Posts Tagged ‘price gouging’

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Super Bowl price gouging complaints

February 5, 2012

Michael Giberson

If you follow price gouging headlines, you become accustomed to seeing price gouging stories around big sports events: the Rugby World Cup, NASCAR races, NCAA basketball finals, and always the Olympics (a selection: Barcelona 1992, Atlanta 1996, Sydney 2000, Salt Lake City 2002, Athens 2004, Vancouver 2010, London 2012, and finally this extreme example).

All of which serves as context to reports of Super Bowl price gouging.

Super Bowls usually produce price gouging complaints. But, as a story about today’s Super Bowl reports, rates in Indianapolis may have a particularly strong mark-up because of the relatively small host city. “This is what happens when the NFL books the nation’s largest sporting event in a city with only 6,000 hotel rooms. … By population, Indianapolis is the smallest Super Bowl city since Jacksonville, Fla., which hosted a disastrous game in 2005.”

Rooms are not in perfectly inelastic supply, non-traditional spaces from spare bedrooms to whole houses are being rented out for the week. Nonetheless, supply is relatively inelastic, and it is only the relatively high prices visitors are willing to pay that brings many of these spaces into the market. A surge in demand and relatively inelastic supply: elementary economics predicts a substantial increase in price.

Host city officials, league officials, and fans often lament price gouging, but it is easy enough to predict the effect of any law or custom that prevented it: more people renting rooms one, two, or more hours away, fewer people at game weekend events and pre-game events, and more people stuck in worse traffic before and after the game. (Or, perhaps in a language more relevant to host city officials, an effective anti-price gouging campaign would mean a smaller bump tax in local tax receipts from folks attending the game.)

The fundamental issue is the relative scarcity of rooms during the game weekend, and the question is how to match fans and rooms. Letting prices work earns price gouging complaints, but failing to let prices work would surely create worse problems.

Posted in Economics, Professional sports, Regulation | Tagged | 3 Comments »

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New York Attorney General proposes to prohibit use of business-related reasoning in gasoline wholesaling

January 2, 2012

Michael Giberson

It sounds kind of funny to say the New York Attorney General wants to prohibit business-related reasoning in gasoline wholesaling. After all, gasoline wholesaling is a business activity and generally business-related reasoning would be entirely appropriate. It sounds like asking a court not to act on law-related reasoning or asking a politician not to think politically. But read the report put out by the AG’s office, “Report on New York Gasoline Prices,” and see what it says on pages 37-39.

At issue is “zone pricing,” a practice by which wholesalers charge differing prices to retailers in different locations, usually based on an estimate of what the market will bear. A New York state law passed in 2008 tried to ban zone pricing for gasoline, but it didn’t seem to have much effect. The report noted, “Certain areas of the state that had relatively high retail prices before the law took effect in 2008, such as the South Fork of Long Island and northern Westchester, still tend to have relatively high prices.”

The problem, according to the AG’s report, is that the anti-zone pricing law prohibits only arbitrary price differences between different locations. (See New York’s General Business Law § 399-ee at 1 (m): “Zone pricing means the arbitrary price differences within the relevant geographic market.”) The report notes that wholesalers admit charging different prices to retailers in different locations, but say the price differences are not arbitrary because they are “based on business-related market and economic conditions such as operating costs, degree of competition, the specific location of a station, and other factors.”

The report says “the inclusion of the word ‘arbitrary’ in the definition of zone pricing renders the prohibition toothless.” The AG’s solution is to propose deletion of the word from the definition. Where the law now merely prohibits certain arbitrary price differences, the AG wishes to prohibit price differences. If the state legislature agrees, the law would then prohibit the use of all kinds of normal business-related reasoning in New York’s wholesale gasoline business.

The state legislature ought not to accept the AG’s recommendation, but rather ought to toss out the zone pricing ban.

As the AG’s report itself indicates, there is no evidence of any consumer harm from zone pricing. With zone pricing affluent consumers may pay a little higher price for gasoline than lower- and middle-class consumers, but there is no reason to expect consumer prices are higher on average due to zone pricing.  (As I put it back in November 2008, “anti-zone pricing legislation is essentially consumer protection for affluent customers unwilling to spend their time shopping around for lower prices”). The toothless zone pricing ban is apparently causing no harm either, so doing nothing would simply leave an empty law on the books.

On the other hand, prohibiting the charging of reasonable price differences by gasoline wholesalers in New York would serve to screw up the whole state’s wholesale gasoline market in an effort to keep customers in affluent areas from paying a few more pennies per gallon of gasoline. Seems like a too high price to pay.

 

[NOTE: The report also includes the AG's report on gasoline price movements in the state during 2011 and a discussion of price gouging. These other issues may be discussed here later this week.]

Posted in Economics, Energy markets, Regulation | Tagged , , , | Comments Off

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Price gouging allegations on cancer drugs

November 7, 2011

Michael Giberson

If you think political interference in gasoline markets is excessive, try reading about drug pricing for a while. From the Los Angeles Times: “Shortage of cancer drugs tied to simple economics, experts say.”

And by “simple economics” they mean the perverse incentives created by government regulation that induce oncologists to prefer prescribing more expensive cancer drugs. Most drugs must be purchased through pharmacists, but government rules allow oncologists to sell cancer drugs directly to patients. These days the  sales amount to about half of oncologist’s income. Government reimbursements through Medicare will only pay 6% over wholesale for these drugs. On this point the Times quotes from a column in the New England Journal of Medicine, “Why use paclitaxel (and receive 6% of $312) when you can use Abraxane (for 6% of $5,824)?”

Last week the President ordered an investigation “to gather information from drugmakers about potential shortages so the government can respond before patients’ lives are threatened and help prosecutors head off ‘price gouging.’ ” If you are like me, you laughed at the phrase “so the government can respond before…” The problem has been created by earlier government responses to earlier perceived problems. Good luck to those who think the problem will be solved by layering on another government response.

In unrelated price hike news: peanut butter prices not so sticky.

Posted in Economics, Regulation | Tagged , , | 1 Comment »

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Price gouging laws wasted resources during the Hurricane Irene emergency

October 4, 2011

Michael Giberson

In a post at the Master Resource blog I point out another problem with anti-price gouging laws: during actual emergency conditions both state governments and consumers likely have much more important things to do that worry about whether particular price increases are unconscionable under the state’s understanding of that term.

Among other points, I note that just before Hurricane Irene hit New Jersey the state was warning consumers about potential gasoline price gouging, among other imminent threats.  When the storm was over, the state reported receipt of 103 price complaints. The result:

The investigation ended up finding no stations guilty of price gouging, though three stations allegedly violated the state’s law against changing gasoline prices more than once in a 24-hour period. The three stations have been cited by the state.

Several persons died in New Jersey due to flooding, and the damages may reach “billions of dollars” according to Governor Chris Christie. These are real emergency issues. In response, among many other actions, the state had investigators out counting how many times gasoline stations may have changed prices within each 24-hour period since the emergency was declared.

Concerns over price gouging can also lead to short-term gasoline shortages and consumers waiting in gas lines.

Waiting in line for gasoline is about as useful a response to an emergency as sending out state investigators to count the frequency of gasoline price changes, but with spot shortages and prices unable to go up to limit demand, gas lines and waiting are almost inevitable.

As the note at the end of the piece adds, “For more on price gouging, see Giberson’s article in the Spring 2001 edition of Regulation magazine and his op-ed appearing in the Washington Times on June 6, 2011. In addition, Giberson blogs frequently on price gouging law at Knowledge Problem.”

Posted in Economics, Energy markets | Tagged | Comments Off

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Passage of Wisconsin’s anti-price gouging bill boosted by President Bush’s public remarks

August 22, 2011

Michael Giberson

Wisconsin didn’t have an anti-price gouging law in 2001, so the state government’s response to post-9/11 reports of gasoline price gouging was pretty limited. While the Wisconsin governor called for an investigation of gasoline retailers, for all practical purposes the investigation was limited to fighting collusion in price setting and instances in which stations may have changed prices more than once in a 24-hour period. (See the previous post for a related discussion. The state also had a law which prescribed a minimum 9.18 cent per gallon retailer margin, to prevent prices from becoming ‘too low,’ but that law was not an issue at the time.)

In early 2002, Wisconsin State Rep. Marlin Schneider introduced an anti-price gouging bill limited to petroleum-based fuels and providing for fines up to $10,000 and prison terms as long at 15 years, but the Wisconsin legislature did not pass it. Wisconsin did eventually pass an anti-price gouging law in 2006, largely in response to gasoline price increases after Hurricanes Katrina and Rita (see regulation here).

One of Wisconsin State Rep. Josh Zepnick’s talking points in favor of the bill was President George Bush’s public call in April 26, 2006 for an investigation into “illegal manipulation or cheating related to the current gasoline prices,” which was followed up by a letter from Attorney General Alberto Gonzales to state Attorneys General asking them to “enforce vigorously the laws of your State against any anticompetitive, anticonsumer conduct in the petroleum industry.”

Zepnick observed that Wisconsin lacked a law that would enable the state to support the President. More:

“Wisconsin consumers are worried about price gouging,” concluded Zepnick. “President Bush and Attorney General Gonzales are worried about price gouging. Legislative Democrats are worried about price gouging. Everyone is worried about price gouging except for Wisconsin’s Legislative Republicans. It’s time they get with the picture.

The law was enacted within a month.

ADDENDUM: Seven states did pass anti-price gouging laws in 2001 or 2002, primarily in response to post-9/11 reports of price gouging on gasoline and other goods and services: NJ, ID, IN, KS, SC, TN, WV. A few states passed anti-price gouging laws in 2003, 2004 and 2005, responding to both post-9/11 reports and hurricane-related price gouging: NC, KY, VA, UT. The other three states passing an anti-price gouging law in 2006 were ME, PA, and VT. Oregon followed with an anti-price gouging law in 2007.

Posted in Economics, Energy markets, Law, Politics | Tagged , | 2 Comments »

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Post 9/11 gasoline price gouging in Wisconsin: two views

August 22, 2011

Michael Giberson

The terrorist attacks of September 11, 2001, created a great deal of uncertainty and fear among Americans. In the retail gasoline market, some (but not all) consumers reacted to the uncertainty and fear by heading to a gas station to fill up their tanks. Some (but not all) gasoline retailers reacted to the uncertainty and fear by raising their gasoline prices, in some cases raising prices dramatically. A newspaper story published September 12, 2001, in the Madison, Wisconsin The Capital Times captured a sense of the concerns and reactions at the time.

One common response to 9/11 gasoline price increases was to try to shame retailers for their actions:

Citing reports of gas prices as high as $8 per gallon in Wausau and $4 per gallon in Waunakee, Gov. Scott McCallum said this morning that price gouging will not be allowed in Wisconsin….

“We are not going to stand for it. It is un-American for people to take advantage of other people for what happened yesterday, of such a tragedy,” McCallum said.

The story also includes a quote from a “Desert Storm veteran,” who called the price increases “war profiteering.” Another consumer said of gasoline retailers, “this is like them having blood on their hands and profiting from one of the worst situations we’ve ever seen.” These are the attitudes that politicians cater to when they call for state action to control price gouging.

Contrast efforts to shame retailers to these remarks by a University of Wisconsin economist, directed more at consumers:

But Mark Ready, an associate professor of finance at the University of Wisconsin-Madison and former chief economist at the Securities and Exchange Commission, said people who lined up for gas Tuesday night bought more than fuel.

“The people who paid a lot last night were buying more than gas. They were buying protection against uncertainty and they were buying the ability to hoard,” Ready said. “To me, I don’t necessarily see it as a problem that they were charged a lot. There were some people who rushed out and gave blood and others who rushed out and bought gas.”

Note the two parts: (1) consumers were buying a bit of physical insurance by getting fuel into their tank, which was particularly valuable to consumers fearful of subsequent market disruptions, but also (2) the implied but relatively mild criticism of consumer selfishness in the remark, “some … gave blood and others … bought gas.”

The moralizing impulse to cast price increases during emergencies as immoral attacks by the retailer against the community seems to be pretty strong, at least among many people. Since the laws implemented to cater to these moralizing impulses almost certainly make consumers worse off, the impulses have dysfunctional outcomes.

 

Posted in Economics, Energy markets, Politics | Tagged , | 4 Comments »

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Gas price gouging on rise*

August 8, 2011

Michael Giberson

Gasoline stations are violating price regulations at a higher rate than any other industry under government price guidelines, an Internal Revenue Service survey shows.

About 20% of service stations checked were selling gasoline above the legal ceiling price, the agency said.

Federal energy chief William Simon told The Milwaukee Journal’s Washington Bureau Thursday that the Internal Revenue Service was intensifying its crackdown on price gouging. He said the IRS was training an additional 1,000 investigators – bringing the total number available to the Federal Energy Office (FEO) to about 2,500.

In addition, he urged consumers to complain to their local IRS office whenever they believed they were being overcharged. He said consumers should get receipts from service stations whenever possible so they could receive any refunds that were ordered.

Acting Atty. Gen. Robert Bork sent telegrams to 94 US attorneys last week advising them to seek restraining orders against gasoline price gouging, Simon said.

Most of the violation probably do not involve flagrant price gouging, in which motorists are charged $1 or more for a gallon of gas, an IRS spokesman said. But the number of such serious violations is increasing.

The spokesman said it appeared that an increasing number of gasoline stations were using various gimmicks to get around the government’s price regulations.

*Excerpt from “Gas Price Gouging on Rise,” The Milwaukee Journal, January 2, 1974.

You probably believe that consumers had to wait in long lines to buy gas in the early 1970s because of the OPEC oil embargo. Annual data on imports available from the Energy Information Administration indicate that oil imports from OPEC nations increased each year from 1968 through 1977. (I don’t find monthly data on a cursory search, though it would be more revealing of conditions during the months of the embargo.)

The newspaper clip above reminds us that U.S. government price controls were hampering oil industry adjustments to higher world oil prices and changing supply conditions. A little common sense is all that is needed to realize that consumers don’t stand in line to pay too-high prices, but will stand in line for underpriced goods (whether due to sales promotions or government price controls).

A related story, “Gas stations worst violators” (The Miami News, January 3, 1974), elaborated on gasoline retailers’ adaptations to price controls: “According to the [Federal Energy Office] spokesman, the gimmicks used include service charges for each gallon of gas, requiring consumers to get a car wash along with a full tank of gas, or making them buy other products at inflated prices.”

The rest of The Milwaukee Journal story is included in the continuation below.

Read the rest of this entry ?

Posted in Energy markets, Regulation | Tagged , , | Comments Off

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Congressman called for gas relief

June 27, 2011

Michael Giberson

Congressman Brian Higgins, of western New York, put out a press release last week welcoming the news that the Obama administration will release 30 million barrels of oil from the Strategic Petroleum Reserve. (“Higgins Welcomes News of Oil Release: Congressman Called for Gas Relief Measure in April.”) The rest of the press release was a listing of all of the efforts the congressman has supported with the intent of “keeping gas prices reasonable.”

 Our efforts include: fighting to remove subsidies to oil companies, regular monitoring of local prices to ensure they correlate to others in the region, responsible domestic drilling and aggressively pursuing alternative energy.”

I’m surprised to see “fighting to remove subsidies to oil companies” as the first listed effort to keep gas prices reasonable. Presumably the subsidies tend to shift costs from consumers as a group to taxpayers as a group and therefore lower the price of gas (if not the ultimate cost). I’m against subsidies to energy companies, however, so glad to see Congressman Higgins on the case.

A bit more, uh, laughable might be the polite term, is the press release’s claims of Higgins’s success in fighting to bring gasoline prices down:

In the fall of 2008 Congressman Higgins fought unjustifiably high gas prices in WNY.  He met with the Chairman of the Federal Trade Commission and demanded an investigation into high prices.

Over the six month period during which the Congressman vocally rallied against and demanded answers the high local gas prices decreased by $1.18 due in part to the Congressman’s actions.

In fact the FTC’s letter credited the Congressman for falling prices saying, “we note that prices began to fall soon after you raised public concerns about the elevated prices.”  The Congressman continues to monitor local gas prices through his website to make sure local gas prices aren’t unjustifiably higher than other upstate regions.

In brief, after the Hurricanes Gustav and Ike hit oil producing areas in the Gulf, prices spiked nationally for a while before resuming the sharp drop in oil and gasoline prices that had begun in the summer. Prices in Western New York were falling a little bit less sharply than prices elsewhere in the state. The Congressman began publicly complaining about the change in relative prices with respect to elsewhere in the state.

What evidence is there for the claim that prices fell “due in part to the Congressman’s actions”??? Essentially none. Notice that the FTC letter to the Congressman only observes that prices began to fall after the Congressman had complained, not that the Congressman had anything to do with prices falling. (I posted a link to the FTC letter to Congressman Higgins in a July 2009 post along with extensive commentary.)

The press release adds that Higgins is co-sponsoring the current version of the Federal Price Gouging Prevention Act, apparently languishing in committee, which I am on record as saying is a bad deal for consumers and merchants.

So the Congressman’s press release is nothing more than a list of ineffectual, misrepresented, or misguided efforts. No real suprise, right, I mean no one reads press releases for their truth content. Still, someone thought highly enough of the press release to reproduce it more or less word-for-word on a newspaper website, so I thought it worthwhile to point out some of the limits of the report.

Posted in Energy markets, Politics | Tagged , | 1 Comment »

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Art Carden on price gouging

June 17, 2011

Michael Giberson

Art Carden, in his Economic Imagination blog at Forbes.com, explains “Price Gouging Laws Hurt Storm Victims.”

How many people see natural disasters like the tornadoes in Tuscaloosa, Alabama, and Joplin, Missouri and say “we should be working to impede the recovery and make life harder for storm victims?” Probably no one. How many people see prices rise after natural disasters like the tornadoes in Tuscaloosa, Alabama and Joplin Missouri and say “we should prosecute ‘price gougers!’”? Probably a lot. And yet prosecuting price gougers makes life harder for storm victims.

I like Carden’s article not because he quotes my Regulation article on price gouging and gives me another reason to link to it (well, I like Carden’s article not only because…), but because he states the main problem with price gouging laws so clearly: “prosecuting price gougers makes life harder for storm victims.”

Posted in Economics, Law, Regulation | Tagged | 1 Comment »

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Price gouging op-ed appears in the Washington Times

June 6, 2011

Michael Giberson

This morning’s Washington Times carries my op-ed on price gouging. You should run out and buy a copy at your local newsstand, call the editor with loads of praise, encourage him to solicit my views more frequently, etc.

Alternatively, read the op-ed at the Times website and offer comments here, there, or both places.

The op-ed provides three examples to illustrate the effects of price gouging policy. Since the op-ed format doesn’t allow footnotes, here are some references to accompany the op-ed:

  1. “A Boston-area water main break in May 2010 had officials warning retailers not to price-gouge on bottled water. It was political grandstanding – the state’s price-gouging law only applies to gasoline – but prices stayed low.” See www.thebostonchannel.com, “Price Gouging Put In Check During Water Crisis,” for quotes from Governor Deval Patrick. The extent of the legal authority assigned to the Division of Standards is to ensure that prices charged at the checkout stand match the prices listed on store shelves, but of course perhaps not every merchant knows all of the details of the relevant state laws. The state’s Attorney General and other local officials issued similar anti-price gouging statements. Other details from contemporaneous Boston-area news accounts.
  2. “In January 1998, an ice storm left millions of people in the United States and Canada without power for days. Chazy Hardware, a small hardware store in upstate New York, sent one of its trucks on a hazardous trip into neighboring Vermont to secure electrical generators for several customers.” The details are taken from a court decision in the case People v. Chazy Hardware, 176 Misc. 2d 960 – NY: Supreme Court, Clinton 1998.
  3. “Some gasoline retailers went to extraordinary efforts to resupply. Other retailers, including Frank Shumpert of Pelion, S.C., refused new supplies when those supplies came at higher cost, preferring to be out of stock rather than be charged with price gouging.” Shumpert is quoted in the Columbia, SC, The State newspaper, “S.C. attorney general launches gasoline price-gouging probe against suppliers,” September 15, 2008 (No link). See more in Price Gouging Report issued by the Office of the Attorney General of South Carolina, July 25, 2009. Report was at http://www.scattorneygeneral.com/newsroom/pdf/2009/gaspricegouging.pdf but is not online anymore.
The Cato Institute helped me find a home for the op-ed, and it is also posted on their website at http://www.cato.org/pub_display.php?pub_id=13164.

Posted in Economics, Politics, Regulation | Tagged | 1 Comment »

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