“Price gouging” and other fairy tales


This is good for a chuckle. While looking up some data on the EPA’s fuel economy web site, I stumbled across the following FAQ:

What can I do if I suspect a gas station is price gouging or price fixing?

If you believe there may be price-gouging or price-fixing, please contact your local authorities and fill out the Department of Energy’s Gas Price Watch Reporting Form.

Has the government also set up a page for reporting unicorn sightings? Maybe the Gas Price Watch form sends an email directly to Santa Claus. If you’re really good, magical elves will leave some cheap gas under your tree.

I’ve said this before, but: there’s no such thing as price gouging. Gas prices reflect supply and demand. If I were allowed to redesign the Gas Price Watch page, it would flood Congress with reminders that that gas is too cheap.

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  1. TarGator - August 21, 2007

    Maybe price gouging on a retail level does not exist due to competition, but price gouging on a macro level certainly does. Two examples OPEC and the reduction of infrastructure in the US by major refiners.

  2. Adam Stein - August 21, 2007

    Maybe the EPA should set up a web site where consumers can report price gouging by OPEC.
    More seriously, neither of these examples are totally convincing. There are lots of structural reasons for the shortage in refinery capacity.
    And OPEC, as a cartel, certainly has pricing power. But they mainly seem to exercise it to keep prices low these days.

  3. Al - August 22, 2007

    We were in Teton Village (Jackson Hole) last week and the gas station there was selling gas for $3.60 to $3.80 a gallon, about $0.75 higher than other stations a few miles away. However, that is not gouging considering that only the overpaid yuppies that hang out there would ever pay that. More power to the price gougers. I notice that gas is going down in price recently. Are we using less?

  4. Chad - August 22, 2007

    I agree with you Adam, “price gouging” is a myth. All it seems to mean is “someone raised prices a lot when supply crashed and/or demand jumped”. Well, duh.
    Sometimes people seem to conflate gouging with cartels and monopolies, which are different things. Cartels tend to be unstable on their own, and are even more difficult to maintain when laws against them are enforced. Most monopolies that do exist are actually affiliated with the state in some way, or are “natural” monopolies such as Microsoft, which exist not because the corporation involved is “evil”, but rather because of peculiar market circumstances which favor one seller over many. In the case of Microsoft, the fact that it is to my advantage to use an OS and office suite that is compatible with that of my neighbor generally overwhelms any micro-advantage I would gain by switching to different OS. If a competing OS was “just as good” as Windows, I wouldn’t switch. Why deal with the compatibility issues and learning curve? The new system (Linux, Apple, etc) would have to be much better to cause me to switch. This lock-in effect can result in monopolies.

  5. Monty - August 23, 2007

    Last I checked we live in a supposed free-market society, and stores are allowed to charge whatever they want. If someone wants to charge $15 per gallon for petrol, more power to them. There is no law (that I am aware of) that stops companies from charging whatever they want.
    I assume they do not mean ‘gouging’ on an individual store basis, though (which makes no sense) and are actually concerned about market gouging where all players in a given market are charging what is perceived to be ‘too much’. However, this is not, technically, illegal. Anyone who has shopped for a video game or a compact disc can attest to the fact that companies generally ‘set’ prices. Why does a DVD cost twenty bucks when a blank DVD is ten cents? Price fixing has been an (unfortunate) standard in our society for years.
    However, the same solution is in place for all price fixing. If it costs too much, simply do not buy it. I know the typical response is ‘we must buy petrol, so that is not an option’. But, then we are in a discussion of whether a free market society works for oil, and IMHO that really does not have much to do with price gouging.

  6. Dustin Brubaker - August 23, 2007

    The only time that price gouging is a reality, are when companies (be they single stores; local franchises; or large companies) raise prices on a single commodity in a way that preys on the general populations’ fearful reaction to an event of some sort.

    An example of this was the way that gas stations tripled the price of gas in the 24 hours immediately following 9/11. Another example would be (and I don’t really know if this actually happens, but I wouldn’t be surprised if it did) if a hardware company were to triple the price of wood in the days immediately preceding a hurricane making landfall in a particular region.

    In both of these examples, the laws of supply and demand justify the price increase. However, in both cases the laws of social justice dictate that it is a cold-hearted action to raise the prices…either you are making it difficult for people to prepare for an actual disaster, or you are taking advantage of people’s gut reaction to a national disaster.

    Price gouging is not the raising of prices due to natural market conditions as they occur in day-to-day activities, like the media would have us believe. However, it does exist and bares its ugly face in ways that most people would attribute to opportunistic charlatans like the snake-oil peddlers of the old west, or ambulance chasers.

  7. Aaron A. - August 24, 2007

    Dustin said:
    An example of [price gouging] was the way that gas stations tripled the price of gas in the 24 hours immediately following 9/11.

    As with the steep gas prices in the South following Hurricane Katrina, I don’t think this was gouging in a literal sense. After events like these, suppliers don’t know when their next delivery is coming. They may have to stretch their existing stock for much longer than normal. Two ways to do that are price increases or rationing; rationing can be hard to enforce, especially for something like gasoline (what are you going to do if somebody takes too much, siphon it back out of their tank?), so prices increase to meet the demand.

    I think you’d be hard-pressed to find a legitimate example of price gouging, a case where buyers have no choice but to buy a specific product, no matter what the price. The closest I can think of is the Hollywood example of a middle-of-nowhere service station that charges $500 for replacing a damaged tire, because the buyer is stranded and has no other options.

    — A.

  8. Patrick Starkey - June 6, 2008

    Gas prices too cheap? Have you lost your freaking mind? Please tell me you’re not one of those tax and spend liberals who thinks that we can raise the gas tax and with just a little more social engineering through the tax code, the gas prices will level off. Dead wrong.
    Did the amount of smokers go down when states increased “sin taxes” on cigarettes? Hell no they didn’t! Its time to get away from trying social engineering through taxation, it doesn’t work.

  9. Adam Stein - June 6, 2008

    Um…yes. When taxes on cigarettes go up, smoking rates decline. When the price of gasoline goes up, consumption declines. This isn’t really controversial (except among people who use cliches like “tax and spend liberal,” I guess…).

  10. Patrick Starkey - June 6, 2008

    Hate to break it to you, but the rates did not go down. Using the tax code for social engineering is not only wrong, it simply doesn’t work.

  11. Adam Stein - June 7, 2008

    You’re really going to cling to the position that when the price of something changes, quantity demanded stays the same? Ideologues are so fascinating.
    Just to be clear here: your claim is that the rise in gas prices hasn’t affected gasoline consumption?
    Hey, here’s a fun experiment. I’m going to Google “cigarette smoking taxation” just to see what comes up. I have no idea what I’m going to find, but I’m betting that Adam Smith is going to be vindicated.
    OK, the first page of links all look promising. I’m going to click on the second one, because it’s from an encyclopedia, and therefore promises to be a broad survey of the literature.
    OK, here’s the first few sentences of the article:
    “Price has likely been the single most effective policy intervention by those seeking to reduce tobacco-caused death and disease. Detailed studies have shown that in many countries price increases cause many smokers to quit and others to reduce their smoking. The smoking practices of young people have been shown to be particularly sensitive to price. For example, between 1982 and 1992 Canada raised the real price of tobacco products by 150 percent. This price increase coincided with a reduction in total cigarette consumption of roughly 40 percent and a reduction in teenage smoking of 60 percent.”
    It goes on like that. Thanks for playing!

  12. Patrick Starkey - June 7, 2008

    No, I sticking to the claim that social engineering through the tax code is not only wrong, it doesn’t work. Taxes serve one purpose, and one purpose only. To fund government operations and expenses. They should not be used to force a particular idea upon the public.
    If I want to buy a gas guzzling SUV; its my right to do so, and the government has no business trying to discourage me from doing so by raising the gas tax. Keep their noses out of my personal decisions.
    That’s the problem with those on the left, they want government involved in every aspect of a person’s life.

  13. Adam Stein - June 7, 2008

    Right. You’re saying that when prices go up, demand stays the same. You’re saying that the entire underpinnings of economics is false. I expect that you’d label gravity a leftist conspiracy if you didn’t like its effects.
    That’s the problem with knee-jerk criticisms of “the left.” They’re bogglingly stupid, and yet no amount contrary evidence can pierce the ideological fog.

  14. Patrick Starkey - June 8, 2008

    Its because most of the theories of the left simply don’t work. Saying that we need to raise gas prices in order to discourage driving, and thus decrease demand is like we should artificially increase the price of wheat to make people eat less bread.

  15. Adam Stein - June 8, 2008

    But…that would work. People would eat less bread.
    Please go away. You’re crazy.

  16. Tony Bright - June 9, 2008

    I agree to a point about supply and demand. However, I believe the general rules only apply when demand is elastic.
    I don’t believe there is a great deal of elasticity in the demand for energy, at least not in the short term.
    There are some minor changes, as we’ve sen drops of say 5% in demand, year over year. But we’ve not seen wholesale drops in demand.
    Instead, it appears other, more elastic portions of consumer spending, are being cut to enable families to continue to afford energy consumption at rates that are similar to years past.
    For example, families may cut vacation or dining out expenses to counter increased energy costs.
    In the long term, and that’s probably measured in 5-10 year terms since folks are typically in debt up to their eyeballs for whatever they are currently driving, folks are locked into their personal fleet, if energy prices remain at current levels or higher, we’ll see changes in behavior.
    But right now, we are just seeing the low hanging fruit changes, and folks adjusting other aspects of their life as they are trapped by what they currently own.

  17. Patrick Starkey - June 9, 2008

    Okay, first of all I apologize for getting off on the “left vs. right” tangent. The real issue is whether gouging is going on, and what can be done about it. (the best way to bring down prices)
    I personally believe that gouging is going on, but its not by the oil companies, but rather by OPEC. When you control over 2/3 of the world’s oil supply, its rather easy to gouge your customers.
    As far as bringing the price down, its both a supply and a demand problem. We have to decrease demand, not by artificially manipulating the gas market through the tax code, but by encouraging people to drive smarter. We also need to increase supply. While I won’t jump into the ANWAR debate, I will say its high time we uncapped all those wells in Texas, Oklahoma, and Colorado, that the federal government is paying the oil companies to keep capped. No need to drill new wells, just uncap the ones which already exist.

  18. Patrick Starkey - June 11, 2008

    Let me get this straight. The author would have us believe, that immediately following 9/11; when gas stations hiked their gas prices to above $3 per gallon, they weren’t price gouging? The cost of the gas to them sure didn’t justify such a high price.
    They did it again after Katrina. No price gouging, what a joke.

  19. Adam Stein - June 11, 2008

    Er…I think what you’re referring to is called “supply and demand,” not price gouging. Things like terrorist attacks and hurricanes tend to move markets. Given the lack of an oil cartel in the U.S., I’m not too clear by what mechanism sellers can maintain artificially high prices. Maybe they get a phone chain going and all agree to charge $3 a gallon?
    The Env Econ blog just took another swipe at this topic:

  20. Patrick Starkey - June 11, 2008

    The reason I say it was gouging is that not all gas stations did it, only a select few. A small percentage of them even admitted that they had been gouging.
    If all gas stations had hiked the prices like that, then I would indeed attribute it to a market scare. But when two or three in a town of 160,000 do it, its simply price gouging…taking advantage of the fear of others.