How Government Makes Us Pay Higher Gasoline Prices

Kimberley Strassel wrote an editorial last week in the Wall Street Journal entitled Another Reason to Love Wal-Mart (available for a fee). In that editorial, she provides another example of how misguided government behavior is forcing many working families and retirees across America to pay unnecessarily higher gasoline prices:

The Senate passed its energy bill yesterday, and is already peddling the fiction that this uninspired bit of legislation may somehow help with soaring gas prices. Yet if drivers really care about getting some immediate relief at the pump, they'd be better off putting some heat on their own state legislatures to back away from a class of anticompetitive laws that are jacking up gas prices around the country.

Known as "sales-below-cost" laws, these restrictions take different forms but all have the same purpose: to protect smaller gas stations from larger competitors who are willing to sell fuel at cut-rate prices. Some of these laws forbid retailers from selling gas below cost, while others actually force companies to mark up their prices. Many were passed back in the 1930s, relics of a bygone era when governments fretted that gas behemoths would use predatory pricing to gain a monopoly and drive out competitors. That threat, we now know, was never very likely, and in the meantime the laws have accomplished the exact opposite -- blocking new entrants to the market and preventing pro-competitive price-cutting.

The only big bad gas giants these days are the Wal-Marts and Costcos of the world, who see gasoline sales as a natural extension to their one-stop shopping philosophy. These giant retailers, while still less than 10% of the gasoline market, are ramping up gas sales in a huge way, and often can sell their fuel at up to 15 cents a gallon cheaper than many competitors. That's because they can often buy their product in bulk at a better price, or can make up for cheaper gasoline sales with profits from other products inside their stores.

But their growth has also inspired a backlash from mom-and-pop retailers and convenience stores, all of which have turned to below-cost laws as their preferred political tool for kneecapping this new competition. Some 13 states currently have below-cost laws, from Massachusetts to Alabama to Utah, and in recent years, with gas prices and drivers' tempers rising, sensible legislators had contemplated repealing the antiques. In response, the independent gas retailer lobby has geared up and made the retention and vigorous enforcement of the laws their No. 1 priority...

....A favorite argument of these smaller businesses is that the law is still necessary in order to ward off nefarious antitrust behavior...

This argument gets to the heart of the flawed logic that motivated the original passage of below-cost laws. Antitrust law, as any good economist will tell you, exists to protect consumers. As such, below-cost pricing isn't on its own an antitrust threat. It is only considered a problem if there is a reasonable likelihood that the company engaged in lower pricing is likely to become a monopoly, which would then allow that firm to later raise prices to supracompetitive levels that would harm consumers.

Over the years, economic research, legal studies and court cases have all found that below-cost pricing hardly ever leads to a monopoly, and that it is especially unlikely in the competitive market for motor fuels...

What antitrust is not about is protecting competitors from more efficient, or more aggressive companies. Yet that is clearly what laws like Wisconsin's are being used for, and nobody denies it. That's one reason why the Federal Trade Commission has felt compelled to wade into this debate, encouraging those states with below-cost laws on the books to get rid of them...

...As gas prices go up, this blatant protectionism will be all the more inexcusable.