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On Price Gouging and the Non-Ideal Theory of Fair Price


Luke Herrine (@LDHerrine) is Assistant Professor of Law at the University of Alabama and a former Managing Editor of the LPE Blog.

Here’s a bit of good news: last month, the New York Attorney General’s office began a rulemaking to elaborate the standards it will apply in enforcing New York’s unusually broad and well-written price gouging law. In her role as Senior Council for Economic Justice, LPE ally Zephyr Teachout is leading the effort. An Advanced Notice for Proposed Rulemaking (ANPRM) went out on March 3, with comments due this Friday, and a draft rule is expected to be announced in a few months.

Price gouging laws are relevant to a number of discussions that have been part of the LPE ecosystem. They implicate questions of moral economy and just price. They provide a tool to manage price surges without suppressing production, employment, and wage demands. They function as “price controls”, a bugaboo of mainstream economists but a central part of the Realist and Institutionalist projects of “freedom through law”, so they implicate questions of economic method. And, oh, what’s that? We’ve actually already hosted blog posts from Ramsi Woodcock on the very topic.

I submitted a comment in response to the ANPRM that builds on these discussions. In it, I begin to sketch out what a contemporary theory of fair price (or “just price”) could look like, using price gouging as a case in point. Since I thought it might be of interest to folks following one or more of these discursive threads, I’ve adapted an excerpt below.

Fair Price and Economic Theory

If one spends too much time around mainstream economists, one might be inclined to think the whole idea of a state enforcing norms of fair price is either redundant or perverse. In standard economic thinking, if “fair price” means anything, it means an “efficient” price, i.e., the price that emerges from the unplanned equilibration of supply and demand in a “perfectly competitive” market embedded within other “perfectly competitive” markets, such that all factors of production (including workers) are paid their marginal contribution to a maximized total social surplus. Thus, to enforce a “fair price” is a matter of setting up a social system in which nobody has the power to determine which price is fair–only “the market” as a whole can do so through the “signals” that prices send about the relative social priorities for different allocations of resources. To say that such a price is “fair” is redundant, since it tracks the (allegedly) more precise concept of efficiency. To attempt to enforce a different notion of fairness is perverse, since it risks “distorting” the “price mechanism”, inviting not just inefficiency but shortages, hoarding, rationing, black markets, and other horribles.

But we know better than that. There is no preexisting market process in which a state can choose to intervene or not. Rather, “the state” is always involved in determining how prices are set in various ways. Robert Hockett and Roy Kreitner illustrate: “On the obvious side, public employment and procurement effectively benchmark prices for some of the most important goods and services in the putatively privately ordered economy. Similarly, changing background rules make all the difference in pricing many of the most important market interactions. It is hard to imagine pricing pharmaceuticals without patent law; impossible to make sense of real estate prices without local zoning ordinances; incoherent to consider the price of medical care without insurance law.”

And (to bang on Sanjukta Paul’s drum) even the process of price formation through market competition among private firms is structured by “the state” through law, when–through property, corporate, antitrust, labor, securities, etc. law–it determines who has control over the prices of which output over which period of time at which stage of the production process, who must be consulted and who may not be, etc. Market participants develop their own price governance institutions in the shadow of the law so that, whether publicly or not, price setting is always governed–that is, it is the subject of ongoing coordination by those with power in the relevant market. (NB: governance can involve competition! But it cannot only be competition.)

If there is no pure (“efficient”) price that merely reflects the intersection of preferences and costs, we need another normative north star. Why not justice, or, more colloquially, fairness?

To ask about fair price is to ask how to ensure that the governance of prices in a given context appropriately balances the interests of those affected by those prices. In the real world this is an inevitably piecemeal and pragmatic inquiry. If one thinks about the matter too abstractly, it would seem that no price is fair until full justice is achieved; fair prices are just those that emerge out of a just social system. But then we’d be back where we are with neoclassical theory: painting elegant pictures of angels on pins. We need non-ideal theory.

Practical efforts to police prices for fairness focus on making prices fairer, not necessarily fair in some all-things-considered sense. They manage the way prices are set in a given set of markets to balance the socially recognized interests of the parties in those markets. Where fair price regulation is most visible is where the legal system aims to correct for imbalances of power between buyers and sellers in a market. In doing so, fair price regulation manages the contingent ways a social system shapes a market in question. Usually inequalities of power will have been created by other parts of a social system, and the goal of fair price regulation is to minimize their impact on the price setting process in a given markets. Once one has an eye to look, one can find examples of regulation of this sort all over the place. Minimum wage laws, collective bargaining laws, rent stabilization laws, utility price regulation, anti-discrimination laws, tariffs, anti-manipulation rules on organized exchanges, unconscionability doctrine, and on and on. All aim to correct for imbalances of power that tip decentralized bargaining in favor of some parties.

(Notice I didn’t say they aim to correct for “market failures”! Many aim to correct for the efficient operation of the price mechanism, which, as everybody agrees, sorts people by ability to pay and to bargain.)

Fair Price and Price Gouging

So what about price gouging laws in particular? As New York’s statute puts it, price gouging laws are concerned with “abnormal disruptions”. They are one tool to ensure that the burdens caused by disruptions of the normal operation of the social provisioning process are shared fairly. In particular, they prevent disruptions in consumer markets from disproportionately harming the most vulnerable (promoting intra-consumer fairness) and/or from allowing those with power over social provisioning to profit off of common vulnerability (promoting seller-consumer fairness).

High prices during a disruption raise fairness questions even when those prices reflect increased costs caused by the disruption. In a system of persistently unequal incomes, high prices tend to be most harmful to those who are already vulnerable, either pricing them out of a market or forcing them to pay money that is relatively more valuable to them (especially if their sources of income and/or access to payment systems have also been disrupted). In a market for essential goods like food or water or fuel or electricity or healthcare, being priced out has especially high stakes and being forced to pay high prices (given the highly price-inelastic demand for such goods) will mean being forced to confront potentially deadly trade-offs. As Sabeel Rahman has emphasized in a different context, the moral urgency of prioritizing everybody’s basic survival before anybody’s luxury also makes fairness concerns about the availability of essential goods a particularly apt focus for officials charged with protecting the public interest.

Additionally, if firms are taking advantage of unhinged price expectations to increase their own prices, that can create a profit-price spiral or “profit-push inflation”, in Gardiner Means’s terminology. Intervening in this cycle with price gouging enforcement can both lower certain prices in the short term and prevent broader and recursive price increases (something closer to the “general” price increases usually meant by “inflation”) in the medium term, all without throttling production or pushing people out of work.

Due to these and related considerations, there is good reason to be worried about price-based rationing during disruptions (even more so than in normal times). These considerations might even be compelling enough to provide a prima facie case for compelling firms to reduce profit margins or even to take losses with respect to certain goods during emergencies (knowing that firms with access to retained earnings, capital markets, and the possibility of cross-subsidizing by raising prices on other goods can well survive temporary dips in earnings). Taking such an action could, of course, cause perverse consequences–from collapsing a market altogether (in the worst case) to promoting panicked buying by the best-informed consumers to interfering with the investment necessary to increase supply—so care is required. It is perhaps not the ideal territory for price gouging enforcement acting alone, but rather a more multifarious approach, with price controls supplementing emergency subsidies, releasing of stockpiles, and the like. (We are setting aside possibilities of rationing through non-market means, since those do not require price gouging regulation!)

Perhaps for this reason, price gouging laws tend to target a source of unfairness that layers on top of these: firms taking advantage of the disruptions caused by an emergency to increase their profits (or to maintain profits that are higher than necessary to cover costs and attract investment). Exactly the spikes in demand (both changes in composition and changes in price elasticity) that make price-based rationing itself problematic make it easier to charge higher prices even when doing so is not necessary to cover costs. And the confusion that follows an emergency can make it easier for firms to increase prices without facing as much of a reputational cost as they usually would (contrary to the impression one might from thinking in terms of market equilibrium, firms often maintain medium-term price stability even when doing so is not the short-term profit-maximizing strategy so as to maintain customer loyalty). What is more, if disruptions are of sufficient scale and scope, they can heighten the advantages of incumbents by raising barriers to entry or even to new investment. All of which makes it easier for firms to increase prices without being punished by consumer exit.

Policing this type of advantage-taking by firms involves its own balancing act, but, in principle, it is a simpler practical and moral task than policing high prices due to increased costs. (In practice it may require enormous data collection, which creates its own set of issues.) It presents all the same intra-consumer and consumer-seller fairness concerns plus the additional consumer-seller fairness concern that the price charged is even more than necessary to manage the cost of disruption (over and above the normal cost of provision). There is also the practical consideration that preventing firms from charging higher prices than necessary to bring a good to market will be much less likely to cause the perverse consequences of market collapse or underinvestment. In other words, price gouging regulation that targets high profit margins can work alone to police fair prices without having to coordinate with other tools like investment policy or emergency stockpiles.


Seen in this light, price gouging laws have an important role to play in our collective response to emergencies. Seeing in this light has an important role to play in our collective response to neoliberalism.