Price gouging and the COVID-19 crisis – This time is (a little) different

October 2, 2020

As with previous shocks to supply and or demand resulting in shortages, the COVID-19 crisis has given rise to allegations of price “gouging.” Professor Michael Salinger has considerable experience with price gouging policy. When he was Director of the Bureau of Economics at the Federal Trade Commission, it became a key issue in the wake of hurricanes Katrina and Rita.

In this CPI Antitrust Chronicle article, Professor Salinger argues that individual businesses might choose to refrain from raising prices to market-clearing levels to maintain customer loyalty, but it is important not to confuse sound business policy with sound public policy. He argues that legal prohibitions against price gouging do not make market outcomes either more efficient or more fair.

The concerns about price gouging raise the more general issue of the efficient way to allocate scarce resources during times of emergency. Professor Salinger argues that, in general, the response of markets to the COVID-19 crisis is another example of the efficiency of markets in solving the basic economic problem of how to allocate scarce resources. By standing in the way of the proper functioning of markets, legal prohibitions against price gouging serve no useful purpose and can do considerable harm.

However, Professor Salinger also argues for one exception to the general rule for the efficiency of the market outcome. Some centralized national system for procuring and distributing PPE and ventilators would have been better than simply letting the market operate.

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