Analytics

Disaster profiteering and the coronavirus pandemic

There is an old-fashioned English saying: where there’s muck you’ll find brass. The phrase means unpleasant situations (‘muck’) can often present business opportunities (‘brass’ is an English colloquialism for money). And it proves true. When the consumer demand for a good increases, there will be a potential scarcity of supply of that same good, and so the price of the commodity also increases. A global crisis creates the perfect storm for increasing demand and scarcity. And where there is growing demand, an opportunist will smell profits.

The American academic John Mutter in his recent book calls this type of scenario one of disaster profiteering and those who stand to benefit disaster profiteers.  Profiteering from disaster, Mutter reveals, is far from accidental but an outcome of design. After hurricane Katrina in New Orleans, the American real estate developer Joseph Canizaro said the clearing out caused by Katrina represented some ‘very big opportunities’.

Inevitably the COVID-19 pandemic has helped create a whole new class of disaster profiteers – both large and small. There has been a surge in the demand for basic food staples as consumers started panic buying. There has also been a surge in demand for emergency products including: baby formula milk, hand sanitizer, antibacterial hand wash, cleaning products, medicines like paracetamol, thermometers and sanitary products. And inevitably as demand and scarcity grew for such products, so have prices. The prices of food and sanitary products in the UK increased throughout March and April in online shops. Statistics from the Office of National Statistics revealed that a basket of basic food and cleaning products cost 4.4% more than before the official lockdown closure in the UK.

Increased prices may be inevitable in this current crisis, and to an extent they may cover the extra costs incurred in the supply chain. But what characterises disaster profiteering above all else is price gouging. Price gouging is not just an average price increase of just few percentage points but involves a sudden and very considerable spike in the price of goods, services or commodities to a level much higher than is considered reasonable or fair. What can be counted as an unfair price increase? There is no definite rule or formula for what constitutes price gouging. Even so, in the US, laws define price gouging as an increase above a certain amount such as 20% or increases that are not deemed ‘reasonable’. Another good indicator is making a price comparison with other well-known retailers and if there is a radical disparity we are in price gouging territory.

It’s no surprise to find the COVID-19 pandemic has presented ideal opportunities for disaster profiteering via price gouging. Numerous instances of exploitative price increases have been reported in the US. In New York police arrested a man who had stockpiled medical gear, allegedly selling it for a 700% mark-up. In Minnesota, one convenience store charged $79.99 for 36 rolls of toilet paper and another raised the price of lentils and rice by 60%

But coronavirus price gouging is a global phenomenon. Back in February in Russia, before even WHO declared the coronavirus a pandemic, President Vladimir Putin ordered that pharmacies caught inflating the prices of face masks would be stripped of their operating licences. It was reported in Japan that a local politician had sold face masks at highly inflated prices, making 8.9 million yen ($87,000) in the process.

The real hotbed of pandemic-driven price gouging can be found not in high street shops but in well-known internet auction and retail sites. In Florida, one seller was offering 15 N95 face masks on Amazon for $3,799. In the UK, eBay auction sellers raised the prices of hand sanitizer (an important defence against contracting the virus) by up to 5,000% with a 49 p supermarket bottle of sanitizer sold for £29.99. The Independent newspaper in the UK reported how a 5-litre bottle of hand sanitizer Carex, which usually sold for around £13, was listed on Amazon for £63.93. Potential online customers vented their anger: ‘What a rip-off hope the seller gets the virus’, and added: ‘I bought this months ago at £13ish. Now £89.99 robbing b*****d. Should be prosecuted for profiteering.’

Italy is no stranger to online price gauging of ‘coronavirus products’ despite the notoriety of being the country hardest hit by the virus. In late February, as the coronavirus victims were increasing and Italian pharmacies were soon running out of sanitizing products and masks, a 250 millilitre bottle of a popular Italian sanitizer Amuchina (normally selling for €7.50) was sold for €50 on eBay. A 1 litre bottle of the same product reached a record price of €799.

Various national governments and police authorities have also taken action to combat coronavirus profiteers. In the UK, the public body that polices fair competition has formed a coronavirus taskforce to pursue companies that have profited from the pandemic by inflating prices or by selling fraudulent products which are claimed to be cures or vaccines for coronavirus. Forty states in the US have laws against price gouging, and many governors issue emergency declarations to activate these laws in response to the coronavirus pandemic. The New York Times reported in late March that senior lawyers across thirty states issued letters to Facebook, Amazon, Craigslist, eBay and Walmart pressurising these to act against online price gouging. In Spain, which has one of the highest COVID-19 casualty rates globally, police forces have intervened to combat the underground market for coronavirus goods, as well as limit the damage done by websites claiming to sell drugs that can treat the virus. During March of this year, Spain’s national military police, the Civil Guard, announced it had seized around 69,000 masks and more than 5,000 goggles and gloves at airports and ports. Some of these seized medical products were due to be auctioned online.

Governments are not working alone. Online retailers are sensitive to the charge that their platforms are being used to exploit consumers and have taken action against sellers listing coronavirus-relevant commodities at vastly inflated gouged prices. Amazon has deleted listings of hand sanitizer and face masks with marked-up prices, and eBay has tried to prohibit the sale of such items as hand sanitizer and masks. A company spokesperson for Amazon claimed that ‘…in line with our long-standing policy, have recently blocked or removed tens of thousands of offers. In addition to removing these offers, we are terminating accounts.’

Despite the actions being taken voluntarily by private retail platforms such as Amazon, as well as by governments and police authorities, price gouging and general disaster profiteering seems to be spreading like the virus itself. The coronavirus price gouging curve is not being flattened. The UK consumer advocacy group Which? investigated online retailers following the claims made by the likes of Amazon. The report concluded there has been a failure of ‘filters’ and other checks put in place by eBay and Amazon to adequately protect consumers against aggressive price gouging. Which? found active auctions with multiple bids of products – some with a cost inflation of up to 1,000% despite all the promises from these online retailers.

What might be a more effective strategy for combatting COVID-related price gouging? It seems waiting for companies to self-regulate to protect consumers has proven far from effective. One strategy is potentially effective at tackling price gouging but has been rarely used other than in some exceptional cases. And that strategy is price capping or price controls. Take the Jordanian government which has capped the prices of common food products to protect consumers from exploitative price gouging. Capping prices remains an unpopular strategy on the part of governments, despite being an effective policy tool for combatting disaster profiteering. The Nobel Prize winning economist Angus Deaton was once asked back in 2012 about whether price controls could be justified in times of crisis. His answer is more than relevant today: ‘Efficiency is less important than distribution under such transitory conditions.’

By Dr Michael Marinetto, Senior Lecturer in Public Management, Cardiff University Business School

Previous ArticleNext Article