The OECD has ever written anything on competition law and price gouging. It has, however, asked Prof. Frank Maier-Rigaud to write a paper exceeding 80 pages on Excessive Pricing in 2011 (see here).
Despite its title, the paper seeks to provide a framework for all exploitative practices. This is well beyond my focus today, so I will review those sections of the paper relevant for sudden price increases and exploitative practices following sudden shocks.
The first and second sections discuss ideas of fair prices and economic value, and whether intervention against excessive pricing is justified.
The idea of a just, fair or natural price, and with it the concept of economic value and rudimentary equilibrium notions, can be traced back to ancient Greece. They have occupied political philosophers and economists for well over 2000 years. Despite this longstanding debate, the fundamental question of the appropriate benchmark for assessing whether prices are unfair, unjust or excessive remains unresolved to this day.
Therefore, interventions by competition authorities to deal with exploitative practices directly are controversial. Where exploitative practices can be sanctioned, the competitive price is often considered the appropriate benchmark for assessing whether prices are excessive. However, a competitive price is not given, but something that emerges from market conditions. As the concept of competitive price is not defined, it could be interpreted as any price that obtains under equilibrium conditions, including the monopoly price. Alternatively, the concept of competitive price could be interpreted as the equilibrium price that obtains under competition. This interpretation allows any equilibrium price short of monopoly to be considered competitive, ranging from equilibrium prices under duopoly or oligopoly, to equilibrium prices under perfect competition.
Many commentators have argued against treating high prices as problematic per se. Excessive pricing in the absence of exclusionary conduct or collusion is usually either a consequence of temporary and self-correcting market failures, or a problem to be addressed through sector-specific regulation. While many competition laws around the world contain provisions against excessive prices, competition agencies have only exceptionally brought such cases. Some jurisdictions even preclude competition enforcers from calling into question the high prices charged by a “pristine monopolist” absent collusive or exclusionary practices. Where exploitative excessive pricing is prohibited, such prohibition has remained for a long time conceptually underdeveloped and underused in practice. On the other hand, a number of authors have argued that there are good reasons to engage in enforcement against excessive pricing. Lowering prices is the objective of competition law; in certain circumstances high prices to do not trigger entry within a reasonable period; many areas of (competition and consumer) law require fair pricing, and determining whether a price is fair is a common challenge for courts. Of particular interest to us here, it has been argued that intervention against excessive pricing may be justified in certain circumstances – mainly when markets lack self-correction, or at least lack self-correction within a reasonable time frame, and intervention not detract from incentives to innovate and invest.
Section three focuses on the interaction between regulation and competition law, which is of no interest to us today. Section IV focuses on screens for enforcement against excessive prices.
Enforcement against excessive pricing presents high risks of type I error (i.e. mistaken intervention) with potentially high costs (because the market may self-correct in the absence of intervention, and an error will lead to dynamic inefficiency related to low investments and innovation). On the other hand, type II errors (i.e. mistaken failure to intervene) have a relatively low cost, mainly related to allocative inefficiency. When taken together with the fact that even arguments for competition enforcement against excessive prices only provide support for intervention in specific market and institutional circumstances, this naturally leads to a presumption against competition enforcement in this field.
Only when certain stringent conditions are met will competition enforcement against exploitative excessive pricing be justified. Reflecting this, a number of demanding screens for competition intervention against exploitative excessive pricing can be found in the literature. While differing as to the details, these screens have in common that they require: (i) The offending firm to have significant market power, close to a pure monopoly position in the market. The closer the market structure is to an oligopoly, the less likely it will be that a dominant firm will have sufficient market power to generate excessive prices. In addition, the higher the degree of market power, the less likely it is that the market will self-correct within a relevant timeframe. (ii) There must be high and durable barriers to entry which make the market unlikely to self-correct. As long as markets can self-correct, high prices and profit margins will be transitory phenomena which may not justify a competition intervention; (iii) Intervention should not occur when it may adversely impact research and innovation, where the risks and costs of enforcement errors are highest. (iv) Alternative regulatory intervention must be either impossible, extremely unlikely, inappropriate or absent.
Section five reviews a number of jurisdictions which enforce competition law against excessive prices. It includes a discussion on price gouging rules.
Many examples come mainly from Europe, and the discussion mostly focuses on cases dealing with price differences across borders that impede market integration. Such examples are of limited interest to us here.
More interesting is the discussion of national experiences. German examples demonstrate that, under certain circumstances a competition law approach can be more effective in dealing with a well-defined problem of excessive prices, and that such intervention can be much quicker than a regulatory reaction. In particular, a number of competition interventions have taken place in the gas sector, sometimes following considerable rise in gas prices and, in some cases, substantial differences in price between individual suppliers. This enforcement was facilitated by a specific provision in the German competition law that makes it easier for the competition authorities to prosecute abusively excessive prices in the electricity and gas markets by allowing a partial shift of the burden of proof for excessive prices on the companies suspected of the infringement.
In addition to competition law, there are also other laws directed to controlling excessive prices. Further to classic public utility regulation, there exist price gouging and usury laws that often have different public policy rationales from the excessive price prohibitions found in the competition laws. Price gouging laws, in particular, aim to protect vulnerable consumers from short term, windfall market power in relation to necessities. In the US, 29 States had, at the time of writing, laws that prohibit excessive prices of certain commodities during periods of abnormal supply disruption. These laws provide for civil penalties, criminal penalties or both. Most of them, although not all, are triggered by a state of emergency declared either by the president, the governor or local officials. The basic methodology employed is based on a comparison of a (fictitious) “normal” price with the potentially excessive price in periods of abnormal supply disruption. Positive deviations from the “normal” price do not automatically trigger sanctions, as limited deviations are allowed. For instance, some states allow price increases to match increases in wholesale costs, while others restrict price increases to a certain percentage.
During discussions in 2006 concerning whether to adopt a federal price gouging law, the FTC wrote a report arguing against it that also set out a list of factors that should be considered if Congress nevertheless were to proceed with passing federal price gouging legislation. These include: (i) defining the offence clearly; (ii) accounting for increased costs, including anticipated costs, which businesses face in the marketplace; (iii) recognising that local, national, and international market conditions may be a factor in the tight supply situation; (iv) attempting to account for the market-clearing price.
Section VI deals with methodologies to determine excessive pricing, while section VII deals with instances where authorities may rely on excessive pricing as a catchall theory of abuse, instead of formulating a more detailed theory of harm. None of these topics is relevant for us today.
Section VIII focuses on remedies.
This is obviously relevant, but the paper focuses on instances where high prices flow for lasting market power, which is not the focus of our concerns today. The consequence is that the remedies the paper discusses – profitability caps, or structural remedies – are of limited interest.
The most relevant insight of this section for our present circumstances concerns price caps. Similarly to most behavioural remedies, price or rate of return regulation will typically require ongoing monitoring and possibly adjustment, and may therefore not be an appropriate choice for a competition authority seeking a one shot remedy. Assuming that it is possible to identify a certain price level above which prices become excessive, a behavioural remedy could be designed that obliges the infringing firm not to offer its products above that price. However, imposing a static pricing remedy is appropriate only as long as the market conditions (such as costs, number of firms, demand) do not change substantially. If any of these parameters change, it is necessary to adjust the price cap. An alternative is a dynamic pricing remedy that has some level of built-in flexible adjustment of the price cap. For example, the maximum price level could be automatically adjusted for changes in costs. However, this ignores shifts in demand, and can easily move to a remedy akin to a profitability cap, with related challenges concerning identifying and monitoring appropriate rates of return.