Price gouging: Is it wrong? Should it be against the law?

Michael Giberson

The April 2009 Business Ethics Quarterly includes an article on price gouging by Jeremy Snyder, a response from Matt Zwolinski, whose article on the topic was published a year ago, and a reply from Snyder. (Zwolinski’s earlier article on price gouging was discussed here last March.  See related links below.)

Snyder (“What’s the Matter with Price Gouging?” Business Ethics Quarterly, (2009) pp. 275-293. Ungated version here.) is concerned with specifying the nature of the moral wrong associated with price gouging. Snyder asserts that markets generally do a good job of efficiently allocating resources, even following a disaster. He said, “If there is something morally wrong with price gouging, it is not that gouging causes direct harms or economic inefficiency. In fact, a critique of price gouging will need to confront the positive moral value of the efficiencies and rationing effect created by price increases.” He identifies the moral wrong associated with gouging as a kind of failure of respect for others because it impairs equitable access to essential needs of consumers.

He acknowledges that Zwolinski already addressed a related “lack of respect” point. In the 2008 article Zwolinski said that while gouging victims of disasters may reflect a lack of respect for the victims, laws against price gouging reflect and encourage similar or greater lack of respect because they interfere with autonomous decision making by potential sellers and buyers.  Snyder asserts that price gouging prices the poorest members of the community out of the market for essential goods, and contributing to this inequitable result is immoral.

Snyder also attack’s Zwolinski’s “nonworseness claim” and suggests rules for ethical rationing of necessary goods after a disaster.  The “nonworseness claim” asserts that because us gouging someone is better than neglecting them altogether (i.e. closing shop or refusing to sell at any price), and neglecting them is within our rights, it must also be within our rights to gouge them. In my view Snyder’s response, which gets into questions of motivation and long-range character, seems to have little to do with whether raising prices substantially on essential goods after a disaster is itself an immoral act. Snyder’s ethical rationing approach calls for merchants to limit price increases and impose limits on sales quantities (in order to counteract the excess demand at the below-market price).

Snyder said he hoped in the article, “to have shown that [his] account tracks well with widespread intuitions as to when and why certain price increases are morally problematic.” His method of “showing” is the traditional philosophical approach of appealing to the reader’s intuition, which has I think rather obvious limitations (here, of course, I’m appealing to the reader’s intuition about useful ways of demonstrating claims about factual matters).

There are better ways to study claims about “widespread intuitions” – as social psychologists know and philosophers are discovering – but at least Snyder is acknowledging that these intuitions are important to the analysis. Price gouging laws arise because of consumers’ emotional response to some kinds of price increases, the impulse to deem such price increases as morally objectionable, and the desire to legislate in response to that moral impulse. If lawyers, philosophers, and economists are going to make progress in understanding price gouging and appropriately reforming anti-price gouging laws, my view is we need to better understand these widespread intuitions.

Zwolinski, in his response (“Price Gouging, Non-Worseness, and Distributive Justice”  Business Ethics Quarterly, (2009), pp 295-303), notes many points of agreements with Snyder’s article, and noted that the response focused on the areas of disagreement.  His main effort is to reassert his “nonworseness claim” against Snyder’s attack and argue against Snyder’s proposal to limit both price increases and quantities sold per customer during emergencies.

Zwolinski agreed Snyder’s alternative approach to ration access to essential goods might change the distribution of goods during the emergency compared to the status quo, but Zwolinski doesn’t see reasons to claim the alternative distribution is more ethical. Further, like more general anti-price gouging laws, Snyder’s approach does not make the emergency conditions less desperate nor aid in the recovery. Price gouging, on the other hand, generates both information and incentives useful to aid recovery.

Snyder replied (“Efficiency, Equity, and Price Gouging: A Response to Zwolinski”  Business Ethics Quarterly, (2009), pp 303-306. Ungated version.) that Zwolinski’s defense of price gouging “sacrifices equitable access to these goods in favor of efficiency,” while Snyder believes that anti-gouging legislation to protect equitable access to essential goods during emergencies can be morally laudable.

Snyder notes that many discussions, including Snyder’s own earlier article, frequently conflate two points: (1) What kind of moral wrong, if any, arises in price gouging? and (2) Does anti-gouging legislation actually work to reduce instances of the moral wrong? Snyder reasserts his goal to address the first point, but suggests his work on the first point can help promote the appropriate reforms of anti-gouging laws.

It is a big step, but barely noticed in this discussion, to move from observing “X is not moral” to “the law should prohibit X.” It may be wrong not to call your mother on her birthday, but we don’t need a law requiring such calls. A variety of philosophical, legal, and economic theories can be called upon in the effort to justify imposing a law. Advocates of anti-gouging laws ought to do better than assert a law is needed simply because they believe the practice is wrong.

Earlier posts on price gouging studies:


5 thoughts on “Price gouging: Is it wrong? Should it be against the law?

  1. Is it so hard to grasp the fact that PRICE RATIONS!!

    When gas is in short supply, one way to extend the supply is to raise the price, thereby making consumers be more discriminating in their use of gas.

    The term “gouging” is used by unscrupulous politicians to curry favor with the ignorant masses and to gain empowerment by fixing prices.

    This country is paying dearly for its ignorance and it greed (I do not mean greed of the oil companies).

    Travis

  2. Travis, I agree with you on the straightforward microeconomics of “price gouging.”

    My general interest in the topic is stimulated by the fact that moralizing emotions seem to override rational thinking when it comes to price gouging laws – more and more states are passing such laws – and so promotion of sound policy apparently will require a deeper understanding of the motives and not just clearer exposition of the economics.

  3. Michael, Amen to your distinction between legal and moral judgments. If I didn’t make that point myself in my original article (space was a bit tight in the response piece), I sure should have.

    I also am sympathetic with your concern regarding the role of intuitions in moral arguments. At some level, perhaps, intuitions are all we’ve got to work with in foundational moral theory. But there are a number of reasons to be deeply suspicious of the evidential value of intuitions: as I point out in my first paper, they tend to be responsive to what Bastiat would call ‘the seen’ to the neglect of what is unseen. And for that reason they are probably poorly suited for thinking about the ‘extended order’ of contemporary society. Not to mention the problem that there are lots of explanations for why we might have a given intuition that have nothing to do with any deep insight into moral reality.

    Thanks, again, for reading the paper, and for the feedback!

  4. As Lynne (I believe) has pointed out here previously, the hotel, airline and rental car industries (among others) have already dealt with this issue quite effectively. The typical hotel has a room price schedule posted on the back of the entry door. Almost nobody ever pays that price, but charging it when the opportunity presents does not constitute “gouging” because it is the posted price.

    Automobile dealers frequently use “additional dealer markup” or “market adjusted price” programs to deal with limited vehicle supplies for exciting new products. “Market adjusted price” also serves as an easy price reduction as part of a deal in the making. I know that auto dealers dream of “pilgrims” who will pay the MSRP for a vehicle; and, “early adopters” who will pay an additional premium to be the “first on the block” to have some hot new vehicle. However, these are not referred to as “gouging” because there is no crisis.

    Market reality is that the truckload of chain saws, or generators, or water, etc. will not appear in the market at the normal market price, because the providers have to make more than normal market effort to provide them. Therefore, the question always remains: “Are the potential buyers in the market better off if the needed supplies are available in the market, albeit at a higher than normal price?” I believe the potential buyers are always better off, since they have the opportunity to acquire what they “need”; and, they are under no compulsion to buy anything at any price if they don’t “need” it.

    Also, if the higher “gouge” price is so attractive to potential sellers, there is nothing to prevent additional potential sellers from bringing supplies to the market and undercutting the prevailing “gouge” price to achieve both a quicker sale and a quicker profit.

    I am still waiting to see a universally agreed upon definition of “gouging”.

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