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.

RELATED FAQS

  1. What was the Mahonia company and why did it become the subject of a lawsuit?

    In 1992, J.P.Morgan went into the energy trading business by creating a venture company called Mahonia Limited. At least, ...
  2. What was the most notable hostile takeover of all time?

    The drama of the RJR Nabisco takeover and wide coverage make it one of the most notable takeovers in history.
  3. What are the dangers of using the Electronic Federal Tax Payment System (EFTPS)?

    The Electronic Federal Tax Payment System (EFTPS) is a convenient way to file your taxes, but you need to be aware of some ...
  4. Am I responsible for fraudulent charges on my credit card?

    In the event that your credit card is stolen in the United States, federal law limits the liability of card holders to $5 ...
RELATED TERMS
  1. Banker Trojan

    A malicious computer program designed to gain access to confidential ...
  2. Black Market

    Economic activity that takes place outside government-sanctioned ...
  3. Bear Raid

    The illegal practice of ganging up to push a stock's price lower ...
  4. Voodoo Accounting

    Creative rather than conservative accounting practices. Voodoo ...
  5. Cookie Jar Accounting

    A disingenuous accounting practice in which periods of good financial ...
  6. Financial Shenanigans

    Acts or actions designed to mask or misrepresent the true financial ...
comments powered by Disqus
Related Articles
  1. Consumer Protection Laws You Need To ...
    Personal Finance

    Consumer Protection Laws You Need To ...

  2. Credit Scams To Watch Out For
    Insurance

    Credit Scams To Watch Out For

  3. What You Need To Know About Insurance ...
    Insurance

    What You Need To Know About Insurance ...

  4. What Investors Can Learn From Insider ...
    Markets

    What Investors Can Learn From Insider ...

  5. Identity Theft: How To Avoid It
    Insurance

    Identity Theft: How To Avoid It

Trading Center