Michael Giberson
The upcoming highly publicized, somewhat politicized release of the Chevy Volt is attracting some unfavorable attention because of the significant dealer markup that at least some Chevrolet dealers are seeking. Edmunds AutoObserver reports being asked for $20,000 for the dealer in addition to the MSRP of $41,000. Around automotive blogs, the phrase “price gouging” is being tossed around a lot (see plugincars.com, GM-Volt.com, worldcarfans.com, egmCarTech.com, and plugincars.com again).
The $20,000 markup appears to be the highest reported, but in an online survey 25 percent of respondents reported seeing markups of $10,000 or more. At USA Today‘s DriveOn blog, Fred Meier opines “U.S. taxpayers are kicking in a $7,500 tax credit and California is giving buyers another $5,000 to encourage electric car sales. That’s a waste of money if this dealer is right and folks will give him an extra $20K to be first on their block to have a Volt.” Fully justifying a conclusion that “that’s a waste of money” would require some sophisticated policy analysis, of course, but at first glance the case in favor of the conclusion seems pretty strong.
But, as long time readers know, I’m somewhat more interested in the use of the term “price gouging,” having worried about the meaning, economics and policy application of the term frequently here in the past. (See prior “price gouging” posts here: https://knowledgeproblem.com/?s=price+gouging+giberson.) I’m concerned both with the meaning of the phrase in everyday English and with application of the term in economics, policy and law. (NOTE: The rest of this post is rather pedantic and academic and overly concerned with slight differences in classification and meaning, so it won’t be to everyone’s taste. Proceed, as always, at your own risk.)
Previously I’ve described “price gouging” as involving three elements in its central or prototypical usage: a price increase judged as unfair, an emergency or desperate situation, and a good or service of particular use or value in mitigating the consequences of the emergency. As also noted, frequently consumers and editorialists fling the term “price gouging” any time they don’t like a price. See the prior KP posts for examples. Now I think both parts of this description can be improved.
Notice in the Chevy Volt case, there isn’t a price increase per se. The product hasn’t yet been sold at any price. And while the manufacturer has announced a “suggested retail price” (MSRP), it is well known that actual retail prices for automobiles may be substantially higher or lower than the MSRP. The “price gouging” term is also invoked in other cases without price increases, but simply when prices for a product are higher in some stores than they are in other stores. So rather than assert price gouging requires “a price increase judged as unfair,” I’ll assert that price gouging requires “a price judged as unfairly high.”
This isn’t any simpler than before. To judge a price as unfairly high implicitly invokes a further three element breakdown: the price under consideration, a reference price relied upon by the consumer in coming to the conclusion that the price under consideration is too high, and then the negative moral reaction that causes the consumer to evaluate the price under consideration as unfair. The analytical value of this reformulation is in allowing specific attention to the choice of reference prices and to the judgment of unfairness.
The Chevy Volt case also does not involve an emergency or desperate situation, and therefore not a good or service useful in mitigating the desperate situation. Similarly, price gouging is alleged for HDMI cables sold at seemingly high prices along with High Definition TVs, another example lacking an emergency condition. Still, it seems to me there is some useful structure to the concept even in this casual usage. While there isn’t an emergency, there is a certain urgency involved. If you want to be the first on your block to drive a Volt, obviously you need to get your Volt before one of your neighbors gets one. If you’ve committed to buying the HDTV, you must have an HDMI cable to hook it up to your video receiver. I think this urgency aspect makes “price gouging” seem like the appropriate term in these more casual usages.
To be clear, I think an emergency or desperate situation is part of the definition of a prototypical case of price gouging. If you want a good example of price gouging, you need the desperate situation. It is common for legal definitions of price gouging to require an emergency condition. It is just that it is also possible to properly use the English phrase “price gouging” in cases that lack a desperate situation. Even in casual usage however, not anything goes. For the term “price gouging” to be appropriately applied, you still need a price judged as unfairly high and you need some sort of difficulty or urgency or other constraint on the consumer, however attenuated such constraint may be.
I recall stories of other cars going for over list when they were in peak demand and low supply. When there are simple, easy to get alternatives or the item is not a necessity it feels like a serious misuse of the phrase to call it gouging or profiteering. If there are buyers out there willing to pay 20K over list seems like a pretty capitalistic method for line management regardless of how many of us ‘want’ a Volt. May not consider it to be fair, but hard pressed to call it gouging. Nobody anywhere has to buy a Volt.
Would be good for these dealers to remember however, that consumers have long memories. For every sucke… um customer, the dealer gets to fork over the extra 20K there will be many that are so turned off by the concept that they may not return. It’s been 20 years since I visited a Toyota dealership – back then they had a hot car and weren’t willing to deal. Found something I liked better. Even as a youngster I didn’t like being treated like a fool.
If somebody is stupid enough to want a Chevy Volt, they deserve to pay $60,000 for it. It is a situation for which the phrase “more dollars than sense” was invented.
Sounds more like mispricing than price gouging. Also reminds me of many stories of mispriced (too low AND too high) for IPOs…
clarification: I mean that price gouging is rhetorical and not different from mispricing, except in its “up” orientation. Is there a word for underpricing (“bargain”?) that non-business people accuse businesses of? Maybe “undercutting”? Damn, we need MORE ECONOMIC COMMON SENSE.
Hell, I don’t think it’s “price gouging” even in an emergency – the prototypical example in practice is the increased prices of generators during a hurricane.
And that’s useful because it helps encourage resupply and helps ration them to those in the greatest need – as determined by their willingness to pay.
(That said, I also think the tax breaks are a complete waste of money, in and of themselves, without any reference to dealer markup.
The idea that a Volt will have any side-effects remotely worth $10,000 in State money to encourage its purchase is laughable.)
I was in the local independent dealership of a partially US government-owned auto manufacturer this morning. A new 2011 model expected to be in high demand had a “market adjustment factor” of $7000 posted on the window, next to the federal sticker. The vehicle was not a Chevy Volt, or any other hybrid, but rather the new “muscle” coupe version of a popular vehicle.
I would hardly refer to this practice as “price gouging”. Not only is there no “emergency” or “crisis”, there is no “need” – just high level “want”. I view it as very similar to the widely forgotten, widely disastrous federal luxury tax, except that the money would flow to a private business, rather than to the federal government.
Thank you for your discussion on defining price gouging (an impossible task).
How would what happens on stubhub.com fit into your price gouging definition? At Stubhub, tickets are consistently bought at prices above a reference price and the “judging” at an individual level and is done by whether a transaction occurs at a listed price.
Perhaps something about information asymmetry should be introduced in your definition.
Pingback: The Chevy Volt and Defining “Price Gouging” « Appreciate Yourself
njanusch,
“…defining price gouging (an impossible task).”
If price gouging cannot be defined, how can it be detected and how can it be prosecuted?
Enquiring minds want to know.
@Ed Reid
Since price gouging is difficult to define and detect, then it is impossible to prosecute. One way to detect it is by the government passing laws to create temporary price ceilings during emergency situations. Any seller selling above that price ceiling would be prosecuted. But any card carrying economist would conclude that a price ceiling would result in an inefficient outcome and distort the market.
Also, for all the claims that consumers are being price gouged by greedy oil companies, I have never seen any successful prosecution of such claims.
@njanusch
As long as government establishes the temporary price ceiling before the market response begins, the result is nothing more than an inefficient outcome and a market distortion, which is after all the specialty of government at all levels. Those who might willingly have paid some price above the temporary price ceiling would not have the opportunity, though many would be aware that they might otherwise have had the opportunity.
However, when the government, which has great difficulty doing anything timely, establishes the temporary price ceiling after the fact, or after the market response begins, those willing to pay the price which later exceeded the temporary price ceiling would already have the goods or services which they willingly purchased, while the sellers would be deprived of their profits and possibly their livelihoods, not because of their rapid response to clearly demonstrated market needs, but because of some arbitrary determination of a temporary price ceiling.
As a likely result of this process, many “opportunistic entrepreneurs” would choose not to risk prosecution, thus assuring that the needed goods and services would not be available at all, or far less rapidly, or in lesser quantities. Government would then decry the failure of the market participants to respond to the needs of those affected by the crisis.
Sure sounds like a win-win situation to me. 🙁