The simple and straight definition of this concept is pricing and selling at a price level, that is substantially higher than the fair price level.
Price Fixation and Cost Fixation
The concept of market is made up 4 important factions. Firstly, there is the product or the commodity that is sold by the supplier/producer. Next, there is the supply, that is number of units that are supplied into the market. Third, there is the demand for the supplied commodity or unit, which is of course backed by the ability of the consumer to pay for the same. Last, there is the price of the product.
There are two basic ways in which price of any commodity is ascertained.
- Costing is the primary, or initial method with the help of which price is set. Costing is a technique where the price of the commodity/product is derived at the factory level. In such a case, cost of production plus overheads, plus taxes, plus transportation cost, plus profit margin, determine the cost of the commodity.
- Once this commodity enters the market, a certain demand for it gets generated. The basic rule of thumb that is observed is that more the demand, for lesser units, the more is the price of the commodity. The less the demand the lesser the price. The same principle works the other way round also. That is, the more the units supplied, the less is the cost, and the less the supply the greater is the price. This principle is known as the demand and supply analysis.
Now, based upon these two principles, the suppliers/producers can also manipulate and escalate, or even inflate, the price levels in an unethical manner. Here's an explanation on how it is done, or why it is deemed to be unethical.
About Price Gouging
All of us have heard of gouging of gas price. In this phenomenon, the actual calculated cost price of gas is much lower, and the price for which it is sold is much higher. Now, the unethical part comes in where sellers, increase their profit margin, overprice their production cost and finally send lesser units into the market.
In such instances the price escalates, drastically, or unnaturally. A method which escalate the prices, which is commonly used, is where the number of units sent into the market is very less and at the same time, a substantial number of units that are sold are stored away, creating a higher demand, boosting the price levels. When the levels go up, the stored away units are sold off. This phenomenon is known as artificial scarcity.
The gouging phenomena comes under the scanner of governments, when the general public gets affected by it. Auctions, costly and luxury goods, cannot be deemed to have gouging effects. However, fuel, medicines, food, clothing and other things that are required to survive, or even live properly, cannot be priced over a certain limit. If the prices exceed the fair price, then anti-gouging policies are adopted by the government. Gouging of prices is a felony in some nations and states.
Gouging of prices is something that is to be frowned upon, as it is almost as good as robbing of basic needs. Socialist and communist nations deal with such phenomena in a very harsh manner. There are some basic necessities of every human being on which a price tag cannot be added on, simple things like water or air or medicines or even a few morsels of food, are not be sold or measured in monetary terms, they are to be shared properly, and justly by all humanity.