SOME THOUGHTS ON PRICE-GOUGING

What is price-gouging, anyway? The activity has been much in the news lately. Because gasoline prices have leaped from the give-away levels and below at which they had languished for many months, oil companies stand accused of what is implied to be a horrible offense.

What is price-gouging, anyway?

The activity has been much in the news lately.

Because gasoline prices have leaped from the give-away levels and below at which they had languished for many months, oil companies stand accused of what is implied to be a horrible offense.

But what is it?

And why just oil companies?

People who sell things always collect as much money as they can from their transactions. This is called charging what the market will bear.

It's also normal, acceptable, essential business practice. But "charging what the market will bear" doesn't very well describe what actually happens. It makes selling sound like a one-way proposition.

In fact, for every seller charging what the market will bear, there must be a buyer naturally trying to pay as little as possible.

Important phrases here are "as much as the market will bear" and "as little as possible."

Elementary market theory reminds the doubtful that buyers quit buying when sellers try to charge too much. And sellers quit selling when buyers insist on paying too little. Unsatisfied buyers and sellers either find new counterparties or quit the market. This is competition.

Prices change when relationships change between supply and demand, which they do all the time. Periods of elevated price discourage demand and, thanks to competition, bring new supply to market. Periods of low price reduce supply and increase demand.

Wonderful things, markets. Dynamic. Self-enforcing. History shows that oil markets work very well, politically inspired utterances of the moment notwithstanding.

It is reasonable to predict, therefore, that as long as competition remains free to perform its essential role, the current period of elevated price won't last. In the worst case, crusading governments will interfere with inevitably doomed efforts to hasten the inevitable correction.

Oil companies, wholesalers, convenience-store operators, and everyone else in the oil-supply system are not doing anything now that they don't always do.

They're charging what the market will bear. This is not gouging. Buyers are still buying. Supplies remain low relative to buoyant demand despite the price run-up. Competition for oil available to the market is more intense than has been the case for several years.

This is why prices are high. Adults should not find this shocking.

If what is happening now can legitimately be called gouging, what was it called in 1998 and early 1999, when prices were low and suppliers were losing money? What, in other words, is the opposite of price-gouging? And why didn't that make news?

In fact, when prices were low and suppliers were losing money, oil sellers were doing exactly what they are doing now: charging what the market would bear. Prices were low because far too much oil was available relative to demand.

Allegations of price-gouging imply that sellers have enough influence over prices to cause them to perform contrary to relationships between supply and demand.

And if suppiers are in fact able to do so now, why didn't they use this power to rescue themselves from the heavy losses they sustained when supply exceeded demand?

They didn't do so because the power doesn't exist. Competition makes this so.

"Price-gouging" is political fantasy, a way for ambitious people to profit unjustly at other people's expense. Politicians who toss the term recklessly about should be treated with great suspicion.

More in Economics & Markets