What is the price gouging law in Australia? Is price gouging illegal in the country? Are price hikes “okay” during a crisis? What is price gouging Australia economics in the market retail world today? Did the coronavirus pandemic cause it?

 

Many experts are arguing that a price increase strategy is justifiable during the crisis. Every day consumers and shoppers, however, feel price rises are unfair and exploitative and completely unjustified.

 


Table of contents for this article include: 

I. Price Gouging Australia: Why It Is  Always Wrong In Practice

II. What is Price Gouging Economics? Are Price Hikes ‘OKAY’ During a Crisis?


 

 

 

Price gouging


Price Gouging Australia: Why It Is Always Wrong In Practice


 

Price Gouging: Back in September of 2017, the United States has experienced a terrible season of extreme weather. The recent biblical style floods in Texas and the Hurricane Irma in Florida and the Caribbean region. Businesses took advantage of the situation, raising prices on bottled water, gasoline, flashlights, and canned goods. Hurricane price gouging was in play.

 

The press has covered a couple of stories focusing on incidents of price gouging whereby unscrupulous business owners have been perceived to take advantage of people affected by the disasters. An image that became famous in a media coverage was a photo of a case of bottled watermarked with a price that was over twice its pre-disaster price. In this circumstance, can we call this price gouging capitalism or simply price gouging?

 

In this blog, we will look at an alternative viewpoint. Ask: “Is it always wrong to increase prices during natural disasters?”

 

Taylor Wells is a specialist team building organisation focused on pricing and revenue management. We help businesses optimise their pricing approach – and find the vital experts needed to put those changes in place.

 

Price gouging – lots of criticisms but can there be benefits?

 

It is well known that increasing prices during a crisis is a great way to become very unpopular. CNBC reported:

 

“Hotels aren’t the only ones guilty of price gouging as Houston grapples with continued rainfall and flooding from Hurricane Harvey, the most powerful storm to hit Texas in more than 50 years. Over the weekend, more than 500 complaints of price gouging were lodged with the Texas attorney general’s office, according to CNBC—including $99 cases of bottled water, gas at $10 a gallon and hotels tripled or quadrupled in price.”

“These are things you can’t do in Texas,” Texas Attorney General Ken Paxton told CNBC in an interview Monday. “There are significant penalties if you price gouge in a crisis like this.”

 

Some free-market economists and adherents to very low controls over capitalism often argue that price differentiation is usually better than a rationing or queue system.

 

An article at zerohedge.com – a popular finance news site argues the opposite position:

 

“But people fleeing Hurricane Harvey were in desperate need of hotel rooms. And the news crew was complaining about paying a high price.”

“The news team reported on the terrible incident of gouging. But they actually demonstrate exactly why prices need to go up when demand goes up.”

“I wonder if they decided to bunk up together and buy fewer rooms because of the high price. After all, that is the whole point of “gouging.”

 

Despite the criticisms, there are reasons why price gouging is good. After a natural disaster, supplies of certain items become more rigid while the demand goes high. Free market economists stress the social benefits of allowing the price to rise in this scenario. Price gouging is good because it calls in more supplies, people store up goods for emergency use and it encourages conservation.

 

Think of the future – not just today

 

It is very important for businesses to remember that a crisis can last a very short (if extremely traumatic) space of time. However, a business hopefully will last and prosper for many years. If a business is perceived to have been guilty of price gouging in customers hour of need – they will likely have no commercial future when the storm ends.

 

It is for this reason that a form of rationing or queue system would likely be a better system – i.e. it ensures stocks are maximised and the business is not viewed as exploitative. Trying to justify increasing prices significantly during a crisis will be a very tough explanation for business owners to achieve.

 

At Taylor Wells – we are big believers in looking after your customers, as without them you would not exist as a business. We would be interested in your view on the topic above.

 

Conclusion

 

It can be challenging to identify a reasonable price increase that reflects businesses’ higher risks and costs; as well as to pinpoint where in the supply chain the cost increases are hitting hardest. It’s true especially during the proliferation of loosely regulated, border-spanning online sales.

 

Higher prices have the vital function of signalling to manufacturers that it’s worthwhile to create more supply. Otherwise, it may not be worth disrupting their businesses and taking risks during a health emergency.

 

Unless governments are willing to provide substantial support, price caps do not inject enough cash into the economy. Neither can they keep businesses afloat. Many economists believe that price caps aren’t effective, and could even be counterproductive in emergencies. They might encourage fighting and overcrowding in stores as people compete for scarce-yet-affordable goods.

 

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what is price gouging economics


What is Price Gouging Economics? Are Price Hikes ‘OKAY’ During a Crisis?


 

The debate on price gouging economics continues unanswered and unabated.

 

What is clear, however, is that the uncertainty and severity of the pandemic have caused consumers and businesses to go into survival mode. More often than not, their fear translates to panic buying, causing a shortage of essential everyday items and price to increase further.

 

A good example of this is a medical supply company charging too much for personal protective equipment and facemasks. The company’s prices for face masks have soared since the COVID-19 pandemic unleashed panic buying in Australia. Medical or medication price gouging in Australia can’t be avoided in this kind of crisis. A direct comparison shows a box of 20 masks sold for up to $80 by other medical distribution businesses but was sold for $531.08 by the medical supply company in question.

 

Likewise, consumers have changed their shopping habits, too: visiting smaller shops, planning shopping trips for off-peak hours, replacing the usual staples, buying as a group, or  – in some cases – paying higher prices. Many shoppers are wary of the price tag on products believing that their interests are not being considered during the crisis and sometimes even exploited.

 

In this article, you will learn how price hike economics impacts society as a whole and how to justify a price increase in the midst of a crisis without penalising the customer, consumer or shopper.

 

Price Gouging Australia as Unconscionable Conduct

 

Rod Sims, the Chairman of the Australian Competition and Consumer Commission (ACCC), explained the challenge that faces the ACCC in responding to exploitative pricing. He said:

 

“The ACCC cannot prevent or take action to stop excessive pricing, as it has no role in setting prices. But in some circumstances excessive pricing may be unconscionable, for example where the product is critical to the health or safety of vulnerable consumers. If a business makes misleading claims about the reason for price increases, it will be breaching the Australian Consumer Law.”

 

Clearly, if the ACCC has strong evidence that a supplier did not disclose the price or the reason of the price increase of an essential good, it would have a strong case under the laws against misleading or deceptive conduct. Moreover, when the supplier openly charges a high price to well-informed purchasers, it will be more difficult to establish a claim of unconscionable conduct simply because demand is high and stocks are low.

 

There is no general prohibition against price gouging in Australia. It is not in itself illegal. Therefore, there are no states in Australia that have laws against price gouging. Businesses are generally allowed to set their own prices. However, they should be aware that there are certain conditions in which excessive price increases may raise concerns under the Australian Consumer Law (ACL) or raise competition law issues under the  Competition and Consumer Act 2010 (Cth).

 

Are companies justified in raising their prices?

 

To understand whether businesses are justified to increase prices during a crisis, it is important to understand the key difference between price increases and price gouging. They are not the same.

 

So what is price gouging economics? Most price increases (not all) occur as a result of higher fixed or variable costs resulting from supply or production shortages, increasing freight costs or operational disruptions. Other price increases occur because the business is underselling themselves on a product and wants to reposition prices based on the value perceived and delivered to their customers. There is no harm here as long as the products are as valuable as the price tag indicates; the prices are in an acceptable bandwidth; and of course, customers see it this way too and repeat purchase.

 

Price gouging, on the other hand, is nearly always a blatant attempt to make a sudden and substantial profit from a crisis, usually at the expense of the customer.

 

Though price gouging isn’t a technical economics term with a precise definition. It’s about exorbitant price increases of essential goods that follow as a result of a crisis.

 

There are some elements of ethics involve in decisions in price gouging in Australia. Well, I may say in general too. It looks like there’s a thin line between what level of price increase is acceptable and what is not. Anyhow, as long as any justifications provided for price increases are accurate and can be substantiated to avoid any misleading conduct risk. Also, they are mindful of the prohibitions against unconscionable conduct.

 

Signs of supply shortages

 

Now, if we look back at the first signs of supply shortages in the early days of the pandemic, supply constraints occurred as a result of mainly panic buying (or unpredictable spikes in consumer demand), especially for non-perishables like tinned beans.

 

When an unexpected demand spike like this occurs due to consumers hoarding before a natural disaster or pandemic, it is common to find that supply chains struggle to adjust to replenish supplies fast enough.

 

The inefficiency and time delays created by supply issues explains in part price hike economics. In effect, when supply chains cannot readily adjust to replenish supplies, businesses are forced to increase prices quickly to encourage manufacturers to make more of these goods. Manufacturers read higher prices on the customer and consumer side as higher demand or a valuable product. They then produce more of it because they see this as an area of profitability.


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What’s the connection between price gouging economics and a price hike?

 

In many cases, supply shortages or delays are often temporary. This is to let manufacturers and distributors alike catch up and meet consumer demands. Effects on a food price hike, for example, can vary, but some commodities (like sugar) have been dropping in price during the crisis while others (like rice) have been increasing, due to more people cooking indoors.

 

National policy changes on export and import procedures have also created issues with supply and artificial imbalances in demand. Overall, global changes in food prices haven’t been passed onto consumers immediately, unless of course retailers use economic conditions as a reason for a price hike.

 

Generally, what happens is the manufacturer and distributors absorb the initial costs. They then try to pass a percentage of the costs to retailers. However, major retailers especially supermarket don’t accept price rises easily. They are notorious price negotiators; and as we know from the press, major retailers put their suppliers under increasing price pressure, sometimes to the point of commoditising entire categories and brands.

 

But sometimes, retail delays and customer hoarding creates some good news, too. Short supply, in turn, gives manufacturers and retailers a premise upon which to reposition their prices to a point that consumers are paying prices they would have otherwise rejected prior to a crisis but should have been paying, thus setting a new price standard realisation in the market or industry.

 

It applies also to grocery deliveries. For example, paying drivers more, charging customers more, and getting the supply up to a level where it’s sufficient to meet the increased demand.

 

Price gouging

 

Price gouging, on the other hand, is a different story. What is price gouging economics? Well, the term “price gouging” only entered the newspapers relatively recently and keeps appearing a lot during this crisis.

 

Price gouging is when people suspect businesses of increasing the prices of goods, services, or commodities to a level much higher than what everyone is considering as reasonable or fair. It is a blatant attempt to profiteer out of misfortune and miscommunication. It is a way to capitalise on the supply shortages that had occurred.

 

Usually, price gouging occurs after a demand or supply shock or shortage rather than before it. This is because it is easier for businesses to relate their massive price hike to the sudden change in consumer behaviour or supply shortage.

 

However, even though the rationale is appropriate and well-timed, price gouging economics states that when prices are obtained by practices inconsistent with a competitive free market or to windfall profits, this is price gouging. It can be considered exploitative and unethical.

 

One way major supermarkets in Australia have tried to get around the difficult price gouging debate is to cap prices for day-to-day essentials over the crisis. Capping prices and restricting the number of items sold are standard practices. They were adopted by both Coles and Woolies during the crisis to prevent the hoarding of the goods. In one way, price caps have helped supermarkets promote public health and their own brands. But, the underlying reason they enforce it was because they want to regulate spending; smooth out supply without increasing prices and creating further price perception issues.

 

 

Discussion: How to reduce consumer anger to pricing increases?

 

A good way to reduce consumer anger to price increases during a crisis is to explain the reasons for them. Inevitably, wholesale prices will rise substantially. Many retailers will have to pass on some of those higher prices to consumers. This is normal practice that many people understand.

 

Another way to ease the perceived pain of price increases is to find alternative price increase strategies and limit quantities per customer rather than raise prices. But in any case, inform the customers of the reasons for pricing changes, rather than letting them assume the worst.

Yet, all the transparency in the world may not be enough for consumers worrying about their finances. People are instinctively appalled by anything they perceive as price gouging, and psychology suggests that this is a strong feeling.

 

Economists and others also agree with consumers on this matter of inequality. They often argue that price gouging comes with significant risks to health and well being. Is it right, for instance, to increase the prices of essential goods when people are losing their job, having less money to spend on low-cost goods that they need to keep them physically healthy?

 

Some business owners argue that yes it is justified. They contend that they need to increase prices to stay in business. Keep their staff in jobs and serve the community. If small businesses are doing their best to serve communities despite potential health risks, why shouldn’t they earn a bit more pay? Knowing how to increase prices without losing customers is always a tricky balancing act whether you are a big or small business.

 

Implications

 

To avoid accusations of price gouging, take a more scientific approach to increase prices in times of uncertainty. Don’t take a crude percentage increase across all essential goods to protect your margins. Think about the impact this may have on customer price perception. Work out pricing strategies to increase sales that both cover your costs; maximise margins; and make sense to consumers.

 

Price gouging is too strong a word when businesses are struggling to stay afloat. Their supplies run out and can’t replenish due to the lockdown. Putting a price cap on items that are in short supply can ensure it can reach other consumers.

 

Nowadays, price increase not only applies to the essential supplies. Even airline prices have increased too. We might have heard from friends complaining of having to buy an extremely expensive ticket to get home where they got stuck at before the lockdown. However, airline price gouging is actually ethical and legal in these times considering the supply and demand. Just as long as the price is reasonable and justifiable.

 

If disasters followed a free-for-all, with very high prices for essentials; then the inequality among the masses becomes much higher. Those who can’t afford high prices face extreme deprivation, even death. While those with sufficient wealth face no more than an inconvenience.

 

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