Why is a "hockey stick bid" considered fraudulent?

By Richard Wilson AAA
A:

A "hockey stick bid" is a pricing strategy in which a supplier will spike the price of a commodity considerably beyond the firm's marginal cost. A supplier will typically make a hockey stick bid when the market demand for the commodity is very inelastic, so that buyers are willing to pay more for a commodity that is normally less expensive. A reason for such an inelastic demand could be a shortage of a necessary product so that the buyers are willing to pay whatever price the seller offers. (If you want to learn more about elasticity of demand, take a look at our Economics Tutorial on Elasticity.)

Examples of hockey stick pricing can be found in the energy market, where shortages sometimes occur and astute sellers realize the potential to make more money from the situation. The seller will then sell a small quantity of the commodity for a significantly higher price than average, thus forcing buyers to either forego the product or pay an exorbitant price. The term "hockey stick bid" refers to the graphical depiction of the pricing strategy in which the price is at a normal level and then suddenly spikes far beyond average levels, which often mirrors the shape of a hockey stick with the high bid being the tip of the stick.

This practice is considered fraudulent because it seems to manipulate the market price, especially in dire circumstances. A typical hockey stick bid example is that of an ice storm in which demand for energy to heat homes and businesses rises beyond regular levels and a energy supplier may submit a hockey stick bid forcing the buyers to pay excessively or freeze. In this example, it is clear that a hockey stick bid creates victims (the buyers) while the seller reaps the profits from the heightened need for the good.

This question was answered by Richard Wilson.

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