April 2, 2020
Crisis prices: Is it legal to profit off of a pandemic?
On March 27, 2020, Ontario Premier Doug Ford issued a warning to COVID-19 profiteers: "We're coming after you."
He cited high-end grocery retailer, Pusateri's, which had charged customers $29.99 for containers of disinfecting wipes -- a price premium that even Pusateri's clientele noticed. (CTV notes that the average price for these wipes is $5.99.) Pusateri's described the price as a mistake and apologized for it.
Price jumps in times of crisis are, of course, not always a mistake. The widespread spike in demand for disinfectants and protective equipment presents an opportunity for people to profit. This is called "price gouging."
On March 14, the New York Times reported on two Tennessee brothers who saw an opportunity in COVID-19. They cleaned out the supply of hand sanitizer at several local retailers, and then rented a U-Haul to buy up the supply of hand sanitizer and wipes on a 1,300-mile road trip across state lines. They then sold the products online at multiple times the purchase price. One of the brothers explained: "it was crazy money." Amazon took down their listings, and eBay followed suit.
On March 22, CTV New reported that a family had set up shop in a Port Coquitlam, BC park to sell boxes of surgical masks, for as much as $70 apiece. Bylaw officers fined the family $500, and still they returned to sell masks the next day.
The economics and psychology of price gouging
Most economists don't really have a problem with price gouging. When there's more demand than supply for something, the free market will tolerate a price increase.
It's the same principle behind the higher-than-usual Uber prices that people complain about on New Year's Eve. Uber justifies "surge pricing" as a way to get more drivers on the road, to meet demand. Uber also caps the surges during emergencies. This is a bit different than cleaning out local supply in order to flip for profit during a pandemic.
Still, economists warn against anti-price gouging laws for a number of reasons. In an article in Forbes, Jeffrey Dorfman explained that, while price gouging laws are good politics, they discourage suppliers from increasing supply. The idea is that higher prices will encourage production to meet heightened demand (like Uber's surges). The Mises Institute, a libertarian think tank, published a blog post calling price gouging "life saving": during a crisis, higher prices cause consumers to determine what they need, and in so doing discourage stockpiling. From this point of view, the Tennessee brothers are heroes, for acquiring disinfectant and making it available (at a premium).
These arguments ignore the disproportionate effects of price gouging on people with lower incomes. They also assume that consumers will respond to market force in a rational and informed manner. In the middle of an extraordinary public health panic, this assumption is questionable.
The reality is that people will tolerate a price increase in times of shortage, but they want to be treated fairly. In an influential study on fairness and profit seeking, the authors suggest that if the cost of disinfectants increases at the manufacturers' level, it feels fairer for a shop to pass the increase on to consumers. If, however, a crisis gives the seller the power to charge whatever it wants, for profit, people find this type of exploitation unfair. "The cardinal rule of fair behavior is surely that one person should not achieve a gain by simply imposing an equivalent loss on another."[efn_note]Kahneman, D., Knetsch, J. and Thaler, R. (1986). Fairness As a Constraint on Profit Seeking: Entitlements In The Market. American Economic Review, 76(4), 728-41, p 731. [/efn_note]
Price gouging in Ontario
Under Canada's Competition Act, it is illegal for companies to act together to raise prices. This is called a conspiracy.
The unfortunate reality is that a business, acting alone, can raise its prices. In ordinary times, it may lose customers to competing businesses with lower prices. That's how the market is intended to function.
In Ontario, under the Emergency Management and Civil Protection Act, the government has the power in times of crisis to make orders against "Fixing prices for necessary goods, services and resources and prohibiting charging unconscionable prices in respect of necessary goods, services and resources."
Indeed, on March 28, Ontario announced an emergency order that would fine individual offenders $750, or impose a penalty of up to $100,000 and one year in jail upon conviction. (Penalties are higher for corporations, and their directors and officers.) The order applies to the sale of "necessary goods", which include certain protective equipment, disinfectants, hygiene products, and medication.
The Port Coquitlam example demonstrates that a small fine may be insufficient to deter price gouging during the pandemic. The stiffer penalties on conviction, however, may do the trick.
Either way, the order only helps if offenders are caught. If you are aware of a person or company in Ontario offering necessary goods at unconscionable prices, you can report the misconduct to the province, by phone (1-800-889-9768, during regular business hours) or online.