & demand, but in such short term that it’s harmful to consumers and extracts undue profits for seller (wholesaler, etc. didn’t benefit)
Example: pricing water bottles linear with daily high temperature. As temperature goes up and more water is demanded, price goes up. Usually associated with outsize / windfall profits following supply shocks or huge increases in demand.
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