Price Gouging in the Age of Coronavirus: An Analysis of the Regulatory Strategies

[S.S. Shri Lakshmi is a 3rd year student at Hidayatullah National Law University, Raipur (HNLU)]

Amidst all the panic caused by the current novel coronavirus (COVID-19), the international economy has suffered a beating. Factories across China have closed, bringing exports to a halt and oil stocks have plummeted due to a drastic cut in travel. At the same time however, specific industries have been “benefiting” due to this outbreak. For instance, while both hand-sanitisers as well as facemasks have held only a small market share in India in the past, as the number of COVID-19 patients continue to surge, there has been a manifold increase in the demand for these goods.

Along with this increase in demand, there has also been a simultaneous increase in the prices of these products by those seeking to cash in on this pandemic. While some of these prices reflect fair market conditions at a time of crisis, others seem to go beyond supply-demand market dynamics into the area of exploitative price gouging. While price gouging is not prohibited per se in India, in the United States (US) there exist several state-laws against it, with both civil and criminal penalties. This post critically analyses the utility of price-gouging laws and considers whether there is any scope for the applicability of such laws in India in the age of coronavirus.

First, one must consider the relevant market in which price gouging laws usually apply. Price gouging laws come into play during a “state of emergency,” which have in the past been declared for natural disasters such as hurricanes or floods for a limited geographical area. Often, during natural disasters like these, the goods that have been protected by price-gouging laws have been necessities like food or electricity. Although under typical free market conditions, the price of these goods would be allowed to increase indefinitely (as they would be considered to be scarce goods), two assumptions operate that support the application of price gouging laws instead. The first assumption is that these laws will only be applicable for a brief time until things go back to normal once disaster relief is conducted. The second assumption is that these goods are scarce only in the relevant geographical market and, in the worst case scenario where all the available product-stock is depleted, the demands of the consumers from that relevant geographic market will be met through imports.

The problem today is that, in the age of coronavirus, neither assumption is applicable. Since there seems to be no cure for COVID-19 yet, one does not know for how long this emergency will last. Not only this, but the scale of COVID-19 is so large and the ensuing panic so widespread, that if a relevant geographic market has to be determined, it would comprise most of the world, thus ruling out the availability of imports in the worst-case scenario. For what seems to be the first time in modern history, there could be a global shortage of these products, thus ruling out the applicability of price gouging laws in traditional markets. However, with the advent of technology, the consumer has access to another type of market via e-commerce websites. Let us now analyse the applicability of price gouging laws in such marketplaces as well.  

In the age of vertical marketing by e-commerce websites, which enable the customer to directly interact with the market, rather than seeing the products run out of stock (as is the case with traditional marketplaces), the consumer instead views this seemingly unfair increase in prices first-hand. Recently, US Senator Ed Markey of Massachusetts wrote to the CEO of Amazon regarding the “unjustifiably high prices” of hand sanitisers on their website, implying that Amazon was unfairly profiting from panic buying.

Various e-commerce sites like Amazon and Flipkart offer products that are otherwise sold out at traditional retailers, prompting the customers to turn to e-commerce sites to meet their ever-increasing demands. Merchants on online marketplaces have, however, taken this as a revenue generating opportunity and are listing overpriced goods on these websites. While the e-commerce platforms have been battling price gouging by blocking or removing suspected price gougers from their website, the bottom line is that the quantity of suppliers on these open marketplaces is simply too much for these companies to tackle effectively. Thus, upon a more careful analysis, one realises there is only so much that e-commerce platforms can do to regulate, without the government stepping in.

When speaking of government intervention, however, it is necessary to analyse when and to what extent the state should interfere with the market. It is necessary to question whether the government should prohibit price gouging, even if this interferes with the freedom of consumers and suppliers to make whatever deals they choose. It is also pertinent to note that anti-gouging laws have their own setbacks.

First, it could lead to the hoarding of products. If the price of necessary products remain the same even during times of crisis, consumers who get to the products first may feel encouraged to buy more than they need “just to be on the safer side.” This could exacerbate the shortage that already exists. On the other hand, moderately high prices would force a person to think carefully and ration their supplies (for example, buying one litre of hand wash, instead of two), allowing more people to benefit from the current supply of goods.

Secondly, and more importantly, the freedom to increase the prices of the products during times of crisis also acts as an incentive for manufacturers to push past hurdles that may arise in the face of the crisis, and they may continue to supply essential goods. For example, in the face of coronavirus, manufacturers would be less likely to suspend the working of factories that manufacture say, sanitisers, if they believe that they will see increased profits from the sale of these products in the future.

Therefore, while it may be easier to favour price gouging laws in times of crisis over fair-market prices, as determined by the forces of supply and demand, it is also necessary to understand that outright intervention may lead to the opposite of the effect that is desired. At the same time, however, the need for regulation of prices of such products of hygiene exists because the demand substitutability of such products is quite low. Further, especially in a country like India, if the prices of goods like hand sanitisers or masks increase beyond a point, citizens are likely to fall prey to hoaxes and buy fake remedies for coronavirus instead.

Thus, rather than direct interference in the market, a more amicable solution seems to be one where the government acts as a regulator. For instance, one solution can be that the new price of the product in times of crisis cannot be higher than say 10% or 20% more than the average price of the product over the past three months. Such a middle ground can be adopted by countries like India, instead of going so far as to introduce price gouging laws in the age of coronavirus.

Another solution could be in the form of excessive pricing laws. However, while India has prohibited excessive pricing under the abuse of dominance provisions under the Competition Act of 2002, the Competition Commission is often unable to enforce these laws as it is difficult to prove what exactly is ‘excessive pricing.’ In such scenario, the novel approach taken by Amazon in the US may be emulated, where Amazon does not display the normal “Add to Cart” and “Buy Now” buttons on the product page. Instead, Amazon displays an alternative “See All Buying Options” button, which directs customers to an extra page where they can view and compare different prices for the same product as sold by various sellers. This occurs when Amazon’s technology determines that the price of the item is too high compared to prices elsewhere on the web. This small change in the placing of buttons satisfies the dual purpose of not only allowing the consumer of all of their options, before they are allowed to make an informed decision regarding their purchase, but also ensures that the manufacturer is kept in check and restrained from listing high prices, in the fear that a consumer may easily choose another less-expensive product.

Finally, it is especially important to keep in mind that the goods being regulated in this case are not the usual items that are regulated during a crisis, such as food or electricity. Rather, they are items of personal hygiene and are preventative in nature. Some of the items facing a shortage such as masks and medicines may be more necessary for hospital staff and persons already affected by coronavirus, rather than the general consumer population who buy these products out of panic rather than necessity. Thus, steps may also be taken to ensure that goods are not hoarded and are available on a priority basis to those who need it the most.

S.S. Shri Lakshmi

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  • An interesting insight into a contemporary issue. Hope you follow it up with a more discursive analysis. Also, in highly interconnected international markets such as the EU, how do you think this dynamic would play out? Just curious and wanted to know an educated opinion, since you seem to have given it some thought

    • Hello! I am very glad you found the article interesting. Thank you so much for your question. It made me think quite a bit. Here is my take on the same:

      Currently, only the USA has price gouging laws, whereas the EU, India etc. have laws related to excessive pricing (please refer to the United Brands case for a closer analysis of this EU law). I do believe that price gouging laws could be used as a tool to reduce price differences across the EU market, especially because much focus is given to this already. However, while it is true that some parts of Europe have been worse affected by COVID-19 as compared to other parts (eg: Italy), in a crisis that is so widespread, the prices of the goods can be kept same/similar (through imports, coordination with other EU countries etc.) only up to a certain extent and for a limited period of time. While it would typically not be a problem for other member states to absorb costs in other situations of ’emergency,’ owing to the far-spread nature of coronavirus, I believe that the demand and supply will be so skewed at some point that changes in prices become necessary (to prevent hoarding etc. as I have mentioned in my article).

      Apologies for the delay in my response. Hope I was able to answer the question to your satisfaction!

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