Price Gouging: An Unethical Practice
Price gouging is an unethical practice by which sellers charge higher prices for goods and services in order to increase their profit margins. It occurs in both public and private markets, but is most commonly observed during a disaster or other emergency.
Supply and Demand in Competitive Markets
In a competitive market, supply and demand drive prices. If one supplier raises the price of an essential item, it will entice others to do the same. In an emergency, price gouging may be more difficult to prevent because of the increased competition among sellers.
Encouraging Fair Allocation and Discouraging Hoarding
If price increases are rationed to those who need them most, it may discourage hoarding and encourage a fairer allocation of the most vital supplies. High prices also may exacerbate self-selecting - those who have the most immediate need for a particular product will buy it first.
Laws to Combat Price Gouging
Laws to combat price gouging vary widely by state and can apply to products and services that are usually essential, but that become more critical during an emergency, like personal protective equipment ("PPE") used in fighting the coronavirus (COVID-19), hand sanitizer, and food and water.
Encouraging Cooperation and Minimizing Greed
A good society, however, seeks to minimize excessive greed and to encourage cooperation. In times of crisis, people tend to pull together to help each other out and to minimize the suffering that they can. When people exploit one another for personal gain, they deprive the community of its collective strength and ability to survive.
The Consequences of Price Gouging
When price gouging occurs during a natural or public emergency, the consequences can be severe. For example, gasoline retailers have faced fines for charging unreasonably high prices during hurricanes and other emergencies. Similarly, hotels and restaurants are sometimes subject to legal action for overcharging for room rates and food. The cost of bottled water has also been an issue for many consumers.
Understanding the Laws and Seeking Legal Advice
As a business owner, it is important to understand the laws governing price gouging and how to avoid them. If you are unsure whether your pricing strategy is ethically or legally sound, it's a good idea to consult with a consumer protection lawyer. Price gouging can also lead to civil litigation by the Federal Trade Commission and other government agencies. Depending on the jurisdiction, these agencies can issue restraining orders or take other measures to protect consumers.
The Definition and Legitimacy of Price Gouging
The term "price gouging" was coined in the 1930s to describe an unconscionable increase in the price of a commodity when its value had previously been low. This is considered a violation of state or federal laws and can be prosecuted under civil or criminal law. In an emergency, suppliers of a particular product may not be able to predict the level of demand and therefore cannot adjust their production or transport costs to make up for the shortfall. In such circumstances, price gouging may be a legitimate response to the problem.
Varied Regulations: Need for Legislation
While most states have enacted legislation prohibiting price gouging during a declared state of emergency, other areas do not. This means that in some cases, the only way to stop price gouging is for a local or state government to enact its own law.
