DOT’s airline price gouging investigation and a political economy-based prediction

On Friday, the U.S. Department of Transportation announced it had launched an investigation into possible “unfair practices (e.g., price gouging) affecting air travel during the period of time that Amtrak service along the Northeast Corridor was delayed or suspended as a result of the May 12th derailment.” Five airlines received letters from the agency seeking information on prices for travel between airports most affected by the derailment. CBS News in New York had the story, as did many other media outlets.

In the statement released by the DOT Transportation Secretary Anthony Foxx said, “The idea that any business would seek to take advantage of stranded rail passengers in the wake of such a tragic event is unacceptable. This Department takes all allegations of airline price-gouging seriously, and we will pursue a thorough investigation of these consumer complaints.” The DOT was responding to consumer complaints and a letter from U.S. Senator Chris Murphy (D-CT).

Pure political theater.

The law DOT cites, 49 US Code § 41712, allows the department to investigate whether an airline “has been or is engaged in an unfair or deceptive practice or an unfair method of competition in air transportation or the sale of air transportation.” In the event the department finds price gouging, the sole remedy present in the law is to order the airlines to stop. Given that rail travel was restored after five days, prices have already returned to normal. No meaningful remedy is possible…

…unless DOT wants to go big: rather than finding the prices constituted unfair practices, the DOT could conclude that the airlines’ computerized pricing algorithms constitute unfair practices and order airlines to cease employing them. The airlines’ dynamic pricing systems are not popular with consumers, so they might make an appealing political target. Such a response would be meaningful, in that it would impose significant costs on airlines to reform their systems, but is such a conclusion likely?

The word “unfair” is not defined in the law; the DOT said it relies upon the U.S. Federal Trade Commission’s Policy Statement on Unfairness for a working definition. The policy statement provided a three factor approach to fairness. considering: (1) consumer injury, (2) violation of public policy, and (3) unethical or unscrupulous conduct. In practice the FTC relies only on the first two factors.

Under the policy, apparent consumer injury is judged against the commercial benefits associated with the trade practice. While dynamic pricing is unpopular with consumers, it is profitable for airlines. In addition, it likely produces prices and service quality that are, on average, better for consumers than otherwise. A balancing of apparent harms and apparent benefits should tilt in favor of dynamic pricing.

Here is my political economy-based prediction:

After a month or two the DOT will report finding that airline prices did jump suddenly after the derailment as demand for air travel jumped up. They will observe that initial price spikes resulted from airlines’ computerized pricing mechanisms and did not reflect an intent to “take advantage of stranded passengers in the wake of such a tragic event.” They will note that airlines responded by adding flights and pressing larger aircraft into service. The report will conclude temporary price spikes reflected the ordinary workings of supply and demand under short-lived extraordinary circumstances. No finding of unfair practices will result, and no trade practices will be condemned.

While the announcement of the investigation produced a lot of press, the release of the report will produce little press. A finding of “ordinary workings of supply and demand” is not newsworthy.

What is more, the DOT already knows this answer. It already believes there is nothing to find in the data it is requesting. Still, a Senator wrote a letter — by the way Senator Murphy sits on the Senate subcommittee that oversees the DOT budget — and the DOT responded.

The Senator himself, too, either already knows this answer or simply has not thought too hard about it. But why should he think about a future no-news report? The announcement of the investigation and the press that the announcement garnered, that was the goal. The rest is noise.

[Thanks to Tom Konrad for bringing the story to my attention.]

You should probably raise prices a bit during emergencies

At the Master Resource blog today: “In Defense of Price ‘Gouging’ (lines and shortages are uneconomic, discriminatory).”

In the essay I emphasize the unintended bias that results when consumer demand surges and supplies are tight, as for example when winter storm forecasts lead consumers to rush to the grocery store for bread and milk. Because retailers rarely raise prices in such situations, shortages are the predictable result. The burden of those shortages isn’t spread randomly, however, but rather tends to fall more heavily on certain segments of the population.

When emergencies happen (or are first forecasted) some consumers are readily able to rush to the store while other consumers are not so lucky. The early bird gets the bread and milk and eggs, the late arrival finds little or nothing available….

Households with … “high opportunity costs of shopping,” for example those households with infants or with both parents working full time, were more likely to miss out on the opportunity to buy foods before they ran out. It is easy to see that elderly and mobility-impaired consumers, too, would be more likely to be shut out by any sudden rush of consumers to the store after a disaster.

Higher prices would discourage over-buying and help ensure that useful consumer goods get distributed to more households, not just the households best able to rush to the store.

We can debate how significant the effect is, and I do not argue that raising prices solves all interesting problems, but a modest increase in consumer prices would likely be an improvement.

How about grocery stores imposing a 5 percent storm surcharge that goes to charity, with an ability to opt out? Maybe a sign next to the bread shelves saying “Help those most hurt by the storm: We recommend you donate 25 cents to [name of charity] for every loaf of bread you buy. Our checkout staff will be happy to help you with your donation!”

While I have targeted many complaints at anti-price gouging laws here at Knowledge Problem, in the Master Resource post I broaden my focus a bit to encompass the consumer sentiment against price increases during emergencies. We need a social change to enable markets to work as best they can in such situations. More effective markets aid by reducing the scope of the problems to be addressed by charitable work (as Dwight Lee argues in his essay in Regulation magazine – see the related discussion and link in the Master Resource post).

The quoted part above in part relies on research done on consumer purchases in Japan after the Great East Japan Earthquake of March 2011:  Naohito Abe, Chiaki Moriguchi, and Noriko Inakura, “The Effects of Natural Disasters on Prices and Purchasing Behaviors: The Case of Great East Japan Earthquake.” DP14-1, RCESR Discussion Paper Series, September 2014.

Price gouging in a second language

Research on differences between decisions made in a person’s native tongue and decisions made in a second language reminded me of an unexplored idea in the social dynamics surrounding price gouging.

I’ve devoted a few posts to the question of whether or not price gouging laws get applied in a discriminatory fashion against “outsiders,” primarily thinking of immigrants or cultural minorities. My evidence is slim, mostly the casual reading of a handful of news stories, but consider these prior posts and possible examples from Mississippi, New Jersey, and West Virginia.

In the New Jersey article I speculated it was possible that “outsiders” were more likely to engage in price gouging behaviors, and observed, “Social distance between buyers and sellers can work both ways.”

Some support for my speculation comes through communication research by Boaz Keysar of the University of Chicago, who has documented the view, as the subtitle of an article in the journal Psychological Science puts it, “thinking in a foreign tongue reduces decision biases.” Part of the explanation Keysar and his coauthors offer is the “foreign language provides greater cognitive and emotional distance than a native tongue does.” (The work was mentioned in a recent Freakonomics podcast.) An immigrant hotelier or retailer may not connect as emotionally as a native does with laws expressed in the native’s language or with customers when transacting in that language. When exchange is seen as impersonal rather than personal, price-setters are less constrained in their pricing decisions.

Interestingly, Keysar is also coauthor on a study concluding that moral judgments are markedly more utilitarian when problems and responses are conducted in a second language. Economic analysis tends to support the view that “price gouging” in response to sudden shifts in demand is the correct utilitarian response (as flexible prices help goods and services move toward those who value them most).

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.

 

Price gouging-moral insights from economics

Dwight Lee in the current issue of Regulation magazine offers “The Two Moralities of Outlawing Price Gouging.” In the article Lee endorsed economists’ traditional arguments against laws prohibiting price gouging, but argued efficiency claims aren’t persuasive to most people as they fail to address the moral issues raised surrounding treatment of victims of disasters.

Lee wrote, “Economists’ best hope for making an effective case against anti-price-gouging laws requires considering two moralities—one intention-based, the other outcome-based—that work together to improve human behavior when each is applied within its proper sphere of human activity.”

Intention-based morality, that realm of neighbors-helping-neighbors and the outpouring of charitable donations from near and far, is good and useful and honorable, said Lee, who term this as “magnanimous morality.” Such morality works great in helping family and friends and, because of the close relationship, naturally has a good idea of just what help may be needed and when and where.

When large scale disasters overwhelm the limited capabilities of the friends and families of victims, large-scale charity kicks in. Charity is the extended version magnanimous morality, but it comes a knowledge problem: how does the charity identify who needs help, and what kind, and when, and where?

The second morality that Lee’s title referenced is the morality of “respecting the rights of others and abiding by general rules such as those necessary for impersonal market exchange.” This “mundane morality” of merely respecting rules does not strike most people as too compelling, Lee observed, but economists know how powerful a little self-interest and local knowledge can be in a world in which rights are respected. Indeed, the vast successes of the modern world–extreme poverty declining, billions fed well enough, life-expectancy and literacy rising, disease rates dropping–can be attributed primarily to the social cooperation enabled by local knowledge and voluntary interaction guided by prices and profits. The value of mundane morality after a disaster is that it puts this same vast power to work in aid of recovery.

The two moralities work together Lee said. Even as friends and families reach out in magnanimous morality, perhaps each making significant sacrifices to aid those in need, the price changes produced by mundane morality will engage millions of people more to make small adjustments similarly in aid. A gasoline price increase in New Jersey after Sandy’s flooding could trickle outward and lead gasoline consumers in Pittsburgh or Chicago to cut back consumption just a little so New Jerseyans could get a little more. Similarly for gallons of water or loaves of bread or flashlights or hundreds of other goods. Millions of people beyond the magnanimous responders get pulled into helping out, even if unknowingly.

Or they would have, had prices been free to adjust. New Jersey laws prohibit significant price increases after a disaster, and post-Sandy the state has persecuted merchants who it has judged as running afoul of the price gouging law.

Surely victims of a disaster appreciate the help that comes from people who care, but they just as surely appreciate the unintended bounty that comes from that system of voluntary social interaction guided by prices and profits called the market. Laws against post-disaster price increases obstruct the workings of mundane morality, increase the burden faced by the magnanimous, and reduce the flow of resources into disaster-struck regions.

Perhaps you think that government can fill the gap? Lee noted that restricting the workings of mundane morality increases the importance of political influence and social connections, but adds the shift is unlikely to benefit the poor. On this point a few New Jersey anecdotes may inform. See these stories on public assistance in the state:

We often honor the magnanimous, but we need not honor the mundane morality-inspired benefactors of disaster victims.  While the mundanely-moral millions may provide more help in the aggregate than the magnanimous few, the millions didn’t sacrifice intentionally. They just did the locally sensible thing given their local knowledge and normal self-awareness; doing the locally sensible thing is its own reward.

We need not honor the mundanely moral, but we also ought not block them from helping.

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.”)