Congress Tells FTC to Define Price Gouging

By Steven Mufson
Washington Post Staff Writer
Saturday, May 6, 2006

If there's one thing that members of Congress can agree on when it comes to energy it's this: They're opposed to price gouging. American motorists aren't crazy about it either.

The only problem is figuring it out what it is.

In a measure passed overwhelmingly by the House this week, lawmakers proposed penalties for price gouging -- to $150 million for wholesalers, $2 million for retailers and two years in jail for either -- and ordered the Federal Trade Commission to put a stop to it. The House measure also called for the FTC to define price gouging.

"One of the problems with price gouging is that there are a lot of different definitions of what price gouging is," said Jeffrey Schmidt, director of the FTC's Bureau of Competition. "It's not as though there's a consensus view."

In a recent blog entry, Edward Lotterman, an economist who writes a column for the St. Paul Pioneer Press in Minnesota, wrote that anyone trying to define price gouging should consider the following examples: "Paying $12 for two thin slices of cold greasy pizza and two small Cokes in an airport departure concourse; my neighbors selling a house for eight times what they had paid for it years ago; Twin Cities apartments renting for $150 more per month than a year ago; me charging $200 per hour as an consulting expert in a legal case when I get less than $50 per hour teaching at Metro State University."

Economists don't even use the term price gouging.

"Many economists cringe when they hear politicians talk about price gouging," said N. Gregory Mankiw, an economics professor at Harvard University and former chairman of President Bush's Council of Economic Advisers. "To economists, the price system is central to how market economies allocate resources. Sometimes prices need to rise to balance supply and demand, even if that outcome is politically unpopular."

No federal statute prohibits price gouging now, said Rep. Joe Barton (R-Tex.), chairman of the House Energy and Commerce Committee. "It's true that we all think we know price gouging when we see it, but that's not the sort of definition that a prosecutor can take to a judge or jury," he said. "We're here to put the gougers out of business, if there are gougers, or behind bars."

Traditionally, the FTC has played a key role in investigating price fixing or manipulation, offenses that usually involve collusion between two or more players in a market who conspire to reduce competition so they can increase prices. There are many people who allege that major oil companies have engaged in such a plot by limiting output by oil refineries. Schmidt said the FTC was conducting "a very serious substantial investigation that is examining whether there has been unlawful gasoline price manipulation."

But price gouging is something that usually involves one company or outlet taking advantage of temporary market conditions to charge an exorbitant price. As gasoline prices are going up by the day, many people think that's what's going on now.

In a competitive market, that wouldn't be possible -- at least not for long. Consumers would go to some other seller, demand for the price gouger would dry up and he would cut his prices.

"Typically we rely in our economy on prices, which play an important role in signaling suppliers to produce more or less of a product," Schmidt said. "In a competitive market, as a rule we don't talk about price gouging or regulation because we don't want to interfere with that market dynamic. No one wants to punish a firm when it's responding to the dynamics of a competitive market."

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