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Price gouging and the free market

by Bill Osler / September 4, 2005 4:47 AM PDT

I'm not sure what the law is in this area. I'm hoping some of y'all can enlighten me.

My own bias is that, except for regulated monopolies, the government should pretty much get out of the price setting business. Efforts like the misguided California laws regulating the retail cost of electricity illustrate some of the problems associated with clumsy government attempts at price control. IMO, since government interventions are ALWAYS clumsy they are best avoided when possible. Regulated monopolies are a bit of a special case, but that is another discussion.

Anyway, why shouldn't independent gas stations be able to set their prices for gasoline at whatever level they choose? Can't grocery stores charge whatever they choose? Or department stores? Or professional offices (physicians/lawyers/...)? I recognize that there are constraints on physician office charges due to commercial contracts and so forth, but my understanding is that the underlying fee schedule can be whatever the physician wishes as long as the various contracts and provider agreements are honored.

Is there some legal barrier that bars gas stations from setting their prices at whatever level they choose?

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In most states there are gouging laws, Dr. Bill
by Dave Konkel [Moderator] / September 4, 2005 1:34 PM PDT

Not just on gasoline, but on event tickets ("scalpers" are arrested), etc. Here's a discussion about the laws in texas and Florida on price gouging in case of hurricane (both are quite conservative states!)
Price Gouging During a Natural Disaster.

-- Dave K, Speakeasy Moderator
click here to email semods4@yahoo.com

The opinions expressed above are my own,
and do not necessarily reflect those of CNET!

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It's interesting what is and is not covered ...
by Bill Osler / September 4, 2005 10:23 PM PDT

OK, my initial impression is that increasing prices to cover the anticipated replacement cost of inventory is allowed. We can hope that market pressures will force retailers to drop their prices as soon as the anticipated replacement cost falls.

One odd thing is that 'scalping' is a matter of perspective. I visited New York recently and discovered that some of the shows I would like to have seen were already sold out. Never-the-less, it was possible to obtain tickets to many of those shows by having the hotel concierge purchase them from a ticket consolidator/broker at prices (for Lion King) about 60% above base price.

What is the difference between ticket brokering (a legal activity) and scalping (an illegal activity)?

I could argue that the ticket brokers are actually creating worse problems than the small time scalpers that get arrested because the brokers buy tickets in large volume, thus creating or at least worsening a shortage situation and helping to inflate the price of the tickets.

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I can understand gouging as a very local response to
by Kiddpeat / September 4, 2005 11:13 PM PDT

an emergency situation. For example, all the motorists in NO need gas to get out of town before the storm hits. Some gas stations change their price to $100 per gallon. The price the stations have to pay their supplier has not, and will not, change. They can refill their tanks for $2.00 per gallon.

That is FAR different from a situation where 10% of your production capacity is suddenly lost, and demand for the product was already straining the production capacity. This is a situation where prices must rise to put demand and supply back into balance. It leads to widespread price increases which must be made to achieve balance and avoid shortages.

A legitimate price increase does not, however, prevent irresponsible politicians from trying to look like heroes by loudly proclaiming the dire consequences of doing something they don't like. The politicians do not get so carried away as to decrease the taxes being charged on the sale of the product.

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Sort of related ...
by Evie / September 5, 2005 1:28 AM PDT

... to the notion of ''gouging'', but not directly in response to your post Bill. I didn't want to start yet another gas price thread so I thought I would add some comments on pricing and gouging here.

First, MOST stations are independent entities, some of which sell a name brand of ''Big Oil''. Too many people are blaming the oil companies for something they have little control over aside from the price they as vendors charge their distributors (station owners).

I travel back and forth to NY quite frequently and mostly take I-95. There are a few big truckstop fueling stations along the way. One is the ''Pilot'' off Exit 40 just South (West really) of New Haven. You have to get off the exit to go there, and if you're going South this is more of a PITA/detour than if you are going North. It's not all that inconvenient, but it does take a bit more time than going to the Mobils on the highway. Coming North, there is another station you have to pass by to get to the Pilot (Citgo), coming South there is another station that is a left turn vs. a right turn (Shell). The Pilot is quite large and has at least 32 pumps, the truck fueling area is a separate area/entrance entirely. The Citgo services trucks as well, but I've gotten blocked in there a few times because all traffic shares the same entrance/exit, etc. This station has only 8 pumps. I've never been to the Shell, but at a glance it has far fewer than 32 but more than 8. Just to the right of the exit going North is a no-name station. I think they have 4 pumps but there's no pay-at-the-pump, etc.

For MOST of the past two years that I can remember, the Pilot price is the lowest of the three that are together, and if the no-name is less there's usually a traffic jam most can't be bothered to wait through. Pilot is consistently at least 10 cents less than the Mobil on the highway. The Shell price is consistently considerably more -- 5 cents or more a gallon with an 8 cent differential being common. They offer a free car wash with a fill-up. The Citgo price is usually comparable to the Pilot. In recent months they have been a cent or two lower and I've gone there sometimes when going North as I can see the prices at both stations, but almost never when going South as I can't see the price and it's a PITA to drive down that road to turn around just to check it out.

The price at the Pilot is consistently one of, if not the lowest price I've seen in the state. Before Katrina it was fluctuating around $2.30/gallon and in the pre-Kat spike it had risen to $2.53. Then

August 26 the price was 2.53

August 31 the price was posted as $2.79 on the 5mile out announcement billboard, price at the pump WAS actually $2.89 on the big price sign. We filled at the Citgo for $2.84. On the way out, driving past the Pilot the sign had changed to $3.09. Shell was selling for $2.79 still. Mobil on the highway a few exits North was only $2.75.

Sept. 1 the price was $3.39, Citgo unknown, Shell $3.25.

Sept. 4 the price was down to $3.29, Citgo the same, Shell $3.25. Back on the highway, the Mobil in the rest area was only charging $3.09.

(Down in NY, the gas spiked to $3.89 on the 3rd, but were already down to as low as $3.41 on the 4th.)

So is/was Pilot gouging? I don't think so. I think they are a HUGE volume station and were actually trying to keep their traffic down a bit in the face of questionable supplies. Normally, they keep their prices low (the cheapest gas near my home is usually at best the Pilot price, rarely cheaper, usually a few cents more), and the residents of the area circa Pilot have them to thank for the relatively low prices at nearby stations (I've driven around that area to shop quite a bit). The only reason the Citgo sometimes sells gas for a few cents less is to attract business as their set up is a bit less convenient than the Pilot. Additionally, we are talking about Sunday of Labor Day weekend where a station looking to ''gouge'' holiday travelers would not be lowering prices as they did by 10 cents. My guess is that a few days out from Katrina, the estimates about future supply were more concrete so they could be less protective of inventory. In order to gouge, you have 4 stations that would have to collude to raise prices. Nobody ever complains, I would note, when prices are ultra low due to price warring stations Wink

So when I next go to NY, I probably will top off around here where I can find gas for about $3.09 at last check. I expect Pilot probably will have gone down another few cents. I'll report back sometime tomorrow.

The market and competition is handling this nicely. No need for Blumenthal to waste tax dollars investigating IMO.

Evie Happy

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Update today
by Evie / September 6, 2005 12:43 AM PDT
In reply to: Sort of related ...

Pilot $3.09
Shell $3.15

As assessment of refinery/distribution capacity has become more concrete, the prices are coming down. Also the usual state of the Shell charging more has been restored. Seems the Pilot shot its price up above "prevailing market rates" to indeed preserve its inventory. Of course I heard Schumer calling for a top-to-bottom FTC investigation and Blumenthal is still on the march Sad

Interestingly enough, I hear Democrat Corzine and Hillary's potential opponent Jeannine Pirro are both calling for a Federal gas tax holiday. What was strange is that someone said this wouldn't do much for gas prices. Obviously a very uninformed person!

Evie Happy

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(NT) (NT) Pilot/Citgo usually lowest around NM too.
by drpruner / September 7, 2005 7:13 AM PDT
In reply to: Sort of related ...
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1) Price gouging.
by drpruner / September 7, 2005 7:20 AM PDT

If the "real price" has stabilized at about $3 a gallon, then the Alabama $6 is 'way too much. Illegal? It is if local laws say so. But what about community pressure after the dust settles? Would an informal boycott of those stations in Xmas travel season, say, punish them?

2) "Conspiracy." Easy to say Rockefeller?s spiritual descendants are conniving behind the scenes. What I heard on better authority is that the refiners were adjusting their deliveries, if not their wholesale prices, to distribute the stuff fairly. That's sensible IMO, and could be left alone. Sometimes a cigar is just a fuel nozzle. Happy

Your comment about California was good. What a disaster!

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Actually gouging might in the long run
by gearup / September 7, 2005 8:12 AM PDT
In reply to: 1) Price gouging.

produce surpluses of fuel do to people not buying it. In effect gouging today might result in lower prices tomorrow...though on second thought I doubt it as have seen too many SUV's filling up at hi priced name brand pumps anywa

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If "gouging" actually exists...
by EdH / September 7, 2005 8:58 AM PDT

Haven't seen much evidence of it. An outrageously high price here or there means nothing. As has been pointed out, the intention of outrageous prices might be to prevent people from getting too much and forcing the station to shut down.

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