Tag Archives: price gouging

Gasoline retailer getting gouged by New Jersey Attorney General?

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Michael Giberson

Last week the New Jersey Office of the Attorney General announced settlement of two of the 24 post-Sandy price gouging cases the state has pursued. Shiv Shivam Inc., doing business as Lukoil in Piscataway agreed to pay $20,000 to the state; C.S. George & Sons, Inc., doing business as George’s Gulf Station in Clifton agreed to pay $26,000. Neither gasoline retailer admitted fault. One detail about the payments to the state struck me as odd.

Here are two paragraphs from the Shiv Shivam Final Consent Judgment:

 Defendant has agreed to pay a settlement amount of Twenty Thousand and 00/100 Dollars ($20,000.00) (“Settlement Payment”) within thirty (30) days from the Effective Date.

The Settlement Payment is comprised of Six Thousand Six Hundred Sixty-One and 76/100 Dollars ($6,661.76) in civil penalties, pursuant to N.J.S.A. 56:8-13, as well as Five Thousand Four Hundred and Three and 99/100 Dollars ($5,403.99) in reimbursement of Plaintiff’s attorneys’ fees and Seven Thousand and Nine Hundred and Thirty-Four and 25/100 Dollars ($7,934.25) in reimbursement of Plaintiff’s investigative costs, pursuant to N.J.S.A 56:8-11 and N.J.S.A. 56:8-19.

The comparable paragraphs from the C.S. George & Sons settlement are similar except paying $26,000 overall, divided as $20,489.50 for civil penalties; $5,062.50 for reimbursement of Plaintiff’s attorneys’ fees; and $448.00 for reimbursement of Plaintiff’s investigative costs.

Notice Shiv Shivram is charged almost $8,000 in Plaintiff’s investigative costs, while C.S. George & Sons is charged less than $450 for similar services. Do you wonder whether it actually cost the Office of the Attorney General nearly eighteen times as much to investigate the one case as the other?

Is the New Jersey Attorney General taking advantage of the gasoline retailer’s duress at being targeted by the state to collect unconscionably excessive investigative costs?

Ralph Nader on gasoline prices

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Michael Giberson

If you’re looking for another point of view on gasoline prices, Ralph Nader has an article in Counterpunch, “The Gas Gougers.” In the article Nader blames speculators, a lazy media, and a business-friendly government for the recent 50-cent run up in gasoline prices.

There was a time when even a few cents increase in the price of gasoline or natural gas would provoke Congressional investigations, actions by state Attorneys General, and condemnations of the producer countries, the OPEC cartel and Big Oil from presidents and the heads of antitrust divisions of the Justice Department or the Federal Trade Commission. That is, until smooth, smiling Ronald Reagan came to Washington, D.C. with his mantra that “government is not the solution; government is the problem.”

Curiously, “Reagan came to Washington” back in January of 1981, so I’m having trouble understanding how that moment connects to a gasoline price increase in January 2013, some 32-years later.

Nader might say his point is that now the industry can raise prices and not worry about government interference. But if the industry could freely raise prices without government interference, why did they wait 32 years to claim this particular 50-cent per gallon prize? Why didn’t the oil and gas industry raise their prices this much a year ago, or two years ago, or thirty?

Each price surge in recent decades seems to have different principal causes. This time it seems to have been precipitated by surging prices of crude – easily manipulated – and in the U.S. the permanent or temporary shutdown for repairs, of too many refineries.

Believe it or not, the U.S. is now a net refined petroleum importer because of the continuing refusal by the industry to rebuild or expand refinery capacity on the very sites where many refineries have been shut down, often in favor of offshore, cheaper installations.

Whenever supply and demand for refined oil products is tight, all it takes is for one or two refineries to suspend operations, other than for repairs, and the prices surge all over the country.

The “easily manipulated” price of crude oil? So again, explain why the industry keeps manipulating the price up and then back down again? Perhaps more to the point, why did the industry tolerate 15 to 20 years of low and relatively stable crude prices starting in the mid-1980s (during the Reagan administration!)?

“Easily manipulated” and yet seemingly so hard to control.

And, believe it or not Mr. Nader, the U.S. is now a net refined petroleum products exporter–not a net importer–and has been since mid-2011. Somehow, despite the continuing refusal to rebuild or expand refinery capacity, we have petroleum products in such abundance that we can ship them overseas. I’m sure once Mr. Nader figures out his facts are exactly backwards, he will immediately revise his claim and give the oil and gas industry credit for maintaining surplus refining capacity.

And it turns out that one or two refineries (in California) can suspend production and have essentially zero effect on prices anywhere in the country (but in California, as price data from last year reveals). Similarly, disruptions of refineries in the Northeast don’t seem to spread consequences too broadly across the country.

Nader thinks political grandstanding and government participation in oil markets and refinery operations is called for: Obama should use his bully-pulpit to put the heat on Congress; Obama should release oil from the Strategic Petroleum Reserve to push prices down; the Defense Department should build it own refinery capability and sell excess products into the market to suppress prices.

Nader seems to pine for the energy policies of the 1970s–before Reagan came along–but maybe he should review that decade of periodic energy crises, government oil and gas price controls, import tariffs and oil allocation schemes, calls for energy independence, and repeated Presidential addresses to the nation about the seriousness of increasing energy scarcity. I don’t think it worked as well as he seems to think it did.

Notes on the post-Sandy NJ/NYC black market in gasoline

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Michael Giberson

Jeffrey Tucker at Laissez Faire Today points out Peter C. Earle’s blog on the emergence of a black market in gasoline in northern New Jersey and New York City during the post-Storm Sandy period. A few days after the storm swept through, when politicians began reasserting their willingness to enforce price gouging limits on gasoline sales, Earle went looking for signs that the price caps contributed to gasoline sales shifting to the black market.

Without too much trouble Earle found the black market: tweets naming offer prices or bid prices much higher than legal retailers could legally charge; on-line want ads with prices asked at $15 or $25 per gallon, and other ads with buyers suggesting $5. He tracked bids and offers for a few days, noticing a kind of rough fumbling for a mutually workable price–the way price discovery works when it has to work in the shadows. As news stories noted at the time, some persons were offering a variety of personal services in exchange for gasoline in place of a cash payment.

I wish news organizations with their teams of reporters and camera crews would have explored these market developments more carefully-not just going for the “sex for gas” titillation, but also reporting the more ordinary money trades. It would be great to have price, quantity, and location data for all of the black market exchanges, too, so as to get a clearer picture of the costs of price gouging policy’s price caps. But Earle’s reports provide some useful insight into how people creatively respond to politicized efforts to control prices. Earle has performed a real public service.

It is interesting to note that consumer bids tended to anchor around $5/gallon, perhaps near the highest that consumers could imagine being willing to pay under most circumstances, and yet sellers were often offering at a much higher level. (This $5 stickiness in buyer bids may be evidence of an anchoring effect, that is to say a behavioral bias that causes the market to function less efficiently in that consumers resist transactions that would contribute to consumer surplus. See related issues raised here.)

Norwalk Connecticut Gas Station Settles on Charges of Sandy-Related Price Gouging

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Michael Giberson

When it comes to gasoline price increases, how much do prices have to rise before a price increase is “unconscionably excessive”? What difference between prices before and after a declaration of emergency is large enough to create a “gross disparity”? Twenty percent? Ten percent? Five?

In Connecticut these days it looks like a mere 2.25 percent price increase after a big storm is a sufficient danger to the consuming public to invite the wrath of Conn.’s Department of Consumer Protection. As reported in a DCP press release:

A  Norwalk Shell gasoline station has signed an agreement with the Department of Consumer Protection and has paid $1,449 to the agency to settle allegations that the station raised its retail gas price by 10 cents per gallon on November 1, 2012, without there being a corresponding increase in wholesale gas prices for that day. The conduct occurred in the immediate aftermath of Storm Sandy. State law prohibits fuel suppliers from charging unconscionably excessive prices during times of abnormal market disruptions, such as storm-related disasters.

“Given that the state was in a period of abnormal market disruption due to the severe impact of Storm Sandy, we determined that the Shell station’s 10-cent per gallon increase was not justified and constituted an unconscionably excessive price for gasoline,” Consumer Protection Commissioner William M. Rubenstein said today.  “The retailer sold 4,830 gallons of gasoline that day at the increased price, but we are requiring him to disgorge three times the amount of that unfair profit.”

The Shell station is known as Connecticut Avenue Shell and is located at 307 Connecticut Avenue, Norwalk.  While the station does not admit to any wrongdoing, it entered into the agreement, which requires it to pay $1,449 to the Department of Consumer Protection for its complaint resolution, education and enforcement programs.

A newspaper account fills in some details: a few days after November 1 the newspaper observed that Connecticut Avenue Shell was charging $4.55 at a time when many stations in the area were charging between $3.95 and $4.05. (A check of connecticutgasprices.com supports the view that the station regularly charges higher prices than other stations in the area.)

Assuming the price was $4.45 for the days leading up to November 1, the 10-cent change constituted a 2.25 percent increase in the price charged for regular unleaded gasoline at the station.

No doubt the retailer concluded that $1,449 was less than its lawyers would have charged to fight the allegation, and so it took the commercially expedient route of settling with the state. Still, the settlement puts a pretty tight cap on future retailers who may wish to raise prices during times the state has asserted a market disruption.

Hoffman on price gouging (in which I take on claims made in a 7-year old blog post)

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While seeking out the guns and ammo price gouging post at Mother Jones (see link here) I came across a post-Katrina 2005 Political Mojo post by Bradford Plumer on price gouging that I don’t recall having seen before, and it provides a link to a Dave Hoffman post-Katrina post at PrawfsBlawg that actually advances some empirical claims in favor of state anti-price gouging laws. Most advocates of state price gouging controls rely on arguments that come down to “I don’t think it is fair so those sellers shouldn’t be able to do it.”

(ASIDE: There is an empirical claim embedded there too – whether or not the advocate actually thinks post-emergency price increases are unfair – but the feelings of editorialists are not normally significant factors in formal policy analysis.)

Here are a few of Hoffman’s more substantive claims:

  1. “In civil emergencies, markets don’t work to clear information in rational ways.”
  2. “High prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby.”
  3. “Price gouging regulations do two things to reduce panic and regulate demand.  First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce “panic demand” in emergencies without increasing price.”
  4. “Second, the regulations – when publicized appropriately – have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve.”

My responses:

1. Claim #1 depends on what he means by “rational,” but my expectation is that prices do the same work of helping coordinate buyers and sellers during emergencies as before and after. Yes it is true that during times of quick changes in conditions that more of those prices may turn out to be “wrong” in the sense of too high or too low, but the pre-emergency price is almost assuredly wrong in this same sense and so will likely guarantee that outcomes won’t achieve his rationality standard however he chooses to define that term.

In any case, with a manageable definition of “rationality,” we could explore empirically whether freely-adjusting prices do better or worse than alternative price rules in helping to better clear information rationally. (By “clear information in rational ways” I take Hoffman to be referring to the market’s imperfect-but-still-normally-useful ability to reveal where goods are most highly needed.)

2. It is absolutely true that when it comes to cases in which our lives hang in the balance, consumers will do things that would otherwise be crazy. Would you pay $100 for a bottle of water? Normally no, but if I would die without it then yes. (And if I were about to die for lack of water, I should probably go to the emergency room, not the supermarket. The irony, of course, is that the emergency room would charge $100 to provide the water.)

As an empirical claim about consumer behavior, at least with respect to almost all market transactions during civil emergencies covered by price gouging laws, I’d say he is wrong but at least this is potentially testable. But to the extent we are talking about life and death, I’d say the relevance of his point to price gouging policy is essentially nil. A hurricane hits the Gulf Coast and suddenly state officials in New York and Massachusetts are warning gasoline retailers not to use the hurricane as an excuse to raise prices excessively. No New Yorker is going to die from a Gulf Coast hurricane because gasoline prices on Long Island jumped from $3.50 to $4.75 for a few days.

Of the millions of retail transactions conducted under activated state price gouging regulations, my guess is that fewer than 0.01 of a percent of them involved life and death. In the actual post-emergency retail sales covered by most price gouging laws consumers are quite capable of weighing whether they need four days of bottled water or fourteen,  whether they really need to top off a nearly full gasoline tank again, and if they can get by with two batteries instead of eight, and so on.

3. The empirical claim suggested by standard economics seems contrary to Hoffman’s claim on panic buying. Since emergencies are times of heightened demand and limited supply, some panic demand and hoarding behavior is typical. Artificially low prices are more likely to result in shortages, therefore are more likely to prompt consumers to rush to stock up on supplies. Price gouging controls, in this standard economics story, promote “panic buying.” Two things that would reduce panic buying: (a) consumer confidence that stores will not run out of goods, and/or (b) belief that prices will tend to fall rather than increase over the next few days.

It might be the case that with price gouging laws on the books a consumer doesn’t have to worry about unjustified price increases, but I don’t see the connection between added trust in the market and a consumer’s decision to stock up on supplies right away rather than later. I feel like I must be missing Hoffman’s point.

4. The claim that publicized price gouging enforcement will yield the same kind of “forcing effect” of higher prices, i.e. induce equivalent conservation of newly scarcer goods and services, is eminently testable. The comparable situation in electric power might by those hot summer afternoons during which the utility (mayor, governor, etc.) calls on power consumers to help protect system reliability by voluntarily cutting demand. These voluntary calls for conservation work in the strict technical sense that some people will reduce their consumption. But compare the response rate to that among power consumers with a direct economic incentive to cut back consumption during these power system emergencies, and I’m sure publicizing emergency conditions has nothing at all like the same kind of “forcing effect” as simple economic incentives.

And, of course, it is simply not possible that, say, Governor Christie’s disaster declaration could contain all of the necessary information about which goods are now going to become how-much-more scarce in which parts of the state for how long, and how much one consumer’s needs should weigh against another consumer’s needs, etc.

Hoffman declares his motives in his concluding paragraph: “I dislike folks who intentionally profit on others’ misfortune.” Personally, I’m not so worried about intentions and I’m not  worried about degree of profits. I simply want to support public policies that are best at helping people in distress get useful goods and services at reasonable terms and conditions.

Now, of course, Hoffman is for helping people in distress just like I’m for helping people in distress. The debate here isn’t which one of us secretly hates puppies, but rather which policies will work best for the people affected by emergencies. My empirical claim is that normal public policies towards retailers and pricing do a better job in helping people in distress than anti-price gouging laws do.

ALSO: See Hoffman’s follow-up post, still from September 2005, in which he reacts to some of the comments to his first piece. I now notice that some of those 7+ year old comments beat me to the punch on points I’ve made above. Hoffman suggests the ‘hotel problem’ is more interesting than the gasoline station problem. Here is my ‘hotel problem’ price gouging argument: Hotel rate price gouging during snowstorms can promote public safety.

Mother Jones on guns and ammo price gouging

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Michael Giberson

A post at Mother Jones‘s Political Mojo blog sees a silver lining in current price gouging on guns (see “Gun Lovers Freaking Out Over Price Gouging“): “It might help keep sales in check—at least temporarily—while Congress gets around to thinking about thinking about considering an assault-weapon ban.”

Well, technically speaking, current prices and current sales reflect efforts to coordinate supplies during the current short term spike in demand. If someone wanted to actually limit the number of legal sales they should favor a capped low price rather than a market-driven high price.* Currently the high price is motivating a lot of effort to bring more guns to market; a capped low price would do much more to keep sales in check.

*Gun control advocates should note that the effect of a binding price cap would be to promote legal work-arounds (i.e. “we only sell that model with this handy $150 instruction guide”) or simply motivate more dealers to sell on the black market. In the very short run a price cap would lead to shortages, but over time smart people find ways to overcome barriers.

Price gouging on guns?

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Michael Giberson

Newly showing up in the “price gouging” news searches: claims of price gouging on guns. From a news report on the Atlanta Gun Show:

“This gun show hasn’t seen this amount of people come through the door in 10 years. It’s very busy,” said [vendor Monique] Migneault.

And the number of people isn’t the only thing that increased.

“Stuff’s way up on prices. Any kind of assault rifle, they’re up there. It’s bad,” said [shopper Brandon] Jessup.

[Another shopper, Michael] Roberts noticed the same thing.

“I bought an AK-47 last year for $600 and this year it’s close to $1,200. The same exact gun,” said Roberts.

Jessup called it price gouging, but vendors said it’s not.

“We can’t get these guns for the same price we did six months ago, or even last week for that matter. They’ve actually gone up since last Wednesday, so we have to pass that on to customers, so as a business we can stay afloat and maintain our status quo,” said Migneault.

And from another gun show in North Carolina:

Organizer Joel Koehler, [said] “People keep coming and coming and coming” …

He added the only cancellations he had were vendors who were sold out and didn’t have inventory. …

Gun dealer Dean Barr said his business is booming.

“We sold in one month what we normally sell in a year. December was a record month in gun sales all time,” said Barr.

Barr said even thought prices have doubled for the most popular firearms, he is protecting his livelihood, not capitalizing on tragedy.

“People look at dealers or distributors and think they are price gouging, remember this happened before the Christmas shutdown. Nobody has been making guns for two or three weeks,” added Barr.

Price gouging also mentioned in news stories about gun shows in Oklahoma City and Forth Worth, and in gun owners online forums, and industry sites. Prices are up at Michigan gun shows too.

In my Regulation magazine article on price gouging I said price gouging claims require three factors: a price judged unfairly high, an emergency or difficult situation, and a product or service useful in responding to the emergency. According to these reports, prices for guns and high-capacity magazines are reportedly double that of a year ago. The emergency is a bit more abstract, but arises from the concern that changes in law may ban certain popular types of guns and related equipment. The easiest way to beat the possible new restrictions is to stock up now, making guns and magazines goods that are useful in responding to the emergency.

Now, I wonder if any of these sharp price increases happened during declared states of emergency in states with anti-price gouging laws, or in states with anti-price gouging laws not requiring a declaration of emergency?

Economics research topics in price gouging from odd-even rationing to guilt and shame

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Michael Giberson

Today the Master Resource blog published my list of ten price gouging topics needing economic research.

As I point out in the introduction, many economists think price gouging  is too simple to be worth studying. After all, it is just a kind of price cap, and we know how price caps work. My response is that “too simple to be worth studying” is losing the policy battle.

Here is my list of ten topics, see the post at Master Resource for explanations and scattered links to related discussions:

  1. Economics of odd-even rationing
  2. Shortages and the hoarding impulse
  3. Distributional effects of price gouging prohibitions
  4. Non-price rationing techniques: queuing and beyond
  5. Short-run elasticity of supply after disasters
  6. Short-run elasticity of demand after disasters
  7. Organizational form and price gouging enforcement
  8. Economics of consumer price complaints
  9. Studies of price gouging enforcement
  10. Efficiency defenses of price gouging laws

As a bonus for Knowledge Problem readers only, here is a hot, hot, hot behavioral economics research topic as well:

11. Guilt, shame, trust and fairness in pricing after disasters

Economists are increasingly realizing that it takes much more to make markets work than formal rules and freely moving prices. A host of issues sometimes styled as “culture” or “informal institutions” are also critical in getting things to work. (An aside: I’m looking forward to seeing Virgil Storr’s new book, Understanding the Culture of Markets.)

Guilt, shame, and betrayal are joining reputation as social-psychological factors important to economic activity and respectable enough for economists to work on. Does shaming “price gouging” behavior work to stop post-disaster price increases? Does shaming price gougers encourage or discourage pro-social interaction after a disaster? (I.e. do merchants work harder to bring goods to market yet keep prices low, or do merchants allow shelves to go bare and avoid engaging in costly efforts to resupply?)

Related video from Fox news reporter Arnold Diaz: Shame! Shame! Shame! for Price Gougers.

Also, a letter to the editor in New Jersey proposes the Scarlet Letter approach to shaming convicted price gougers (though the writer omits my related suggestion to also shame consumers who choose to participate in price gouging then call in complaints to the attorney general).

New York newspaper says “add shame to penalty for gouging”

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Michael Giberson

Is price gouging like highway robbery? The Journal News, from the suburbs north of New York City, said: “Add shame to penalty for gouging“:

Given the extraordinary cost of just about everything in New York, it is often difficult to distinguish price-gouging, which is both illegal and despicable, from the usual highway robbery, which is just sort of expected. Then there are those merchants, as seen during Superstorm Sandy, who make the distinction so abundantly clear that all doubt is removed. Stiff fines and restitution should await these offenders, should the allegations hold up; a measure of public shaming ought to be part of the menu of sanctions as well.

Attorney General Eric Schneiderman, following up on familiar pre-storm threats and warnings, announced enforcement actions Thursday against a dozen gas station operators who allegedly kicked motorists when they were down — after rampaging Sandy darkened many gasoline stations, disrupted gasoline supplies and caused consumers, many toting gasoline cans, to endure interminable waits outside stations. Long lines and even rationing weren’t all that they faced.

For example, there were Mobil stations in Katonah, at 80 Bedford Road, and in Spring Valley, at 189 Route 59, where gasoline sold for $4.79 and $4.65, respectively, according to the allegations from the AG’s Office. Those prices — like all the charges highlighted by Schneiderman — were for a gallon of regular, and decidedly higher than normal, even in this high-cost region.

There was the BP station in Elmont where the price was an attention-getting $6.99; prices at the Shell in East Elmhurst, according to complaints, ranged from $4.89 to $7.90.

But they had nothing on the purported gouging leader, the Mobil at 3424 East Tremont Avenue in the Bronx, “where a consumer waiting in line for over an hour was just three cars from the pump when she was told that she would be charged $50 for five gallons of gasoline — $10 per gallon.” Stations nearby charged $3.95.

If I may interject, I think it is useful to distinguish between cases of suddenly higher prices and cases in which stations charge higher than the publicly posted price.

The “Stations nearby charged $3.95″ will be an incomplete accounting of the cost, since they must have had lines too. It would be great if the New York Attorney General’s office collected data on time spent in lines, might be useful in helping to calculate the full cost of low station prices.

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New Yorkers didn’t ‘share the pain’ of higher gasoline prices during emergency

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Michael Giberson

One idea advanced by proponents of anti-price gouging laws is that after disaster strikes people should put aside their usual self-interests, join in with the community, and share in the burden of recovery. What these proponents often miss is that normal market adjustments will support a sharing in the burden of recovery, even among those lacking much in the way of charitable impulses, when prices are relatively free to adjust.

Prices go up in the disaster zone, supplies are diverted from elsewhere, prices go up elsewhere, people elsewhere cut back a little in response to higher prices, and there we have it: sharing the pain. Adam Smith’s “invisible hand” is a helping hand to those in need.

But the actions of the “invisible hand” were constrained by the very visible hand of the state. In both New York and New Jersey state officials were prominently threatening to slap businesses with thousands of dollars in fines if prices went up too much. Prices did go up a bit in the disaster struck area, but not enough to prompt extraordinary efforts from elsewhere. New York saw none of that normal, voluntary response to changing supply and demand conditions elsewhere, and post-disaster sacrifices remained concentrated mostly in the hardest hit areas.

Consider the price chart below, which shows regular gasoline prices in Albany, Buffalo, and New York City, all in New York State, from June of 2011 through the end of November 2012. Typically these prices move up and down together with just a little localized variation. Beginning at the end of October 2012, during Sandy and its aftermath, prices in the New York City moved sharply higher for nearly two weeks. In New York state outside the disaster-struck area, however, gasoline prices barely slowed their descent from late summer highs.

18_months_of_NY_pricesGasoline lines? Odd-even rationing? Gasoline stations pumped dry? Yes, but only around the power-out, flooded-out, storm-struck area.

Elsewhere in the state: business as usual but for the occasional invitation to chip in $10 to the Red Cross.

ROCKETS AND FEATHERS NOTE: Interestingly, Buffalo prices pretty consistently show a slower price descent when prices are falling than either New York City or Albany. I recall that at the end of 2008 a Buffalo-area Congressman was complaining about the same thing. See here and here. The second half of 2008 was a time of fairly consistently falling gasoline prices throughout the U.S., interrupted only by a short lived mid-September price spike due to Hurricane Ike. Gasoline price researchers, start your engines.