Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, May 06, 2005

Predatory Pricing in Gasoline

The Washington Post reports that this week some gasoline stations in Maryland were required to raise their gasoline prices because of a law passed in 2001 requiring that they not sell gasoline for prices below the wholesale cost. The avowed purpose of the law is to protect competitors from predation and, hence, protect consumers from the long run monopoly prices that would ensue once small independent competitors were driven out of business by the predatory firms with long purses.

Independent service station owners pressed lawmakers for the measure as a way to protect themselves from big retailers selling gas below cost to drive them out of business and limit competition.

...Maryland law prohibits companies that refine gas from operating stations. That means all Exxons and Chevrons, for example, must be operated independently. The independent operators argue that this creates more competition and lowers prices, though the Federal Trade Commission staff has said companies that operate both refineries and stations have efficiencies that can bring prices down.

..."These laws are not necessary," said Mitchell J. Katz, an FTC spokesman. "They hurt competition."
The laws against price-cutting are clearly designed to protect competitors, not competition. Can you say "Robinson-Patman"? The literature in economics is rife with examples and theoretical treatments. Classic articles about predatory pricing and how unlikely we are to observe it include those by Lester Telser and John McGee. So why does the article say,

Several economics professors were unable point to any definitive research showing that the law would ultimately hurt or benefit consumers.
Perhaps the writer of the article, along with the Maryland legislators, needs to read the recent postings by Brad DeLong here and here [Thanks, JC], by Phil Miller here and here, and by Alex Tabarrok. How definitive do they want?

As a consumer, my reaction to gasoline price wars is "Hurt me some more, please!"
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