The problem with bidding wars during a national pandemic

April 01, 2020
by Gus Iversen, Editor in Chief
While most people in the U.S. are busy ensuring they have the necessary supplies and resources to get through the novel coronavirus (COVID-19) pandemic, some enterprising schemers have seized upon the crisis as a way to make a quick buck at the expense of others.

In Tennessee, for example, two brothers set out on a 1,300 mile road trip buying up all the hand sanitizer, respiratory masks and antibacterial wipes they could find with the intention of selling it all at a premium online, New York Times reported.

In Texas, more than 750,000 medical-grade masks went to the highest bidder on a consumer auction website called Auctions Unlimited, Bloomberg reported. Bottles of Purell hand sanitizer sold on the website for over $40, and a box of 16 respiratory masks went for $170.

For a while, plans like these were working as hoarders intended, but soon a public outcry put pressure on online retailers to stamp out unethical price hikes.

“No one should be allowed to reap a windfall from fear and human suffering,” Massachusetts Senator Edward J. Markey wrote in a letter to Amazon CEO Jeff Bezos on March 4. “Internet-based retailers such as have a particular responsibility to guard against price gouging in current circumstances as consumers — who are finding the shelves of local brick-and-mortar stores bare, and who may wish to avoid venturing into crowded stores and shopping malls — turn to the internet.”

After the two brothers were profiled in the Times, the Tennessee attorney general’s office sent investigators to the home of the hoarders, presented a cease-and-desist letter and began investigating the case. In Texas, the attorney general filed a lawsuit to prevent Auctions Unlimited from price gouging, (although the site owner contends they did nothing wrong).

What started as a money-making strategy turned into a fruitless and illegal enterprise.

When does price gouging become illegal?
HealthCare Business News reached out to Bob Litan, non-resident senior fellow at Brookings Institute, to find out what separates a clever scheme from an illegal racket. It turns out that price gouging laws are primarily determined on the state level. In the absence of a crisis (like the COVID-19 pandemic, or a hurricane, for example) the laws of supply and demand are generally left to their own devices. It's when the government declares a state of emergency, Litan said, that price gouging rules start to factor in.

In Texas, the Deceptive Trade Practices Act prohibits anyone from selling necessary items at an excessive price when a disaster is declared, therefore the price gouging lawsuit filed against Auctions Unlimited hinges on the fact that Texas governor Greg Abbott issued a disaster declaration prior to the listing. If the declaration had not been made, then there wouldn't be much of a case.

In Tennessee, governor Bill Lee declared a state of emergency on March 12, triggering the state's own anti-price gouging law. By that time, the two brothers were already having difficulty posting their stockpile on sites like Amazon and eBay, leaving them with nearly 18,000 bottles of hand sanitizer and nothing to do but sell it locally and at a fair price, (according to the Times, the brothers are now seeking to donate their stockpile).

The specifics of price-gouging rules vary among the 30+ states that have them, according to Litan, and although many use language that is open to interpretation (like "excessive" or "unconscionable") California's law specifies a 10% threshold over the normal cost.

Ventilators illustrate a national challenge
While U.S. citizens may struggle to track down hand sanitizer in their neighborhoods, the COVID-19 pandemic is triggering shortages on a national scale that extend beyond personal protective equipment to capital equipment that can be used to save the lives of infected patients.

"Price gouging laws become most relevant with respect to ventilators because if you allow the market to work, then the ventilators would get sent to the highest bidder," said Litan. "But what President Trump can do under the Defense Production Act is allocate ventilators by telling Ford and GE to set pre-crisis prices and let the federal government allocate the ventilators as it sees fit," referring to the companies' plan to produce up to 50,000 ventilators within 100 days and 30,000 a month thereafter for patients who test positive for COVID-19.

In New York, the state that has been hit hardest so far by COVID-19, Governor Andrew Cuomo argues the existing plan for allocating ventilators needs a lot of work. At a press briefing yesterday he described a “bizarre situation” in which every state buys its own ventilators, pitting them against each other in bidding wars, the Guardian reports.

“We all wind up bidding up each other and competing against each other, where you now literally will have a company call you up and say, ‘Well, California just outbid you.’ It’s like being on eBay with 50 other states, bidding on a ventilator," Cuomo said.