What, exactly, is "price gouging" in re: gasoline prices?

Politicians of all stripes pay lip service to the notion that “price gouging” among oil companies should be illegal, but what does that mean, exactly? Oil comanies are reporting record profits, and demand for gasoline, at least, is highly inelastic in the short term. So when are companies “price gouging” and when are they simply making the profit they are entitled to?

(note: I’m hoping there’s a factual answer, but this may well be a GD instead.)

It’s taking avantage of a disaster, to charge more when people are between a rock and a hard place. Profit based on the missery of others.

It isn’t all that simple. My little brother lives in Baton Rouge, LA and bought a house right before Katrina hit. He paid in the low $100,000 range. The population has doubled post Katrina and the demand for houses has gone through the roof.

He called me and talked about moving to another city for other reasons. However, he expressed concern that his house was worth over $200,000 now and he didn’t want to “gouge” anyone. Both me and my stepfather explained that his house price was just market prices at work and he should not sell it for less than market value.

He could have done the same thing days after Katrina. Would that have been market gouging. Is it now? It was the result of a horrific natural disaster.

In my mind, price gouging does not exist unless the seller is the only one with a necessity available to a population when those goods are not in shortage. That is rarely the case. If multiple sellers collude with each other to charge high prices then that is called price fixing and is already illegal. Most of the time, it is simply market forces at work to distribute goods to those most willing to pay by them as determined by their own perceived need.

Let’s say a hurricane hits a small town really hard. Gas trucks won’t be able to make it in for days due to the disruptions. There is a local gas shortage.

The five open gas stations in town immediately raise their prices from $3.00 a gallon to about $5.00 a gallon. Many would call this price gouging. However, this was just the market working distribute a scarce commodity more effectively.

What was the effect in this example?

  1. The gas station owner may have temporarily made some extra money. This is what people usually focus on.

  2. However, people that really needed gas were able to get it. Those with only a casual need got a signal to go elsewhere. Perhaps they didn’t really need to fill up at 3/4 of a tank and could continue to drive another 50 miles where it is cheaper.

  3. Those that had a pressing need were benefited by the availabilty freed up from those whose needs weren’t so strong. Paying $50 instead of $30 for a tank of gas will bankrupt few people.

If the gas station owners were on the phone with each other all day then that is called price fixing. That is very different from market forces reacting to a new supply and demand curve.

In Michigan, we have gas stations all over the place. Every once in a while something happens (terrorist attack, blackout, whatever), and a single gas station owner may suddenly raise his rates to, say, $5.00 per gallon. Invariably this reported on the news, the governer accuses of price gouging, and the prosecuting attorney says he’ll go after this price gouging bastard. No mention of the fact that this is a single station, prices are clearly posted, people payed without coersion.

State laws vary, but essentially it is an eggregious rise of prices of goods in the aftermath of an emergency. Some states, to my recollection, define more carefully what type of increases are gouging, others are more subjective.

As I commented in another thread, the main utility of price gouging laws is to threaten people to keep prices under control under the threat of criminal penalties; rather than actually getting people convicted of the crime months after the emergency has abated.

I can’t find it now, but I recall seeing that the Ohio Attorney General threatened hundreds upon hundreds of businesses with price gouging investigations in the aftermath of 9/11. Only a couple dozen of these companies were actually penalized, and I recall that all of them had admitted to price gouging.

(I see on preview the usual exclaimations that price gouging cannot exist, but I assure you, price gouging laws do exist in many states, and therefore, the law prohibts this behavior as it may define it. No amount of discussing market forces and all that changes the fact that in many places price gouging is a crime.)

Does price gouging have a legal definition? There’s no doubt that it’s simply market forces at work, so I’ve always wondered where the line can be drawn. The laws are based on some perceived moral principle that it’s wrong to profit off misery, but the alternative (low prices with shortages) is just as undesirable. Straying out of strictly GQ territory, but it seems to me that cries of price gouging are made by politicians looking to win popularity, which is ironic, because those politicians are looking to gain off the misery as well.

But what about collusion? How is it all gas stations raise and lower their prices in complete unison. Here in Ontario, Canada, the price per litre has been known to change by 10 cents instantly, at all stations. And in the mean time record profits are being reaped. I have nothing against profitable companies, but if I didn’t want to buy an Ipod, or a new computer, or red meat, or milk, I wouldn’t have to. With gas we have no choice. (I don’t live near any public transportation, in case you’re wondering.) This is collusion and gouging in my opinion. Otherwise gas stations would be out of sync with their pricing, and in a true competitive market, we could shop around. I’m not willing to drive 20 Kms out of my way to save 0.2 Cents per litre and oil companies know it. There has to be collusion at work here.

Assuming there’s free-market competition, and assuming there’s no collusion going on, there is no such thing as “price gouging.” All prices are exactly what they should be.

There doesn’t “have to be” collusion. I am sure there is somewhere but it probably isn’t very common. They are all probably responding to the same market forces. Remember that all the gas companies buy their oil on the same world market. I have never worked at the headquarters of a gas company but I have worked at companies that have to tell their stores to respond to price changes rapidly. They have very good and responsive informational channels throughout the retail channels. Plus, you ignore the competitive forces that make gas stations true to undercut their competition as much as possible.

Raising prices is not the way to distribute limited resources in a disaater, rationing is.

I don’t think that this is true at all. Price gouging laws are basically there to put curbs on the free market. Basically law makers have said they don’t like this aspect of the market and make regulations to fix the problem.

Also, people are often not rational consumers. Last week I went shopping at Costco, where the gas lines were quite lengthy despite the fact that the gas station less than 100 yards away, on the main street had prices 3 - 5 cents per gallon cheaper, and the pumps unoccupied.

I have a friend who’s an emergency room doctor. He make quite a nice income, largely off the misery of others (they mostly don’t come to the ER until they’re miserable). He could easily survive on a fraction of what he actually is paid. Is he a price gouger?

A hurricane can create serious shortages in a matter of hours. Is there a way to set up a smoothly-functioning system of rationing in that kind of time? Any examples of where this has worked?

Does he charge higher prices to people who’ve just been wounded in catastrophic eartquakes, hurricanes, or whathaveyou than the prices he charges to people who’ve simply been in an auto accident? If so, he might be… a redneck. Whoops, I mean, a price gouger. :slight_smile:

That’s the heart of the question: which is preferable: some people not getting food because they can’t afford it, or some people not getting all the food that they can afford?

There is also no ability to set up a good, open, and competitive market in an area that has been devistated by natural disasters in the same timeframe of either delivering supplies or setting up rationing. Consumers who are desperate to get food or gasoline don’t have the ability to comparison shop, as could be reasonably expected in a non-crisis situation. Consumers will grab whatever they can at whatever the price, simply because of the imperative to lay their hands on something. In an emergency situation, I think its reasonable for the benefit of the doubt going to protecting the many people trying to get necessities at higher, but non-exorbitant, prices, rather than to defend the rights of business owners to make whatever profit they can extract from destitute or sickly people. Most states seem to agree with this point.

If it is not an situation of a widespread emergency, I have no problem with businesses trying to soak consumers for as much as they’ll pay, because consumers are more readily able to comparison shop and make free decisions about what they choose to pay for an item.

I don’t begrudge any business making a profit-that’s what businesses are for. It’s the degree of profit, and the lack of regulation which has always annoyed me. I’m a stockholder of a large electric and gas utility, and have observed that for price increases to be allowed, the PUC had to approve them. On top of that, every time the utility wanted to expand generation capacity, they had to expend millions on legal fees responding to the multitude of lawsuits filed to block said expansion. They couldn’t quickly enter those costs into their rate scale and increase the charge per killowatt/hour or cubic foot without regulatory approval. Contrast that with Exxon/Mobil, Shell or BP who all hike the numbers capriciously, and Joe Average has a pistol held to his head, that pistol being shaped like a nozzle, as he is relieved of his wallet’s contents. That, IMO is price gouging.

…Thereby causing even greater problems, such as shortages and inefficient resource allocation.

"Price Gouging’ is a term used by the economically illiterate and political demagogues to describe a perfect natural and good market reaction to spikes in demand or sudden shortages.

Everyone wants to pay less for things, especially during a time of stress. So politicians of all stripes like to take a position against ‘gouging’. It’s a nice populist move. The same is true of price caps, rent controls, and other ways in which people who don’t know what they are talking about meddle in a properly functioning market.

He needs to worry about the IRS. They’ll gouge him good and hard on capital gains if he turns a house around so quickly - if he bought three months ago for $100,000 and sells now for $200,000, he’ll be taxed on the $100,000 profit as if it were a paycheck.

IIRC he would not if it was rolled over into a new primary residence within 1 year.

IANA Tax attorney but I had heard that at some point int he process of refinancing my house.