Price-gouging?

The Washington Times ^ | 9-29-05 | Richard W. Rahn

[JZelle]

If you bought a home 10 years ago for $100,000 and just sold it for $300,000, have you engaged in price gouging? Most people would say "no," provided there were willing buyers and sellers of both sides of the transaction merely responding to the market at the time. As a result of hurricanes Katrina and Rita, some politicians have demanded prosecution of "price gougers." In many states, like Florida, "price gouging" is illegal. The Florida statutes say, "It is illegal to charge unconscionable prices for goods or services following a declared state of emergency." Hmmm, I know what the law means when says burglary or murder are illegal, but an "unconscionable price"? So I looked in Webster's Dictionary, and found unconscionable is defined as "excessive; extortionate" and gouge is defined as "to extort from or to swindle." As an economist, I know prices allocate scarce resources (like gasoline) and motivate future production. At some price, the quantity demanded and the quantity producers are willing to supply come together. If that price is high enough to provide producers a profit, they will be motivated to produce more.

[mysterio]

Here's one : Muncie. A whole penny of difference between all of the stations. And most raised it at about 7:30 AM. All at about the same time.

Muncie

Gee, I wonder how they all knew to raise the price? I watched it happen. But that's not collusion. It's just coincidence.

I'm sure the info will change, so at the time I'm posting this, every station in town is $2.85 or $2.84, and the one that's $2.79 was recorded as the big coincidence was happening.

[mysterio]

Wow! you're right! there's a whole 3 cent difference in anderson at one of the stations!

[FreedomCalls]

I'm sure the info will change, so at the time I'm posting this, every station in town is $2.85 or $2.84, and the one that's $2.79 was recorded as the big coincidence was happening.

That's BS! You are just looking at the lowest prices all lumped together. If you select highest and lowest prices you will see that the price differs from a high of $3.19, $3.15, $3.09, $3.05 (one station each), $3.04 (three stations), $3.03 (seven stations), ... all the way down a penny at a time to $2.74 (six stations), $2.73 (four stations), $2.69 to $2.65 (one each). Not by a long shot is "every station in town" charging the same price to the penny in Muncie.

[Blessed]

>I'm sure the info will change, so at the time I'm posting this, every station in town is $2.85 or $2.84, and the one that's $2.79 was recorded as the big coincidence was happening.<

Not hard to understand.Wholesale price is current market price same as with all commodities.Any price competition is among retailers.With margin beat down every one sets price based on low price leader.If their was really collusion retailers would get together and set prices at a level at which they could make a profit rather than current levels with virtually no margin.

[FreedomCalls]

Anderson is a small town. Of the five stations in town, two are charging $2.85, two are charging $2.84, and one is charging $2.82. They're not the same.

[wgeorge2001]

[There is no competition in the oil market, so I cannot buy cheaper gas from a different station.]

Amen, brother. We are being gouged by an oil conglomerate consisting of 5 or 6 supposed independent corporations. Reminds me of old ma bell before it was split up by the government and that is one of the few times I was glad to see the government protect us from the evil of money mad conglomerate powers.

[gogogodzilla]

Consider that Exxon has earned roughly $10 billion in profit in just the last quarter, and that this quarter's profit are expected to be higher.

I seriously doubt that, even WITH all the red tape, a refinery costs more than $20 billion to build.

[Rodney King]

I seriously doubt that, even WITH all the red tape, a refinery costs more than $20 billion to build.

That is totally and completely irrelevant. The fact that Exxon has a lot of money, or makes a lot of money out of different operations, has nothing to do with whether or not it should engage in a long and costly process that will probably result in failure to build, after millions spent on lawyers.

[Blessed]

>Consider that Exxon has earned roughly $10 billion in profit in just the last quarter, and that this quarter's profit are expected to be higher.<

What is their ROI?

[Rodney King]

consisting of 5 or 6 supposed independent corporations

Too bad that's just not true. Haven't you seen gas for sale by Walmart? Albertsons? Costco? 7-11? Love's? Pilot? Flying J? Citgo? Hess? Valero and/or Diamond Shamrock?

[Rodney King]

Here's one : Muncie. A whole penny of difference between all of the stations. And most raised it at about 7:30 AM. All at about the same time. Gee, I wonder how they all knew to raise the price? I watched it happen. But that's not collusion. It's just coincidence.

You know what happens at 7:30? The managers of the stations wake up and drive around town to see what everyone is selling gas for. What makes you think that gas stations make pricing decisions without regard to what others are doing? Are you suggesting that if you ran a business you wouldn't look into what your competitors were doing to know if you needed to lower price?

[gogogodzilla]

It's a free market. And a free market dictates that when demand exceeds supply, the price rises. ADDITIONALLY, because of the increased price, more supply is created and the market again reaches an equilibrium.

And the gasoline market has more demand than supply. Which is illustrated in the high price of gas. Therefore, any business in the market will do whatever it takes to create more supply.

Unless you don't believe that the free market will solve the problem?

[spacewarp]

He's missing a few things.

1) Joe's Gas Shack is charging $2.50/gallon of gas. Down the street, Jack's Gas Shack is charging $2.55/gallon. Joe's next shipment is coming in. He knows that the price is going up. So, to spread the cost increase thinner, he bumps his gas price to meet the $2.55 that Jack is charging. Granted, in the short-term, he's going to make a few dollars more. But, down the road, he doesn't have to raise his prices to $2.56/gallon and be less competitive.

2) BP knows the prices for each station they have in a district. They know the Exxon stations just dropped prices $.05/gallon. They also know that it will affect the purchasing of some of their customers. They take the bite and call the stations and tell them to drop prices $.05/gallon to compete.

3) Sheetz comes to town. They open their new station, and to get people in the door, they open with a major loss leader, their gas. So, while everyone else is charging $2.50/gallon, Sheetz comes in and charges $2.19/gallon. All the nearby stations know they can't compete with that cost, so they drop their prices either to $2.19/gallon or as close as they can. The ripple works out to about a 7 mile radius. Eventually, Sheetz stops with the loss leader pricing and the market levels back out at somewhere around $2.45/gallon.

Price wars happen in the gas market.
Pricing does get influenced by the distributor.
The free market DOES work.

Somewhere, he forgot about the simple concept called economics.

Paul

[Rodney King]

Unless you don't believe that the free market will solve the problem?

What I believe is basic capital budgeting i.e. the amount of money that you have has nothing to do with whether or not a certain capital project is worth undertaking. I also beleive that vast uncertainty about the costs or timing of a project severly effects the decision-making process as to whether to undertake a project.

[Protagoras]

People are compelled to buy energy and don't have a choice not to.

Same with food, clothing and shelter.

And I dispute the notion that people don't have a choice on how much to spend on gasoline. Car pool, walk, stay home, buy a smaller car, get a bike, public transportation, etc.

But those are inconvienient choices. And it was amazing how quickly people changed their behavior when I was young and prices were this high.

Seriously good graphics, though.

Thanks! I couldn't find any conspiracy theory tin foil ones though,,,,,:^(

But I use graphics to bring a sense of humor to these topics. Some don't get it, for them, I use this one.....

[Neoliberalnot]

I suggest you insulate yourself against rising energy prices by buying high quality energy-related stocks. Money made here will offset higher retail prices. These are mostly publicly traded companies with millions of shareholders. Besides, the amount I pay for gasoline is a pittance compared the 50% of my income in all taxes, including the gasoline.

[petercooper]

[Neoliberalnot]

Very good. Your graphs support the view that I am not the only one that saw a need to buy more energy stocks. Do you have any verbal comments or do you speak only graphics? Sorry, I was being flippant, but your point is well taken.

[NYFriend]

First off, don't rely on the Consumers Union piece, consistent data are found in the GAO report.

Second, the CU report makes the case that you don't need collusion. Market concentration plus a little semi-Game Theory decision making gets you there without collusion.

In essence, the report says that there is no disincentive to running a little short in supply over the short-term, because no one can step in quickly enough to replace that lost supply fully enough to keep prices down. In other words, assume demand is inelastic in the short-term. If supply runs short, there are few replacement goods, strong barriers to market and limited competition, gasoline companies don't lose money when they run short on supply, the price goes up and any lost sales are offset by the higher margins.

Therefore, each company can cut back on refining and reserve capacity, without fear of losing money because supply shortages don't cost them money. If there was a healthy market, a lot of competitors would be looking to undersell each other. They would be ready exploit one company's inability to meet their regular level of supply. When there were no shortages, excess capacity would lead to larger than needed reserves. This extra gasoline would be sold to the independents who keep the big guys honest by offering the lowest possible prices.

[Rodney King]

OK, I'll take another look sometime today.