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HomeMarketEggs, Gas, Tickets: When Do Soaring Prices Become Gouging?

Eggs, Gas, Tickets: When Do Soaring Prices Become Gouging?

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While overall inflation has been falling, Americans are still feeling the pinch of higher costs for many items. In the case of egg prices, which have climbed faster than almost everything else in your grocery store, the squeeze might feel more like a bear hug. 

Egg prices have soared nearly 60% from a year ago, according to the consumer price index. The average price of a dozen Grade A large eggs has reached $4.25 in December, up from $1.79 one year ago, according to the Bureau of Labor Statistics. While an outbreak of avian influenza was the primary reason behind a shortage that led to higher prices, at least one group says egg producers have been fixing the price to gouge consumers.

In a letter sent to the Federal Trade Commission last month, Farm Action, a farmer-led advocacy group, claims that the “real culprit” behind the increases in egg prices is “a collusive scheme among industry leaders to turn inflationary conditions and an avian flu outbreak into an opportunity to extract egregious profits.”

Cal-Maine Foods,
the nation’s largest egg producer, denied the allegations and said it doesn’t set retail egg prices. “The domestic egg market has always been intensely competitive and highly volatile even under normal market circumstances,” the company wrote.

Price-gouging accusations have been lobbed at others, too. As the pandemic, extreme weather, and Ukraine war disrupted the supply chains, many products have become scarce. Prices surge, and profits often follow. Oil and gas companies, for example, have been criticized by President Joe Biden and other lawmakers for profiteering from the war. Those companies don’t see it that way, and—in some cases—they have a point.

Economics 101 dictates that price is the best way to allocate resources. In a free market, prices are supposed to increase when demand goes up or supply runs short. But when are high prices normal and when does it become unfair?

The short answer: Price gouging is in the eye of the beholder.

Generally speaking, price gouging is when companies or individuals charge exorbitant prices for a given good, service, or commodity—often after a sudden surge in demand or plunge in supply. The term usually applies to the price of essential items, such as food and shelter, especially during times of crisis. 

But it can be difficult to draw the line between normal market reaction to supply and demand and price gouging.

While most would agree it’s unfair and unethical if a drugmaker hiked the price of treatment for a life-threatening condition or an airline boosted the price for flight tickets after people had been ordered to evacuate an area under dangerous conditions, it isn’t necessarily illegal. Other cases are fuzzier. Are eggs and gasoline considered essentials? Does a war in Ukraine or a bird flu outbreak count as a crisis for Americans? 

Even when the products involved aren’t absolute necessities and there’s no crisis whatsoever, rising prices can lead to heightened emotions and accusations of gouging. 

For example, when Bruce Springsteen fans saw the best seats for his 2023 tour selling for as high as $5,000 on Ticketmaster due to high demand, many were deeply upset. But was it a case of gouging? The Boss himself didn’t call it that, telling Rolling Stone “most of our tickets are totally affordable.”

“I view price gouging as a subjective, reactive emotion to a change in price, and it’s a reflection of a feeling of being taken advantage of,” says Rafi Mohammed, founder of Culture of Profit, a consultancy that helps companies develop and improve pricing strategies and author of books on the subject.

“There are emotions associated with price,” he explains. “If I get a good deal, I’m happy. If someone changes a price much higher than what I expect to pay, I feel taken advantage of, even though the market condition might have changed. But that reaction is often not rational.”

One example is people’s different attitudes toward dynamic pricing, a system where computer algorithms adjust prices for the same product based on real-time demand.  

Hotels and airlines have been dynamically adjusting prices for years and it has become a widely accepted practice in those industries. But when Uber and Ticketmaster started to use the same model, people reacted negatively. “Every time there’s a change in a new industry, people immediately get upset, but they’ll eventually adjust to it,” says Mohammed. 

There is no federal law against price gouging in the U.S., but many states have their own statutes or regulations that prohibit excessive price increases of basic necessities during a declared state of emergency. California, for example, places a 10% cap on price increases.

Up until 2020, state anti-gouging laws were almost exclusively triggered by natural catastrophes, such as hurricanes, floods, or wildfires, within a limited region and time period. The Covid-19 pandemic changed that. The impact was nationwide, the state of emergency lasted much longer, and many states adjusted their anti-gouging laws to include more essential products such as face masks and test kits, or even toilet paper.

But those laws can be difficult to enforce due to a lack of price oversight. Many statues also contain exceptions where price increases can be justified by rising cost of supply, transportation, or storage.

“In spite of its popular support amongst consumers when it was passed, California’s anti-price gouging statute has rarely been used to prosecute violators,” wrote Spencer Warkentin in a paper published in the Maryland Journal of International Law last year.

Instead of prosecution, the primary goal of anti-gouging laws is to stop the conduct, possibly get refunds for consumers, and deter others from doing the same thing, according to a 2022 paper by Patricia Conners, a shareholder at Florida-based law firm Stearns Weaver Miller.

While many applaud anti-gouging policies, economists and policy makers have long debated the drawbacks of such market interventions. Deborah Majoras, former head of the Federal Trade Commission, has said she’s against a federal price-gouging law.

Keeping prices at artificially low levels could encourage hoarding. People at the front of the line tend to buy more than they need “just in case,” further exacerbating the shortage. Scalpers might even stock up on products and resell them at much higher prices. Higher prices could deter such behaviors.

Prohibiting higher prices could also discourage businesses from boosting supplies. After a natural disaster occurs, for example, it might be costly to source and transport extra products to the affected areas. A capped retail price would offer little incentive for companies to move supplies to where it’s most needed if there is no additional profit in doing so.  

To assuage shortages, federal and state governments could provide subsidies to companies that produce and sell essentials during a crisis, says Mohammed. “There has to be incentive for people to work extra hard during this time,” he says. “Not everyone is going to come and do things out of the goodness of their heart.”

That doesn’t mean there isn’t a reason for restraint. Reputation still matters, especially in the age of social media. “These days, someone on Twitter can easily post the price differential, and that could really kill a brand,” says Mohammed.

Some companies have even done the opposite—lowering prices during a crisis—to win over customers. For example, leading up to Hurricane Irma in 2017,
JetBlue
capped the price of its nonstop flights leaving Florida at $99, while other airlines were criticized for increased fares.

“We want those trying to leave ahead of the hurricane to focus on their safe evacuation rather than worry about the cost of flights,” a JetBlue spokesman said at the time.

Write to Evie Liu at evie.liu@barrons.com

Credit: marketwatch.com

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