New York Attorney General grapples to regulate new web-based businesses in old ways

The New York Attorney General (AG) had an op-ed in the New York Times presenting a curious mix of resistance to change, insistence on regulating new things in old way, acknowledgement that web-based businesses create some value and regulators can’t always enforce rules intelligently, and sprinkled now and again with the barely disguised threat that regulators will not be refused in their efforts to assert dominance over the upstarts. Actually, the threat is not even barely disguised:

Just because a company has an app instead of a storefront doesn’t mean consumer protection laws don’t apply. The cold shoulder that regulators like me get from self-proclaimed cyberlibertarians deprives us of powerful partners in protecting the public interest online. While this may shield companies in the short run, authorities will ultimately be forced to use the blunt tools of traditional law enforcement. Cooperation is a better path.

Ah, yes, the “blunt tools of traditional law enforcement.”

The two targets of the piece are room-sharing service Airbnb, with which the AG’s office has already clashed in court, and car-finder Uber, which the AG may or may not charge with price gouging for the company’s surge pricing policy.

Another example is Uber, a company valued at more than $3 billion that has revolutionized the old-fashioned act of standing in the street to hail a cab. Uber has been an agent for change in an industry that has long been controlled by small groups of taxi owners. The regulations and bureaucracies that protect these entrenched incumbents do not, by and large, serve the public interest.

But Uber may also have run afoul of New York State laws against price gouging, which do serve the public interest. In the last year, in bad weather, Uber charged New Yorkers as much as eight times the company’s base price. We are investigating whether this is prohibited by the same laws under which I’ve sued gas stations that gouged motorists during Hurricane Sandy. Uber makes some persuasive arguments for its pricing model, but the ability to pay truly exorbitant prices shouldn’t determine someone’s ability to get critical goods and services when they’re in short supply in an emergency. I’m hopeful that the company will collaborate with us to address the problem thoughtfully.

You know the Seinfeld/Uber story, right? Last December during heavy snows in Manhattan Jessica Seinfeld used Uber to get her children to Saturday evening social obligations and, due to the company’s surge pricing policy, was charged $415. Even though the app notifies you of the price up front, before you call a car, Ms. Seinfeld felt compelled to complain on Instagram with a picture of her $415 charge and the caption, “UBER charge, during a snowstorm (to drop one at Bar Mitzvah and one child at a sleepover.) #OMG #neverforget #neveragain #real”

Uber, the AG’s office is giving you time to think it over, so what will it be: thoughtful collaboration or the “the blunt tools of traditional law enforcement”?

But I’m not sure what kind of thoughtful collaboration with the AG’s office is going to help Uber get the children of the rich and famous through the snow to their social obligations in a timely fashion. We can cap the amount that the much, much poorer private car drivers of New York City can offer to drive the offspring of the rich and famous through the snow, but that probably will lead those much, much poorer private car drivers to head home instead, and force the rich and famous to send their doormen out into the streets to compete for access to the limited supplies of well-regulated taxis.

 

New York state also moves quickly on price gougers

Michael Giberson

The New York Attorney General’s office takes action against 13 gas station owners in the state for price gouging. Like last week’s prompt response by New Jersey, this is unusually quick work for price gouging cases.

A few quotes from the AG’s press release:

NEW YORK – Attorney General Eric T. Schneiderman today announcedthat his office has notified 13 gas station operators of his intent to commence enforcement proceedings against them for violations of the New York State Price Gouging statute. These are the first of what is expected to be a series of actions taken in a wide-ranging investigation launched in the wake of Hurricane Sandy for price gouging after receiving hundreds of complaints from consumers across the state of New York.

“Our office has zero tolerance for price gouging and we are taking action to send a message that ripping off New Yorkers is against the law,” said Attorney General Schneiderman. “Today’s action is the first in a series of steps my office will take as we continue to actively investigate the hundreds of complaints we’ve received from consumers of businesses preying on victims of Hurricane Sandy. We will do everything we can to stop unscrupulous individuals from taking advantage of New Yorkers trying to rebuild their lives.”

Included is some explanation of price gouging law details:

New York’s price gouging law does not specifically define what constitutes an “unconscionably excessive price.” However, the statute provides that a price may be “unconscionably excessive” if: the amount charged represents a gross disparity between the price of the goods or services which were the subject of the transaction and their value measured by the price at which such consumer goods or services were sold or offered for sale by the defendant in the usual course of business immediately prior to the onset of the abnormal disruption of the market.

In other words, a “before-and-after” price analysis can be used as evidence of price gouging. Evidence that a price is unconscionably excessive may also include proof that “the amount charged grossly exceeded the price at which the same or similar goods or services were readily obtainable by other consumers in the trade area.” However, a merchant may counter with evidence that additional costs not within its control were imposed for the goods or services. Notably, the price gouging law does not prohibit any disparity between the price charged before and after there is an abnormal disruption of the market. Rather, the statute prohibits a “gross disparity,” when it is clear that a business is taking unfair advantage of consumers by charging unconscionably excessive prices, and increasing its profits, under severe circumstances that call for shared sacrifices.

Attorney General Schneiderman added, “These thirteen retailers stand out from others in the high prices they have charged and in the size of their price increases.”

Note the phrase “additional costs not within its control.” If a store manager takes actions to increase cost that are within the managers control: paying overtime to an employee, or undertaking extraordinary efforts to stock up on goods that post-emergency consumers might use, it may find that the state does not consider such costs as legitimate grounds for charging higher prices. (Case in point: People v. Chazy Hardware. Expense and risks involved in effort to procure generators after an ice storm not grounds for charging higher price.)

Two gasoline price gouging examples listed in the press release:

Attorney General Schneiderman noted as an example that, in the case of the Mobil station located at 40-40 Crescent Street in Long Island City, the price per gallon was posted at the roadside as $3.89. The line for the station was three city blocks long. When the consumer got to the pump, the price sign noted a cash price of $4.89 for regular gas and a credit card price of $4.99. The consumer paid the $4.99 using his credit card because he was low on cash and needed the gas.

In another example, at the Express mart station located at 1000 Rte 9 in Lindenhurst, a consumer has reported that there were no road signs indicating the gas prices, only a plywood sign next to the road stating they were only accepting cash for gasoline purchases. There was a long line at the gas station. When the consumer pulled up to the pump he was told the gas price was $4.99 a gallon. He paid the $4.99 because he needed the gas.

The 13 gasoline stations are branded: Shell (3), Mobile (4), USA Petroleum (2), Babylon Gas/Express Market, Sonomax, Delta, and Getty. Without looking for any evidence, I’ll hazard the guess that the seven “big name” stations are all franchisees and not vertically integrated companies with refineries and distribution operations and the other six are small local chains or franchisees of regional brands. Compare to the NJ seven listed here.

Headline: “Gov. Christie expects property taxes to rise in Sandy-ravaged areas”

Michael Giberson

At least the Governor understands that emergencies can drive costs up. We’ll see if this understanding goes beyond the expenditure of public funds to include excess costs faced by small business in New Jersey once the state gets around to prosecuting price gouging cases in earnest. Christie tax story here.

One example of the higher cost of government due to the storm: in at least four cases local government officials–mayor, police chief, sheriff, school superintendent–used local-government portable generators to power their homes or small businesses during power outages.

Gasoline supply chain stories in post-Sandy New Jersey and New York

Michael Giberson

Edward McAllister and David Sheppard, with Reuters, have a great story on the connection between disaster preparedness and the nature of retailer ownership.

They report that corporately-owned retailers, such as convenience-store chain WaWa and vertically-integrated gasoline refiner/retailer Hess, drew on corporate resources in advance of the storm to be ready to return stores to service quickly. Meanwhile, most of the big gasoline brands in the area–Exxon, BP, and Shell, for example–are small franchise operations lacking deep pockets, geographical scope, and logistical sophistication. Perhaps unsurprisingly, it looks like WaWas and Hess and other large corporate retailers were able to help most of their stores to get back in business and keep them supplied. The smaller franchise operations, on the other hand, had more trouble.

Also probably not too surprising, none of the seven gasoline retailers charged with price gouging in New Jersey on Friday were large corporately-owned stores. (The brands of the stations charged: Lukoil (2), Gulf, Delta, Exxon, BP, and Sunoco.)

As I’ve noted in the past on the topic of industrial organization and price gouging, large geographically-diversified companies are much better positioned to respond to disasters. A company with distribution centers across the region already employing constant-contact computer-coordinated restocking technologies are well position to re-organize shipping patters in the wake (or even in advance of) damaging storms and natural disaster. If nothing else, companies with national reputations can enjoy much broader payback from positive public relations stories than can a two- or three-station chain of gasoline stations.

Of course, one implication of these differences is that anti-price gouging laws will fall heaviest on very small retailers. Surely not the intended result, but nonetheless.

ALSO NOTE: WSJ Q&A on the localized gasoline crises.

Columnist alleges post-Sandy pizza price gouging

Micheal Giberson

I’m fascinated by this story by Karin Price Mueller, a columnist for The Star-Ledger, about post-Sandy price gouging. Here is the shortened version of the main episode:

But after more than 48 hours without electricity …, my three children and I wanted a change of scenery. We went across town to a friend’s house for a few hours.

Driving home, we saw lights in a local pizzeria.

“Open,” the light in the window beckoned.

Growing a little bored with my culinary creations on the propane-powered grill, we were eager for a change.

I asked the cashier what they were selling.

Generator-powered large pies or thin-crust versions, no toppings. $15 each.

I ordered one, and we waited with another 20 customers, basking in normalcy, warming up from the cold, savoring the delicious smells wafting from the ovens.

When it was ready, I paid cash and we ate.

And it was delicious. Nothing left but crumbs and a grease smudge or two.

Word must have gotten around, because dozens more customers came, bought pizza, and left in the time we were there.

We returned home, bellies full. Satisfied.

So far, nothing out of the ordinary, but the columnist spent the next day writing a story about post-disaster scams and price gouging. Then it hit her–maybe she paid too much for that pizza the night before.

She dug up a take-out menu from the pizza place and determined the normal cost of the pizza she bought was $11.95, and $15 was a lot more than just 10 percent higher than $11.95.  She wrote, “in retrospect, I wondered if I was a victim of classic price gouging at the pizza joint.”

She returned to the pizza place, explained her price gouging issue to customers to get their reactions and spoke with the merchant. The consumers were mostly satisfied to get what they could at the price offered. The merchant said his usual suppliers weren’t available so he sought out additional sources, and the new sources were more expensive. He also said he’s giving by-the-slice customers a bigger slice–one-sixth instead of one-eighth–which more than makes up for a price which is more than 10 percent higher.

What fascinates me here is that usually consumer’s reaction of “I’ve been gouged” is an immediate and emotional one. Here the consumer’s experience was one of complete customer satisfaction until, sometime the next day she consults an old take-out menu and discovers the price she was happy paying the day before was actually higher than the price the pizzeria charged prior to the storm. Only then does she think that she might have been gouged.

I wonder whether she filled a formal consumer complaint. After all, she wrote, “Pizza isn’t the most important issue out there, but the law is the law.”

RELATED: The same columnist also wrote, “After Sandy, a debate about what actually constitutes price gouging.” The article contrasts the New Jersey law on price gouging with the views of critics, and quotes College of New Jersey philosopher James Stacey Taylor in defense of allowing merchants to raise prices freely. Next we have views from the NJ Attorney General and a former head of the NJ Division of Consumer Affairs (Notable quote: “there are times when the rules of commerce don’t apply and the rules of humanity take over.”). Taylor recently had an op-ed defending price gouging published at The Star-Ledger.

New Jersey moves rapidly on price gouging investigations

Michael Giberson

NJ OAG post-Sandy price gouging complaint charts

Click image to see NJ AG press release and larger versions of the graphics above.

Something new in the realm of price gouging law enforcement: speedy action.

Frequently states begin investigations of consumer complaints only after the emergency is over, conclude investigations months later, and then begin negotiating some sort of settlement with accused stations. You may recall that New Jersey only finally reached a conclusion in its single post-Hurricane Irene price gouging case over a year after the storm struck. The state only initiated the complaint against the gasoline station in mid-December of last year, about three months after the storm.

So Friday’s announcement of eight price gouging complaints by the New Jersey Office of the Attorney General was something of a surprise.

The press release includes links to all eight complaints for the interested reader, each including details on the alleged violations. Apparently as early as November 1 investigators for the state were visiting retail gasoline stations in response to consumer complaints. These eight complaints–seven gasoline retailers and a hotel–represent among them a bit less than 200 of the approximately 2000 complaints that the state has received.

Mark Thoma on price gouging

Michael Giberson

At Fiscal Times, economist Mark Thoma discusses price gouging and fairness and capitalism. I hoped Thoma had provided the thoughtful defense of price gouging restrictions that John Carney was looking for. Thoma didn’t really–he had a weightier topic in mind and price gouging was just a lever he used to pry open the issue. But he covers enough on price gouging to be worth taking a look at.

With long gas lines and other shortages putting people on edge in the wake of Hurricane Sandy, the usual post-disaster debate over the economics and ethics of price-gouging is underway…

Thoma explains the usual economist’s views: extraordinary prices can motivate extraordinary supply efforts and help allocate goods efficiently, though he omits the demand side rationing benefits usually part of this explanation. Then, allowing the efficiency gains, Thoma wonders why merchants usually don’t raise prices a lot, and why we have laws against efficient responses.

Most of the explanations economists have come up with rely upon the idea of fairness. After a natural disaster, people consider food, water, even goods like gasoline a necessity, and despite attempts by economists to explain that allowing prices to rise is best, they are sensitive to two types of inequities.

First, after a disaster supplies are short, shopping around may be next to impossible, and consumers do not appreciate producers exploiting short-term monopoly power. That’s especially true when they can’t see any obvious way for the higher prices to induce more supply in a reasonable time-frame due to the post-disaster conditions. If consumers feel they are being taken advantage of at a time when they already have enough problems due to the disaster, they might decide to shop elsewhere and this could hurt future sales to the extent that firms will forego price increases.

Second, people do not consider it fair when only the wealthy can get the things they need to ease their troubles. If people have to go without because of an act of god, then everyone should share in the pain. The wealthy should not be able to corner the available supplies of goods and services that are in high demand because of the disaster.

The essay then takes this fairness issue, suggests its importance beyond emergency conditions, and concludes that the endurance of capitalism depends on institutional changes that return us to a less uneven distribution of income. Okay, maybe, but I’ll stick to commenting only on the two price gouging points.

First, it surely seems true that “consumers do not appreciate producers exploiting short-term monopoly power,” the classic citation on this issue being Kahneman, Knetsch, and Thaler, “Fairness as a constraint on profit-seeking,” American Economic Review, 1986. (KKR) Merchants, understanding this aspect of consumer behavior, often fail to raise prices to market clearing levels and shortages and queues are common results.

Of course the thoughtful economic commentator has a response: Not every consumer reacts in this same way. After all, even in the two Canadian cities that KKR surveyed by telephone for the classic article, not everyone thought it unfair of a hardware store to raise the price of snow shovels the morning after a snowstorm. And social welfare would be improved if people were more willing to allow merchants to adjust prices freely after storms.

Second, “people do not consider it fair when only the wealthy can get the things they need … everyone should share in the pain.” The idea that freely adjusting prices will mean “only the wealthy can get the things they need” is obviously rhetorical excess. The U.S. economy is mostly a place where most prices freely move almost all of the time, and yet non-wealthy people get many of the things they need every day.

Even after natural disasters, an amazing number of non-wealthy people manage to survive. Neither Maryland nor Delaware have price gouging laws, did anyone notice the wealthy snapping up all of the gasoline, canned tuna, and bottled water in those states?

And by the way, it turns out that letting prices adjust helps achieve the result that more people share in the pain. Laws prohibiting price gouging tend to keep the pain localized to just where the natural disaster struck. If the price of gasoline in northern New Jersey had shot up by one or two dollars a gallon for a few days, gasoline trucks and rail cars around the middle Atlantic states and the Northeast would have been diverted to the area. Supplies would have flowed into stations in the affected areas that had power, consumers would have eased up on their hoarding and lines would have dwindled. And, and this is the “share the pain” result that Thoma (and Michael Sandel) find important, gasoline prices around the region would have risen in response to the supply shifts.

As it happened, gasoline prices in New Jersey rose an average of about 10 cents a gallon statewide after the storm, but that wasn’t enough to motivate extraordinary responses. Notice in this chart that gasoline prices in Philadelphia (in Pennsylvania but just across the river from New Jersey) resemble prices in Pittsburgh (in Pennsylvania but 300 miles to the west), but usually Philadelphia prices share the same market twists and turns as nearby New Jersey. Whatever happened at the end of September had Philly sharing the pain with New Jerseyans. Superstorm Sandy, on the other hand, with anti-price gouging laws prominently on display courtesy of Gov. Chris Christie, saw no sharing of the pain across the river.

gasprices

The “sharing the pain” issue is examined in Montgomery, Baron, and Weisskopf, “Potential Effects of Proposed Price Gouging Legislation on the Cost and Severity of Gasoline Supply Interruptions,” Journal of Competition Law & Economics, 2007. They estimated that a federal price gouging law would have reduced the flow of goods into areas directly hit by Hurricanes Rita and Katrina and thereby left people there worse off, relatively speaking, and people elsewhere with more stuff.

Yes, maybe people would have their fairness-feelings hurt if prices rose in disaster-struck areas, but just maybe the efficiency gains (i.e., harm more effectively reduced in disaster-struck areas) are worth bruising a few feelings.

[Note: Edited for a few grammatical problems after initial post.-MG]