More on Unconscionability and Price Gouging Law

Michael Giberson

[This post is second of two on Eisenberg’s essay on unconscionability. Link to part one.]

Having spent a little more time with Eisenberg’s essay on unconscionability, I’m less enthusiastic than I was at first, but let’s take a look.  Eisenberg advanced two cases in his essay: The Desperate Traveler and The Desperate Patient. Briefly, the Desperate Traveler (A) is stranded in the desert and facing death, another traveler (B) happens by and offers to rescue A in exchange for an extremely large sum, A agrees to pay but once returned safely home refuses to pay the large sum. B sues to enforce the contract.

The second story is quite similar: The Desperate Patient (P) is seriously ill and will soon die unless he receives an organ transplant that has just recently become possible due to the development efforts of a surgeon (S). At the moment only S is able to perform the surgery, which S offers to do for an extremely large sum. P agrees to pay, but after the surgery refuses to pay S the large sum. S sues to enforce to contract.

See more in the continuation.

In both cases Eisenberg said classic contract law would support full enforcement, but argued that only partial recovery should be permitted on the grounds that the contracts were substantively unconscionable.  Eisenberg noted one important difference between the cases: in the Traveler story B’s rescue opportunity was entirely fortuitous, while in the Patient story S was capable of providing the life-saving operation only due to extensive effort.  He then relied on a distinction in the admiralty law governing salvage contracts to justify somewhat greater payment to S. He said, “It is well established in admiralty law that a contract for salvage – that is, a contract to rescue a ship that is in distress, or its cargo – is reviewable for fairness.”  In this review, courts distinguish between fortuitous rescue and rescue accomplished by professional salvage operations that have invested and stand prepared to provide such services. Much larger payments are justifiable for professional salvage operations. (There is much more in the text on these issues, I’m rushing a bit to get to the price gouging issue.)

So what about a case of alleged gasoline price gouging: Is a gasoline retailer like B, the other traveler, who in the course of other activities just discovers he is capable of providing the especially useful service of gasoline supply to people in acute need of gasoline? Or is the retailer like S, the surgeon, capable of providing the especially useful service to people in acute need due to his prior investment and preparations? In truth it seems like B and S: to the extent that the station’s capacity is no larger than necessary to serve its market in its ordinary course of business, then B; to the extent the capacity is larger than necessary for everyday needs, then S.

We can now imagine an economic methodology for identifying which portion of the retailer’s facility should obtain a merely “ample award” for just happening to be capable of providing the especially useful service, and which portion should be able to claim a much larger payment. And if we refer to this combined result as “BS,” then you will know what I think of the idea.

We are led down this path of analysis by first allowing substantive unconscionability as a tool for post hoc revision of contracts, then wondering how these ideas play out in price gouging laws which seek to prohibit unconscionable prices. The idea of substantively unconscionable prices seems to be no more than the latest version of the ancient idea of a “just price.” The idea of a “just price” may well be implied by various moral theories, but it has generally been found to be an awful way to run a market.

When Eisenberg addressed price gouging, he made none of this analysis. After some preliminary sketching of the issue, Eisenberg said: “it is morally improper for a seller to significantly raise its prices, absent a corresponding rise in costs, to exploit important human needs resulting from a temporary disaster.” I nearly wrote “Eisenberg concluded it is morally improper…”, but then I realized that there was neither prior moral analysis nor even a simple list of reasons. He did not conclude, he simply declared. Eisenberg has expected us to agree to his moral principles without explaining what those principles entail, and then wants us to embed his moral principles in law without explaining the policy analysis that justifies the move.

I’m not persuaded. Moral values are diverse in any population, so what justifies Eisenberg’s proclamation? For what’s it is worth, I bet that in many cases in which he feels price increases are wrong, I feel the price increases are okay. Why should I assent to laws embedding his moral views? Unfortunately, Eisenberg doesn’t explain.

REFERCENCE: Eisenberg, Melvin A. (2009), “The Principle of Unconscionability.” UC Berkeley: Berkeley Program in Law and Economics. Retrieved from: http://escholarship.org/uc/item/77h162nt.

[The remainder of the Eisenberg essay addressed issues of transactional incapacity and unfair persuasion, elements that raise procedural unconscionability concerns, but don’t relate to price gouging issues. I recommend the interested reader look at Richard Epstein’s paper, “Unconscionability: A critical reappraisal,” which explains a small scope for post hoc unconscionability review of contracts to help police for procedural problems in contract.  See: Epstein, Richard A., (1975) “Unconscionability: A critical reappraisal,” Journal of Law and Economics. JSTOR: http://www.jstor.org/pss/725297.]


5 thoughts on “More on Unconscionability and Price Gouging Law

  1. Thanks for this analysis, Michael. And thanks for bringing to my attention the disparate legal treatment of fortuitous rescue vs. salvage rescue. I wasn’t aware of that, but it’s useful.
    The distinction gets at something about both the moral desert of the sender and the incentives necessary to bring him to market. All else being equal, high prices serve as a way to reward people who put effort into being in a position to rescue others, and to encourage more people to do so.
    But this, of course, is only one of the social functions of high prices. Such prices also play a role on the demand side, encouraging consumers to conserve. Eisenberg’s analysis seems to leave this half of the equation out.
    And, as your attempt to apply the analysis to gasoline retailers demonstrates, there are huge and I suspect insurmountable knowledge problems in determining whether a given retailer is more like B or S. So while a distinction between ‘deserving’ and ‘undeserving’ vendors might be useful for moral analysis, it’s probably close to worthless as a basis for public policy.

  2. Reliance on disaster and residing in harm are somehow considered immoral…it’s not an actual jump, so there wasn’t much to say. On the other hand we provide currencies which it’s possible to run into scarcity of, as a mere convenience to material sensibility.

  3. Then there’s the “encourage the others” issue of incentives.

    If in the first case B cannot collect his million dollars for driving A twenty miles (to put some numbers on the case) and only gets a thousand dollars (and loses money overall due to the cost of the suit) that news will get out.

    Thus when B2 sees A2 stranded by the side of the road, B2 may reason “I can only get a thousand dollars from A2 no matter what A2 says. That’s not enough to compensate me for the risk that A2 is crazy or smells or will steal my car. So I won’t even stop to see what A2 will offer.” B2 drives on and A2 dies.

    Ditto for B3 and A3, etc.

    This doesn’t argue for honoring the literal contract but it does motivate having very large sums be “conscionable”, based on what the various A’s would be willing to pay to avoid the greater harm and on what sums are required to motivate the B’s.

  4. My understanding from reading Eisenberg is that he would favor awards of large sums – full costs including opportunity costs plus a large amount to assure that incentives remain sufficient. Individual cases will be fact-based, but after all possible costs of rescue are covered AND the rescuer gains an additional, say, $25,000 instead of the contracted additional, say, $100,000. The presumption is that the reduction of $75,000 simply avoids some transfer of surplus from A to B and doesn’t affect the likelihood that B2 offers to rescue A2, etc.

    In these examples I don’t feel too strongly about enforcing the contract as agreed, but price gouging cases (say gasoline prices shooting up during a supply disruption) seem quite different from fortuitous rescue cases.

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