Free Market

The Unintended Consequences of Price Gouging Laws on Online Markets

Knowing that they had boxes of facemasks at their house that were not being used, a local Utah resident decided to list the boxes on Facebook marketplace. They thought this would be a quick and simple way to sell the masks to someone that needed them and was willing to pay an agreed upon price. That individual has since been reported to the Utah Division of Consumer protection and could face charges of up to $10,000.

Examples like this flood the Utah Division of Consumer Protection as buyers attack sellers that have raised their prices in response to increased demand for goods. Online marketplaces such as Facebook, Letgo, Amazon, and eBay have come under increased scrutiny as they provide access for millions of listings that pose difficulties for oversight.

Price gouging laws are based on the idea that buyers make bad decisions during emergency times. Then the sellers take advantage of these bad decisions and charge extreme prices to buyers that are considered to be unfair. The problem with this idea is that emergency times call for emergency actions to be taken. Given the non-normal times, many people are willing to pay a higher price for important products. If buyers are willing to pay a higher price — say double the pre-COVID-19 price — but there are policies that do not allow these exchanges to take place, then these buyers are made worse off.

The unintended consequences seen during the COVID-19 crisis create scenarios that lead to less total buyers being able to purchase the most needed goods. In fact, the items that are most in demand are the ones being targeted by online marketplaces and having their listings pulled from the platform. 

The Utah resident trying to sell packs of 50 facemasks for $40 on Facebook marketplace and then having the listing removed is being shut out from providing an important good to buyers. Price gouging laws are encouraging companies to shut out more and more sellers from their marketplaces, making it more difficult for buyers to get what they need. 

Many of the big players in this marketplace spent time explaining their efforts to be in compliance with the state price gouging laws by removing and restricting listings of the goods that are most needed in times of an emergency.

Online marketplace companies responded in similar preventative fashion to the risks they could face from state governments regarding price gouging violations. On March 6th, Facebook’s Director of Product Management, Rob Leathern stated in a tweet that Facebook would be banning listings and ads that were selling medical face masks. Online marketplace application, Letgo, stated on March 17th, that during the pandemic they will ban the sale of supplies like face masks, hand sanitizer, and toilet paper. Tech giant, Amazon, released a statement on March 23rd that they had already removed over half a million offers and suspended almost 4,000 accounts for pricing violations. Lastly, eBay has stated on their help page that they were working on blocking and removing high-need items from their marketplace.

Although a country would want suppliers  to provide more of these essential goods, the anti-price gouging laws in place create perverse incentives for companies such as Facebook, Letgo, Amazon, and eBay to work against increasing the amount of needed goods in the marketplace. These companies face large risks from the penalties associated with price gouging ranging from fines, jail time , and class action lawsuits . As a result of these risks, these companies are doing the opposite of what they were designed to do. That is to provide an online platform for buyers and sellers to enter mutually beneficial exchanges of goods and services.

While companies work to limit their liability risk from state governments by implementing preventative measures, there are still some sales that sneak through the regulatory tape. When the number of listings on the platform are in the hundreds of thousands, it is hard to catch all the sales, leading some purchases that would normally be considered abnormal. However, anytime these voluntary exchanges are made, no matter the price, both the buyer and seller agree on the final price at the time the transaction is made.

The key takeaway is the total supply of goods that are in the greatest need during the time of a pandemic experiences a shortage as a result of price gouging laws. An introductory economics course reveals how price controls result in shortages, and without the price control there is incentive for suppliers to increase production of the good, enabling supply to catch up with demand. The actions taken by large online marketplace companies reveal the total reduction in supply is larger than people could have predicted. With the companies working actively to remove needed goods from their platforms and prevent new ones being posted, less people will have access to the essential goods they need, only further exacerbating an alarming problem.

Nick Grose is a Policy Research intern with the Libertas Institute, a free market think tank in Utah. He is currently working on a Master’s degree in economics at George Mason University.