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50 comments on The Senate on price gouging

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Stuart Staniford on September 7, 2005 - 1:58pm Permalink | Subthread | Parent | Comments top
I'm not even clear what "gouging" really means. Do we mean simply 1) "making a larger profit than is typical for a business", or do we mean 2) "having excess market power and/or acting anti-competitively in order to make a larger profit than is typical for a business". Obviously the oil companies are starting to do 1), but that seems like an inevitable by-product of the situation in the market, not something unreasonable they are doing deliberately. I don't know about 2), but if there is any of that going on, the appropriate remedy is anti-trust law. And if we are going to stick it to the oil companies, how come we still haven't managed to do anything about Microsoft's outrageous margins (which are clearly due to 2).

It seems to me that the usage in the MSM of "gouging" is mainly 1), and it just reflects a lack of even the slightest economic knowlege.

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Yankee on September 7, 2005 - 2:23pm Permalink | Subthread | Parent | Comments top
Halfin and Stuart, make sure you see the update.
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Halfin on September 7, 2005 - 8:15pm Permalink | Subthread | Parent | Comments top
I'm not quite sure how to react to this display of corporate loyalty (in the "update"). So the distributors are "notoriously greedy and secretive" and struggling gas station owners are "gouging" but the oil companies, his employers, are nothing but noble paragons of virtue! Of course, why didn't I realize it before?

I've got some friends who work for Microsoft and they're the same way. They'll talk your ear off about how the company is unfairly maligned on the net. I guess there's something to be said for allegiance to the team.

As far as his claim that refineries can't raise prices because they are bound by contracts, I believe that's only part of the story. After all, we all know that many refineries are shut down, hence they aren't fulfilling their delivery contracts. Of course there are probably clauses in the contracts for "acts of God" and such, but that still leaves the distributors up the creek. What do they do, if their contracted-for gasoline is not being made available? Do they just go out of business for a while?

No, I believe they have an alternative. They buy it on the spot market. The truth is, although as the insider says much gasoline is sold via contracts such as those traded on the Nymex exchange, a certain fraction is held back and is sold on the spot. This allows for handling variations in demand and unforeseen circumstances. I don't have informed knowledge of the details but that is how these markets generally work.

Prices float in a spot market and are no doubt very high right now, as all the distributors who have been cut off because their refinery partners are not delivering on their contracts fight over the limited pool of available spot market gasoline. This drives up the price, produces a windfall for those refiners which are lucky enough to have some excess capacity, and raises costs for the "notoriously greedy and secretive" distributors.

It may well be true that the distributor market is not all that competitive and many localities have only one or two main distributors. This means that if a distributor is facing high costs, his competitors may be able to take advantage of this and raise prices on their own. So there probably are some cases where distributors are profiting from shortages even when their costs aren't excessive. But ultimately the high prices must be stemming from where the shortages are happening, which is at the refineries.

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RayJ on September 7, 2005 - 4:11pm Permalink | Subthread | Parent | Comments top
Stuart,
In general, I think gouging laws tend to assume 2) is always the reason for 1).  Also, note that the gouging laws tend to apply only during declared emergencies.  As such, price rises before Katrina and Microsoft's pricing cannot be addressed under gouging laws.

On the issue of profiteering, which is what Microsoft and the oil companies may be accused of, it is very difficult to prove and obtain a guilty decision, given the power and political connections of these companies. As a side note, the breakup of Standard Oil was a close run thing and, according to Yergin's account in his book, The Prize, most people were surprised when the Supreme Court found in favor of the government and ordered the breakup.  It probably would have ended differently had Roosevelt himself not taken a personal interest and "fanned the flames of public outrage".
 

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50 comments on The Senate on price gouging

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