Price Gouging. What is it, can it be stopped?

In her initial speech on economic policy, Kamala Harris announced plans to ban price gouging, specifically to combat “the excessive prices unrelated to the costs of doing business that Americans have seen in the food and grocery industry” and to crack down on mergers and acquisitions to maintain competition in the food industry. [link below] The proposal met with immediate criticism by industry groups and economists. New York Times commentator, David Brooks, accused the Democrats of “economic illiteracy.” [links below]

I suggest Brooks and the industry economists he relies on are the ones who need a refresher course in 21st-century economics. They start with the assumption that today’s markets are economically competitive, meaning they respond efficiently to changes in supplies and consumer demand. This is not true in the U.S. and hasn’t been true at least since the 1980s. The only way consumers can be assured they are getting the products they need and want at the most affordable prices is to maintain economically competitive markets.

This means there must be enough alternative sellers of the same basic product that no seller can charge prices higher than their operating costs plus just enough profit to stay in business. [link below] When three or four large corporate organizations, such as Walmart, Kroger, and Albertsons, control more than half of supermarket sales, they can keep market prices well above their costs of doing business, meaning the retail food market is not economically competitive. This lack of competition exists in food processing and virtually every sector of the agri-food system between farmers and consumers. [link below]

Price gouging is typically associated with market disruptions, such as COVID-19, but can also be ongoing in markets that are not economically competitive. [link below] It is not economically illiterate to recognize that price gouging exists and can cause lingering inflation in retail prices.

Brooks accused Democrats of being hypocritical by thinking that markets were working fine back during the Clinton and Obama administrations, but now blaming the same corporations for price gouging. He is right in one respect. The economic advisors to Clinton and Obama bought into the neoliberal “consumer welfare” theory of market regulation. Corporations were allowed to consolidate and control as much of markets as they could, as long as they didn’t raise prices faster than an “acceptable” rate of inflation.

The previous administrations ignored a basic economic principle, going back to Adam Smith. If corporations are allowed to gain the power to exploit consumers by raising prices, sooner or later they will use it. During the COVID-19 pandemic, corporations saw a prime opportunity to use their power to raise prices and increase profits, and they did it. It's not that Democrats have changed their views about the excessive power of large corporations, it’s just that the Democrats currently in positions of power have changed their economic advisors.

When COVID-19 shut down large segments of the economy, supply chains were disrupted, and the supplies of products were inadequate to meet consumer demand at the existing prices. The logical economic response was to raise prices to whatever price level it took to ration the available supplies. The market-clearing prices were well above the cost of production, but production couldn’t get through the supply chain. Those able to pay the higher prices got the products. The rest were left without.

Price gouging occurred in this case because there were too few alternative suppliers and too few alternative supply chains.  In the case of food, the large food retailers were dependent on equally large food processors and producers with no alternative means of getting their products to consumers. With large processors shut down because of COVID-19, the entire agri-food system was on the verge of collapse. People must eat, regardless of cost. Food retailers took advantage of the situation by charging prices as high as the market would bear.

Supply chain issues were eventually resolved but the corporations continued to raise prices, keeping retail prices well above their costs of production and higher than competitive markets would have allowed. Overall, corporate “profit margin increased from 11.3% in 2020 to 19.2% in 2021. Thereafter, this quantity steadily declined and reached 15.1% in the last quarter of 2022, a value comparable to the one immediately after the Global Financial Crisis.” [link below]

Some analysts blame “Greedflation” as much as half of recent consumer price inflation while others claim that price gouging has not been “the major cause of inflation.” Some of the increase in retail prices has been caused by higher costs of production, but price gouging also persists. There seems to be general agreement that prices have gone higher and stayed high longer than would been possible with economically competitive markets. That’s price gouging. [links below]

What could a Harris administration do to prevent price gouging? The first thing most people think of is to impose price ceilings or price controls. Price ceilings can be effective in preventing price gouging during crises, such as COVID. Hurricanes, tornadoes, fires, floods, and extreme temperatures are more common supply chain disruptors. If prices are allowed to rise to whatever level the market will bear, those without enough money to compete will be unable to meet their basic needs.

This is a “market failure” because the market leaves people who can’t pay the higher prices unable to meet their basic human needs. In such cases, the government has a responsibility to ensure the that basic needs of all are met. However, if the government places a ceiling on market prices to prevent price gouging, it must also set up a supplemental supply and distribution system that ensures that the basic needs of all are met. In the absence of other government interventions, “black markets” will eventually emerge to circumvent price ceilings.

Dealing with ongoing price gouging will require a change in enforcement of antitrust policy. The Biden administration has done more than any previous administration since the 1980s to limit the market power of large corporations. Harris has promised to oppose further consolidation in the food industry. However, it will take an administration committed to “trust-busting” or corporate break-up, like that of Teddy Roosevelt, to address ongoing corporate price gouging. The odds of moving in that direction are better with a Harris administration than an administration that has vowed to deregulate the economy.

John Ikerd

Price Gouging/Harris: https://www.forbes.com/.../what-is-price-gouging-heres.../

Brooks: https://www.youtube.com/watch?v=qKhghxVUhBs

Competitive Markets: https://www.foodsystemsjournal.org/.../art.../view/1151/1124

Corporate Consolidation: https://farmaction.us/concentrationreport/  

Greedflation: https://fortune.com/.../inflation-greedflation-consumer.../ 

Corporate Profits: https://www.federalreserve.gov/.../corporate-profits-in...