The FTC Take

see also the skinny, pro & con

For the gas gouging debate, the Federal Trade Commission (FTC) plays a key role; according to the bill to criminalize price gouging, the FTC will decide how to define “price gouging.” The FTC would be guided by 15 U.S.C. 45(n), which authorizes the FTC to punish unfair acts or practices in the business world. An unfair act occurs when an “act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” The legal-economic mumbo jumbo boils down to this: are consumers trapped into buying at the higher prices and, if so, are they being harmed or benefiting in the long run?

How would the FTC measure long run considerations? Answer: very carefully and case-specifically. Very carefully because, as the Cato economists point out, pell-mell accusations of gouging could have terrible long-term effects for consumers—no one will supply gas if they could easily be sent to prison based on a nickel variance in price. Case specifically, because, as the FTCR report suggests, the perfect model of supply and demand competition (which is the basis of fair markets) may not always exist in the real world .

So let’s look at a careful FTC study of a several specific cases of alleged gas gouging in the wake of Hurricane Katrina. The full report assessed price gouging according to average prices in the context of market trends. The FTC found that a handful of refiners and non-refining wholesalers exceeded the national average increase, which would indicate gouging. However, when the FTC extended the analysis to the specific local market conditions, it concluded of the refiner or refining wholesalers “their price increases did not significantly exceed the average of other firms facing similar market conditions.” In other words, no gouging occurred in the month after Katrina.

Importantly for our purposes, the FTC report discusses the policy implications of federal price gouging legislation, noting (not surprisingly) that price gouging is hard to define and that “an ambiguous standard would only confuse consumers and businesses and would make enforcement difficult and arbitrary.” The FTC’s last words seem to steer legislative concerns about energy away from price-control responses and toward general antitrust measures (much as the FTC already handles) as well as other global energy supply and demand issues: “Past Commission law enforcement investigations in petroleum industries have concluded that supply and demand forces are the ultimate drivers of prices to consumers…Further, that does not, and should not, end the debate about appropriate government energy policy. Consumers understandably are frustrated to be told that no laws are being broken even as prices increase substantially. It is important that they gain a better understanding of the working of energy markets. Gasoline prices – and energy prices in general – depend on the actions of all consumers and producers, and those actions can be changed. They can be modified over time by policies designed to make supply more responsive to high prices or to shift demand toward alternative energy sources…Any policy that increases the supply of products at competitive prices may increase consumer welfare, as long as the costs of that policy decision do not outweigh the benefits.”

Price-gouging, the FTC seems to be saying in the report, is hard to define and harder to prove—so hard, in fact, that it might be more fruitful for Congress to pursue other avenues of energy regulation in order to keep prices down. Which is not to say that the FTC punts the issue, but that, as this Washington Post article indicates, antitrust precautions aimed at ensuring a generally competitive market environment might have better results for citizens than price regulations or price gouging punishments.

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