Understanding the regulations and economic conditions that govern the pricing of goods and services is key to determining whether an allegation of price gouging has merit or is frivolous.

Is it legal to charge $75 for an 8-ounce bottle of hand sanitizer during a pandemic?

As social distancing and shelter-in-place orders began earlier this year after the declaration of COVID-19 as a pandemic, a massive upheaval in supply and demand of certain goods and services quickly followed. Personal protection equipment for medical professionals grew scarce. Consumers faced empty store shelves picked clean of disinfectant wipes.

In Philadelphia, one online retailer marked up the aforementioned hand sanitizer by perhaps 10 times its pre-pandemic price. That company is now caught in the crosshairs of the Pennsylvania attorney general for alleged price gouging.

Such incidences evoke questions related to the law's tolerance for raising prices during a declared state of emergency. In fact, there is a nationwide surge in lawsuits (class actions and state regulatory actions) alleging price gouging dating back to shortly after the start of the pandemic. While many of the suits are related to the sale of medical supplies, others pertain to nonessential goods.

Businesses generally have the right to determine their own pricing. But how far can you go during a pandemic without risking legal repercussions? Some background on what price gouging is and how to know it when you see it can clear the confusion.

Illegal or Justified?

Price gouging refers to an exorbitant increase in the price of certain goods and services deemed essential during a natural or human-made disaster. Typically, a sudden spike in demand for a good over the available supply (i.e., excess demand) is followed by an increase in market prices. This can happen either because of legitimate business reasons - such as reduced supply due to supply chain issues and manufacturing disruptions - or because of hoarding by a seller. Either way, other sellers may be tempted to increase the price for the good in question.

"If the seller can prove that the increased price is directly attributable to increases in the cost of labor or materials needed to provide the good or service, the seller may not be liable [for price gouging] under the statute." - California Attorney General

While there is no federal law on price gouging, most states have laws prohibiting the practice. However, the prohibition generally does not apply to all items, and it usually lasts only for a limited period (typically 30 days following the declaration of a state of emergency).

Consider the hypothetical example of pricing a set of dumbbells manufactured by the home fitness company Bowflex. At the time of this article, the Bowflex SelectTech 552, which normally retails for $349, appeared as sold out on the company's website. However, resellers on a major online retailer's site were offering the set starting at $675. Though the price hike of more than 90 percent seems exorbitant, it would likely not be considered price gouging, since dumbbells are not deemed an essential product under price-gouging laws in most states. Most likely, this incident would be ignored as a mere reflection of an imbalance between supply and demand.

On the other hand, hoarding and attempting to resell hand sanitizer can potentially run afoul of price-gouging laws. Such was the case with a Tennessee man who bought 17,700 bottles in early March to try to profit off the public's anxiety over the pandemic.

Raise the Prices Right

A seemingly steep price hike on its own does not necessarily constitute price gouging, as state regulators recognize that there can be legitimate business reasons for a large increase. Rideshare companies, for example, often implement surge pricing during peak demand hours.

Further, raising prices during times of excess demand is not necessarily bad, as it incentivizes new sellers to enter the market - and, as long as there are no barriers to entry, these sellers will increase available supply. In contrast, imposing a price ceiling would eliminate the incentive for new sellers to enter and prevent the market from clearing excess demand.

If you're thinking of boosting prices for certain items, start by examining whether those items are subject to price gouging laws in your state and, if so, consider comparing the proposed increase to the benchmark prices specified by the state. It's important to pay particular attention to where you source the benchmark prices due to local taxes and other idiosyncratic factors. If the price increase exceeds the threshold under the applicable state statute, you need to examine whether some or all of the increase is due to legitimate reasons permissible under the relevant laws.

It all sounds conceptually simple. But a host of complexities can trip up even the best analyst.

Get the Facts

If your business is facing a lawsuit or a regulatory inquiry in regards to a price hike, a thorough analysis of whether a price-gouging allegation has merit may be in order. That requires paying close attention to changes in market conditions and making sure the price increases are properly adjusted for those changes. Engaging an economist with knowledge of advanced statistical techniques can be a game changer in this instance. That person can explain to the court or regulators that once you control for changes in market conditions, the purported price increase is within permissible limits, depending on the facts and circumstances surrounding the allegations and products in question.

Everyone knows $75 is a pretty penny to pay for an 8-ounce bottle of hand sanitizer. But when demand is high during an emergency, it is possible to raise your prices on nonessentials if you accurately determine what the regulations will allow, given the market conditions and changes in demand and supply, as well as other business conditions. Ignoring these steps increases the risk of legal action and the negative perception of profiteering that comes with it.
