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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."

Mankiw said that just because someone buys cheap and sells high doesn't mean that person is price gouging. A gasoline retailer who raises prices on a cargo he already had in his tanks is no different from someone who sells a house for well more what was paid for it years earlier.

Last November, FTC Chairman Deborah Platt Majoras testified before a Senate committee that "price gouging laws that have the effect of controlling prices likely will do consumers more harm than good." She added, "the commission remains persuaded that federal price gouging legislation would unnecessarily hurt consumers. Enforcement of the antitrust laws is the better way to protect consumers."

Though the FTC has in the past avoided coming up with a definition for price gouging, many state governments and attorneys general have defined it. Usually the definitions are limited to pricing actions taken during emergencies or catastrophes, such as hurricanes. In Florida, the attorney general's Web site explains that Florida law "compares the price of the commodity or service to the average price charged over the 30-day period prior to the declared state of emergency. If there is a 'gross disparity' between the prior price and the current charge then it is price gouging."

But what's a "gross disparity"? "Gross disparity would be determined by a jury of Floridians," said Charlie Crist, Florida attorney general and a Republican candidate for governor. "I don't think it would be too hard to give it some significant definition in the mind of a juror who would probably be very upset with someone trying to take advantage of a catastrophe."

Crist, whose office has a toll-free price gouging hotline, said he called representatives of five major oil companies to his office this week as part of an inquiry into whether oil company mergers had reduced competition and violated antitrust laws. "I don't think it's rocket science," Crist said. "I don't think there are secret agreements among them. All they have to do is go out and look at the sign across the street to see what's happening."

He added: "I'm all for profits, but not for profiteering."

Some federal investigations have pointed toward oil company manipulation. A Senate committee investigation in 2002 alleged that at least some big oil companies had tried to limit supplies to boost prices. In 2004, the Government Accountability Office concluded that the wave of oil industry mergers in the 1990s had indeed reduced competition and led to higher prices, albeit by amounts that seem like mere drops in the tank now. The GAO study said that oil mergers had contributed to gasoline price increases of as much as two cents a gallon on average nationwide.

The question of whether oil companies consciously limited refining capacity to drive up prices would fall under established case law on price fixing and antitrust. When it comes to defining price gouging, Congress has passed the burden to the FTC.

"Beyond this, all is the fog of bad and devious legislation," said William D. Nordhaus, a professor of economics at Yale University. He said that for the FTC to come up with a price gouging definition "will presumably involve rule-making, which will require all kinds of cost and benefit inquiries, and will not emerge until after the election, or even after gas prices have declined."

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