Chapter Overview: 15

Price Regulations: Shutting Off the Lifeblood of Economic Circulation

Introduction

The subject of prices has engendered a vast economic literature of theory and opinion as well as conflicts of vision about the way society should operate. At the polar opposite ends of this debate are the ideas of economist Adam Smith (1723-1790) who advocated a totally free market, and the ideas of Karl Marx (1818-1883), who advocated state central control of all aspects of economic life.

Galambos’ teaching espoused the view of prices originated and developed by members of the Austrian school of free market economic thought. That is

The most efficient and socially desirable exchange and use of resources can be achieved and maintained only through the price mechanism operating in free markets.

Two leaders of the Austrian school - Friedrich Hayek (left) and Ludwig von Mises (right). Date unavailable.

Two leaders of the Austrian school of economic thought – 
Friedrich Hayek (1899-1992) on left and Ludwig von Mises (1881-1973) on right.

 

In free market exchanges, prices convey information about the abundance and desirability of resources. This in turn allows fluctuations in price that prevent shortages and surpluses.

Without interference of the state, price volatility would be smoothed out by fast acting market feedback cycles driven by profit-loss at every node of the economic network. It is state control of the money supply and financial markets (ie state intervention) that leads to all economic boom and bust cycles.

The subprime mortgage crisis is a recent example of state intervention in business that caused the greatest bust since the Great Depression. The high-risk mortgage loans and imprudent lending and borrowing practices that began the crisis

The subprime crisis is a recent example of state intervention in business that caused the greatest bust since the Great Depression. The high-risk mortgage loans and imprudent lending practices that began the crisis were encouraged – even required – by the state via the Community Reinvestment Act, which empowered regulators to punish banks that failed to make loans to individuals considered high risk.

State Micromanagement of Prices in Business

The Great Atlantic and Pacific Tea Company (A&P)

A and PFounded in 1859 in New York City, the Great Atlantic & Pacific Tea Company (A&P) is considered an American icon. A&P became the first large grocery chain business, by offering groceries at lower prices than most of its competitors. The low prices and far-flung operations of A&P made it hard for small, independent grocery stores to compete.

It appears that the dominance of A&P was a principal reason Congress enacted the Robinson-Patman Act of 1936. Robinson-Patman requires a seller to offer the same price terms to all customers. The purpose of Robinson-Patman is to outlaw the practice of large retail chain stores negotiating lower unit prices from suppliers.

In 1942, federal antitrust lawyers claimed that A&P had an unfair competitive advantage because its efficiency allowed it to charge lower prices. They charged A&P’s senior executives with restraint of trade and requested criminal convictions. The case dragged on for over 10 years before it was settled in a 1953 Consent Decree requiring A&P to shut down its produce brokerage business. A&P directors filed for bankruptcy in 2011.

Whereas the Robinson-Patman act prohibited quantity discounts, the FTC took this a step further and decided that it was illegal for a manufacturer to charge the same price to all customers across America, stating this was prohibited price discrimination because it necessarily costs more to deliver goods 1,000 miles away than fifty miles away.

B. Dalton book store, along with Walden Books and Crown Books were the three book retailers that went out of business after the 1988 FTC attack against the chains.

B. Dalton, along with Walden and Crown Books, were the three retailers that went out of business after the 1988 FTC attack against six book publishers.

The FTC has continued to attack quantity discounts. In 1988 the FTC charged six large book publishers with violation of the law by selling books to three large bookstore chains at prices lower than the prices charged to independent booksellers. All three of the large bookstore chains have since gone out of business, in large part because they were not able to operate conventional retail bookstores profitably in competition with the lower prices charged by Amazon.com and other companies selling books over the internet.

A recent case against Apple, Inc. illustrates that the Department of Justice and the FTC continue to harass companies for doing business in ways that the antitrust lawyers find objectionable, even though these business practices do no harm to consumers or may even benefit consumers.

Amazon, Apple and Electronic Book Readers

KindleIn 2007 Amazon.com released its Kindle electronic book (e-book) reader. The Kindle was enormously popular from the outset; several million were sold within the first five years of introduction of the product. Amazon capped its e-book prices at $9.99 per book.

In 2010 Apple, Inc. introduced its iPad tablet computer. In addition to many other capabilities and functions, the iPad can be used as an e-book reader.

When Apple introduced its iPad tablet computer in 2010, it entered into agreements with book publishers under which the publisher sets the price it shall receive for each e-book sale.The agreements also specified that the publishers would not sell e-book rights to anyone else at a lower price than to Apple. Apple’s e-book retail prices ranged from $5.95 to $14.95 per book.

In April 2012 the antitrust division of the U.S. Department of Justice initiated an antitrust prosecution of Apple and five book publishers charging that they conspired to fix the price of e-books in violation of the Sherman Act.

With the suit, the United States Department of Justice is forcing authors and publishers to sell books at $9.99, despite the fact the market could justify a higher price for particularly popular titles that might sell in tangible form at a price considerably higher than $9.99.

Co-founder and former Apple CEO Steve Jobs (1955-2011) introduces iPad.

Co-founder and former Apple CEO Steve Jobs (1955-2011) introduces iPad.

In prosecuting this case the DOJ disregarded the real world of book pricing for tangible books (hard cover and paperback) in conventional book stores and over the internet, where books are not all priced the same, but are priced in accordance with the free choices of market participants. One can buy new or used printed books in conventional book stores and on the internet for any price that the seller decides will induce sales. On Amazon.com itself one can buy hard cover and paperback books, new and used, at prices ranging from $0.99 to more than $100.

As of late 2013, Apple announced it will be appealing the court’s decision.

Price Gouging Laws

Between August 28 and September 25, 2005 two powerful hurricanes struck the Gulf Coast of the U.S. These hurricanes caused enormous loss of life and property damage. The storms caused temporary closure of two oil refineries in the area. Gasoline prices rose not only in the hurricane damage area, but across the entire country. As people fled the hurricane area there was a shortage of hotel space in neighboring areas, and a consequent rise in hotel rates, as well as increases in the cost of gasoline, food, and other necessities of life.

Invariably when a natural disaster causes shortages of the necessities of life, politicians raise an outcry against price gouging. However, if political threats of price controls and price-gouging lawsuits prevent prices from rising at a time of shortages, it is the consumers who will suffer in the long run.

Politicians, state lawyers and regulators called for action against price gougers and for price controls in states across the country. The Attorneys General of Alabama and Texas each threatened to prosecute businesses that raised their prices during the hurricane-caused emergency.

It might initially seem unfair for suppliers to raise prices in an emergency situation, but let’s examine more closely: A higher price due to higher demand is the way a free market allocates resources during a time of scarcity. High prices during a time of shortage are the means to bring out additional supply that will satisfy a greater number of customers and reduce prices over time. For a supplier of any good or service to keep prices below the free market level due to political coercion only causes frustration to those vying with each other to obtain scarce resources.

During a time of rapidly rising gasoline prices in the 1970s the U.S. federal state imposed price controls on gasoline. Instead of allowing price to stabilize supply and demand, chronic shortages of gasoline developed and Americans had to wait in lines for hours to buy gasoline. Naturally, the shortages disappeared as soon as price controls were removed.

High gasoline prices in the 1970s led the U.S. federal state to impose price controls. Instead of allowing price to stabilize supply and demand, chronic shortages of gasoline developed and Americans had to wait in lines for hours to buy gasoline. The shortages disappeared as soon as price controls were removed.

At the time of high post-hurricane prices in 2005, the U.S. Congress enacted a law ordering the Federal Trade Commission to investigate whether gasoline prices nationwide were artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices by refiners, large wholesalers, and retailers in the aftermath of Hurricane Katrina. After investigation, the FTC reported that it had found no instances of illegal market manipulation that led to higher prices and that “competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump. 120[Emphasis added]

For once, in the FTC report on gasoline prices, the ideas of the FTC were compatible with the economic law of supply and demand. However, generally the FTC has busied itself interfering with the operation of the law of supply and demand, as has the Antitrust Division of the U.S. Department of Justice.

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