Knowledge Problem

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: http://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.