Discrimination in West Virginia price gouging case?

Are West Virginia “outsiders” more likely to be accused of price gouging?

From the March 8, 2014, Charleston Gazette, “Morrisey accused of discrimination in price gouging response“:

CHARLESTON, W.Va. –A Putnam County storeowner accused of price gouging bottled water during the water crisis says Attorney General Patrick Morrisey discriminated against him because he is Lebanese, questioned him unethically and illegally leaked the charge to the media before informing him of it.

On Feb. 14, Morrisey filed suit in Putnam Circuit Court alleging that Achraf Assi’s convenience stores, Hurricane-based Mid Valley Mart LLC, unfairly raised the price of Tyler Mountain Spring Water from $1.59 a gallon to $3.39 a gallon the day after the Jan. 9 chemical leak that contaminated the region’s drinking water.

Morrisey alleged that Assi, who owns the two stores that allegedly sold water at inflated prices, kept the prices higher for a week following the chemical leak.

In this news report the West Virginia Attorney General refers to alleged price gougers as “bad apples.”

The attorney general’s office reported over 150 calls concerning prices during the water emergency and documented 74 cases of increased prices on water and other goods. As of late February, the AG’s office reported issuing six subpoenas and 15 cease and desist letters. Only one price gouging case has been filed subsequent to the water emergency.

So far as I am aware, this is the first time I’ve seen claimed that price gouging laws have been implemented in a discriminatory fashion.

In 2012 I suggested the possibility that price gouging laws could be applied in discriminatory fashion (here and here). In brief, my claim was (1) the laws typically grant some discretion to the state, and any discretion exercised was unlikely to favor “outsider” groups; and (2) enforcement is almost always triggered by consumer complaint and so gives any consumer bias a role in anti-price gouging law enforcement. I’ve also speculated that “outsider” merchants may be more likely to raise prices in response to emergencies, but know of no research on that possibility.

One year after Superstorm Sandy: Charities, price gougers and the state

Popular Mechanics magazine headlined an article with the question, “One year after Superstorm Sandy, has anything changed?

Well, sure: over the last year the state governments in New York and New Jersey have put a lot of time and money into punishing a few businesses that provided shelter and gasoline to people whose lives were disrupted by the storm. Why, you ask? Because the prices offered by these businesses after the storm hit were somewhat higher than the prices offered by the businesses before the storm hit.

One example, a Holiday Inn Express in Brooklyn recently agreed to pay a total of $40,000 to settle a complaint, part of it to customers and part to the state, because the state concluded the $400+/night rate charged to the customers was too much higher than the $170/night rate charged the week earlier.

As is perhaps obvious, government prosecution of post-emergency price-raising retailers will produce real world consequences. The question for economists is whether on balance the costs of the policies are worth the benefit secured. So far as I know there is no study that tries to answer this question in a comprehensive manner. (Best effort so far: here.)

In related news, the New York Attorney General’s office has reached an agreement with four charities that had collected money to help Sandy victims but not yet spent all of the funds. Under the agreement the four groups committed to a time table for spending most of the remaining funds.

Charities and for-profit enterprises both have provided many useful goods and services to people whose lives were disrupted by Sandy. If the soft price cap imposed by price gouging restrictions reduces for-profit supply responses during emergencies, then the restrictions add to the hardships that charities seek to address (and perhaps also to public demands that government do something, even something foolish).

At Bleeding Heart Libertarians, Matt Zwolinski continues to explore price gouging issues in a couple of recent posts. In “Price gouging and the poor” he takes on the common claim that state laws against price gouging are particularly valuable for protecting poor persons. In “World Cup ‘price gouging’?” he examines the Brazilian government’s declaration it will monitor hotel room prices for the upcoming 2014 World Cup competition and act to prevent abuses. Given that most people willing and able to travel internationally to attend World Cup matches in Brazil next year are far from poor, the two posts make a nice pair. (Related is my February 2012 post “Super Bowl price gouging complaints.”)

Anti-price gouging laws can increase economic welfare

An article by Robert Fleck of Clemson, forthcoming in the International Review of Law and Economics, presented a theoretical case that price gouging restrictions can be value-enhancing under certain conditions. I was skeptical, but Fleck is careful in building his case.

The key qualifier above is under certain conditions. In “Can Prohibitions on ‘Price Gouging’ Reduce Deadweight Losses?” Fleck agreed it is obvious price caps can cause shortages, and price caps designed to apply specifically during emergencies can create shortages at times during which shortages are especially harmful to consumers

But he found a special case for which such laws may be on net beneficial, namely: when consumption of the good creates external benefits, and the price gouging limits are foreseen to create shortages under unpredictable high demand conditions, and production is fixed in the short run, and resale of the good among consumers is impossible, then the policy can induce consumers to buy larger amounts of the external-benefit generating good.

His primary illustration was flu vaccinations, for which production is completed before the flu season type is revealed to be either “high demand” (flu epidemic) or “low demand” (normal). In the absence of shortage-inducing price limits, consumers wait for realization of the flu season type before deciding whether to get a flu shot. Given a price gouging-based price cap and resulting predictable shortage, Fleck explained, more consumers buy a vaccine production prior to the flu season (i.e. before revelation of the flu season type). Because by assumption consumption of the good has external benefits, inducing greater consumption can create net increases in overall economic value.

Fleck clearly stated that his result doesn’t generalize to all price gouging restrictions. While he suggested a few light stories of the potential external benefits associated with drinking water, gasoline, home electrical generators, and chain saws, he didn’t play these alternatives up. (For good reason, too. Unlike flu vaccinations “consumed” at point of retail purchase, these other consumer goods are readily resold. A resale market undermines consumer incentives to purchase the good before the demand type is known and so does not lead to an increase in overall consumption.)

He concluded by raising the possibility the widespread adoption by states of price gouging proscriptions might reflect growth of relatively efficient types of regulation at the expense of less efficient regulation, or perhaps the laws persist because they are not as costly as they otherwise may seen. On this point I remain skeptical.

As Fleck emphasized early in the paper, the model shows that price gouging limits may be on net beneficial, but it does not conclude they must be on net beneficial. In addition, even when the policy may be on net beneficial it will fail to maximize total benefit, and so in theory there are better policies. Finally, he said, the laws would have to be tailored to apply mostly under the restrictive conditions set out above. Price gouging restrictions under other conditions will reduce overall surplus. Fleck suggested (for Hayekian knowledge problem reasons) it was unlikely that policymakers would be so well informed as to be able to identify just which products and at which times the laws should apply.

Overall he has a unique and interesting theoretical case built with traditional microeconomic tools. Other attempts at providing an analytic foundation for price gouging laws are ad hoc and unpersuasive (comments on Rotemberg here, comments on Rapp here and here). But despite Fleck’s offering an efficiency-based justification for price gouging limits, the relatively strict conditions for his theoretical case make the model an unlikely base of support for any existing price gouging policy.

Colorado merchants have pricing freedom

Flooding in Colorado has caused damage across nearly 2,000 square miles of the state. While many businesses are chipping in to help people affected, some people are concerned that lack of a state anti-price gouging law leaves consumers exposed to unjust price increases.

A Denver Post story begins:

Flood-ravaged Colorado is one of only 15 states where price-gouging during an emergency is not illegal — it’s merely capitalism.

To some it might be socially reprehensible and ethically wrong, but legally there’s nothing to prevent a businessperson from upping the cost of necessary post-disaster supplies to meet the pressing needs of those affected by the event.

“The price of a product or service alone is not a scam if it’s fully disclosed,” Colorado Assistant Attorney General Jan Zavislan said. “If the consumer has the information and has the right to shop around, but the sources in an emergency aren’t there, it might be an outrage to people, but there’s no specific law on the price itself.”

As communities begin the process of cleaning up from the floods and taking an inventory of insurance coverage — if any — more immediate needs of food, water, fuel and shelter can be met with surprise over their cost.

As long as a merchant is clear on the price — even if it’s 10 times the rate it had been before the disaster — then there’s no law broken.

The article doesn’t actually cite examples of price gouging in Colorado, just notes that nothing in state law would prevent it. (Another story online said a Longmont, CO resident reported that a septic company nearly doubled it rates after the flood, but that’s it so far as I can find.)

The article explains that a bill to prohibit price gouging in Colorado was vetoed in 2006 by then-Gov. Bill Owens. Owens said, “[the bill] violates the fundamental principles of our market-based economy.”

NOTES: The Denver Post article states Colorado does have an anti-price gouging law solely for needed drugs, the price of which cannot rise more than 10 percent during a disaster declaration.

By the way, by my count 34 states have anti-price gouging laws and 16 states do not have such laws (see my list and the related graphic). The article claims 35 states with and 15 without. Maybe I need to update my list.

New ideas for combating price gouging

At the Harvard Business Review Blog Rafi Mohammed offers a new proposal to combat price gouging. I don’t like it.

First, of course, the title “The Problem with Price Gouging Laws” is exactly the title of my Regulation magazine piece on price gouging laws, and so it dilutes the amazing notoriety I gain from association with that title. (Note: I’m kidding.) Second, and more substantively, his proposal is unworkable.

Mohammed is a pricing strategy specialist, so he understands a bit about how consumers, prices, and retailers get along. He also understands the supply and demand fundamentals that lead a spike in demand to (typically) push prices up and the problems created by laws that block that price response (namely, first-in-line consumers stock up and leave less for others, and suppliers face fewer incentives to bring in added supplies).

To get the supply response needed, prices have to rise, but consumers will object to sharp post-disaster price increases. His proposal: keep prices to consumer stable as per current laws, but provide a government-funded subsidy to retailers selling specific needed goods and services to encourage the desired supply response.

I like some things about the idea. I like that the supply side (in theory) gets better incentives without triggering a counter-productive consumer backlash. In addition, I like that the proposal shifts some of the economic burden of emergency response away from retailers who happen to have useful goods (and are, after all, providing a benefit to the community by maintaining a supply of useful goods), and pushing some of that obligation onto the community as a whole. If public policy wants to promote emergency preparedness, it is better not to adopt policies that shift costs on to retailers who boost emergency preparedness. I also like the attempt at a new approach for a policy area when policy is under-examined by proponents.

Still, the program won’t work. Identifying the goods covered and the degree of subsidy needed simply cannot by done with sufficient nimbleness and accuracy by a state Division of Consumer Affairs to replicate the efficiency of decentralized, market-based price adjustments. In some parts of town a storm may have taken out windows, but elsewhere flooding may have driven some folks out of their home. Some folks lose power, so want ice and batteries (or, if rich enough or need power enough, want an generator and some diesel fuel), and other folks are placed under a “boil water” restriction because of water supply problem. Somehow, in advance of the emergency, the state has to devise a useful set of subsidies to fit the consequences of somewhat unpredictable storms. Not going to happen. (This is, of course, the Hayekian “knowledge problem” that we at the Knowledge Problem blog find so critical.)

In addition, a subsidy system seems readily gamed. Offering a 50 cent per bottle subsidy on bottled water? A convenience store owner may just buy a few cases for himself, then put them back on the shelf and sell them again (and again, and again). Sure, maybe the state could audit and/or police subsidized sales, but the costs of enforcement becomes an issue. So the program can’t get the incentives right, but may incentivize abuse anyway.

On the demand side consumers simply don’t get the signal to conserve. When gasoline supplies are tight, people often respond by topping off their tank much more frequently, in effect hoarding a bit of gasoline in case supplies become completely interrupted. Higher prices encourage people to take only the amount they must have during the supply problems.

Overall, the proposal offers something new to think about, but it doesn’t seem workable. My own solution (improve economic understanding in the general public so we better tolerate efficient price changes) is also somewhat utopian, but so far I still think it is the best long-run approach.

Legalize sustainable pricing to promote recovery from disasters

Michael Giberson

“Price gouging” is by intent a pejorative term. Nobody wants to get gouged, by a price or in any other manner. Analysts advocating or defending price flexibility for key goods and services in disaster struck areas are burdened from the beginning by the derogatory term. In an editorial essay advocating for post-flooding pricing freedom in Calgary, Peter McCaffrey takes a swipe at giving the concept a new name.

First he offers five reasons to favor price gouging after emergencies: (1) discourages precautionary hoarding after disaster strikes, (2) encourages consumer conservation of goods in most demand, (3) encourages suppliers to acquire precautionary inventories of goods useful after disasters, (4) encourages consumers to be prepared in advance for disasters, and (5) rising prices attract more resources from surrounding areas. Each of these actions tend to alleviate suffering and promote recovery after disasters; if price increases promote actions that promote recovery, the price increases contribute a useful social service. (Critics of price gouging can produce lists of particular burdens created, then benefits and costs of post-disaster price flexibility can be assessed. As with any benefit-cost analysis, I encourage the analysts to be thorough and consistent in counting up both pros and cons.)

Price gouging is good, McCaffrey said, but the term itself is meant to be derogatory. It needs a new name. McCaffrey concludes:

A more accurate description would be “sustainable pricing” — pricing that ensures supplies are sustainable to meet the demand of future customers.

It’s time we legalized the art of sustainable pricing to ensure critical supplies are readily available for everyone the next time disaster strikes.

I don’t think it will catch on, but I admire the effort to reframe the name.

Price gouging defined: Looking for family resemblences

Michael Giberson

A range of recent news stories report on price gouging, but the wide variety of cases in which the term “price gouging” gets invoked raises the question of what actually is price gouging. About all that these cases have in common is a price for a good higher than some other price used as comparison.

Examples: bottled water and hotel room prices in Calgary after flooding; hotel room prices in Atlantic City during a rock festival; gasoline prices in Kincardine, Ontario higher than neighboring towns; software prices in New Zealand higher than in the United States; electric power prices higher in Australia after imposition of a carbon tax; prices of bottled water and other goods not labelled in small shops in Saudi Arabia; ammunition in the United States after the political response to the Sandy Hook shootings. A lack of anticipated price gouging reported on the debut of a new Android-based game console, OUYA.

But prices will be varied and constantly changing in any dynamic economic environment, so there will nearly always be some lower price somewhere to be invoked in comparison. Not all of these “some lower price somewhere” possibilities suggest price gouging. The common “essence” here is too weak to provide a clean definition.

I think, rather, the way to define price gouging is similar to the way Denis Dutton defined “art” in The Art Instinct: first identify a clear prototypical example, then consider degrees of similarities and differences between the prototype and any case under consideration. That is to say, identify a prototype then look for “family resemblances.” (For a complementary and more thorough look at language use and natural categories see George Lakoff’s book, Women, Fire, and Dangerous Things.)

For our prototypical case of price gouging I think we need (1) a potential customer under stress, (2) a seller offering a good the customer wants for a reason somehow related to whatever is causing the stress, and (3) the potential customer expecting a significantly lower price than the seller offers based on prices for the same or similar goods offered at some recent time or nearby place. Whatever one feels about the ethics, economics, or proper public policy toward price gouging, we can probably all agree that the prototype is a good example of what is meant by the term “price gouging.”

Among the examples listed above, hotel rooms in Calgary match the prototype pretty well: prices at a Travelodge jumped from C$109 to C$190 because, as a hotel employee reportedly said, “busy because of the flood.” (Travelodge has since apologized for the “error” on Facebook and adjusted rates to one “more reflective of the time of year and occupancy of the hotel.”) I’d call it price gouging and get on about the business of debating the ethics, economics, and public policy issues raised.

On the other hand, gasoline consumers in Kincardine, Ontario are not under any special stress in their everyday gasoline purchases. Higher gasoline prices may reflect higher store costs or, as suggested in the article, a low interest in price competition among the small number of suppliers in town. Similarly, software purchasers in New Zealand are not under any emergency or short term duress when faced with higher-than-U.S. prices on many Microsoft and Adobe products. These cases seem to be mere distant cousins to price gouging. While there does seem to be a family resemblance to “real” price gouging (i.e. to prototypical cases), it is a distant resemblance. Rather than casting the cases as price gouging, some other frame of analysis seems more appropriate.

Since we are dealing with prototypical examples and family resemblances in defining price gouging, and not with logical abstractions with essences, we have to be content with obviously-is cases and obviously-not cases and lots of shades of gray between.

Iowa flooding and price gouging

Michael Giberson

President Bill Clinton surveys flood damage in Davenport, Iowa, July 4, 1993.

President Bill Clinton surveys flood damage in Davenport, Iowa, July 4, 1993. (US GPO photo.)

Tornadoes and floods have led to official declarations of disasters for parts of at least four states (Oklahoma, Missouri, Iowa, and Texas).

All four states have laws against excessive price increases after emergencies, at least for the counties covered by the disaster declaration, and three of the Attorney Generals have issued a press release urging the public report price gouging to the state. (Oklahoma, Missouri, and Iowa; The Texas Attorney General was apparently content to merely alert residents in four counties to possible home repair scams and identity theft.)

In Iowa, the link between flooding and the price gouging law goes back twenty years; Iowa lawmakers passed the anti-price gouging law in 1993 after a massive flood in the state. A Chicago Tribune story from 1993 cited several examples of post-storm price increases: sand-bags, drinking water, sump pumps, and portable toilets.

Patrick Gibbs, the mayor of Davenport, says he got his first hint of the money to be made on floods when he came to work one morning to find “three people in my office, two selling sandbags and one pumps.”

He has watched the price of sandbags rise dramatically, from a quarter each when the first waters lapped around the downtown riverfront to 75 cents by the time three city blocks were underwater.

He senses a ripoff. “Sandbags are the kind of thing nobody buys unless they’re being flooded,” he said, rejecting arguments about shortages created by flooding.

Bob Brammer, a spokesman for the Iowa attorney general, says such price gouging has been relatively rare in the state despite the magnitude of the disaster.

Portable toilet price gouging gets mentioned in several Attorney General news releases. It may be the case that the Iowa law is the only one that specifically lists “sanitation supplies” among the good covered.

The same newspaper story mentioned, “soybean price futures have jumped 25 percent and corn futures 10 percent over the past month as crop losses have spread across Illinois, Iowa and Missouri. That means farmers outside the flood zone will get far more for their crops than normal….” The state didn’t have a price gouging law until later that year. But if the price increase happened this year, would farmers in the affected counties be in violation of state law?

Fox Business: Preventing Price Gouging of Storm Victims

Michael Giberson

Last week a show on Fox Business News ran a segment titled, “Preventing Price Gouging of Storm Victims.” Spoiler: Show host Gerri Willis and Florida Attorney General Pam Bondi chat about price gouging, but nothing much about “preventing price gouging” except that if you do it in Florida, the state “will be coming after you.”

 Preventing Price Gouging of Storm Victims

WILLIS REPORT: Preventing Price Gouging of Storm Victims: Florida Attorney General Pam Bondi on efforts to prevent price gouging after tornadoes and hurricanes. (Image linked to video.)

An unofficial transcript of the program follows below. Warning: If you’re looking for substance on price gouging, you won’t find it in this interview.

As a taste of the discussion, or perhaps to illustrate the reason for the warning, here is one of the most substantive points of the discussion:

WILLIS: So, technically, I guess, gouging is described as a gross disparity in the cost of something in the usual period of time and what you charge right after a storm. But that doesn’t give you actual numbers. Is there ever any dispute, any disagreement over what is gouging and what is not?

BONDI: No, because what we look at is the price, for instance, gas—what gas was selling for prior to a hurricane, and then what fuel was selling for after the hurricane—and those are the numbers that we look at. Lumber is easy, ice is easy, water is easy—any essential commodity directly related to a storm. And that is illegal, and it cannot happen.

Again, people need to be prepared now, because these scammers are getting so advanced, Gerri, and they know that we are looking at, perhaps, a rough hurricane season… um… all down our coasts.

Fox Business News? I’m not so sure that either of our interview participants understand either “news” or “business” very well, and I suspect the concept “fox” is probably a bit overly complicated for them, too.

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Gasoline retailer getting gouged by New Jersey Attorney General?

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?