June 05, 2004

Higher Prices Are Lower Prices!

Alex Tabarrok has the standard economist's reaction to Minnesota's (and Maryland's) minimum-gas-price laws: he bangs his head against the wall:

Marginal Revolution: How to lower gas prices: Minnesota's Commerce Department has fined a number of gas stations, often attached to Wal-Marts, for selling gas too cheaply. "The state adopted a law in 2001 that bars gas stations from selling gas without taking a minimum profit. These days, stations must charge at least eight cents per gallon more than they paid. The Commerce Department is now issuing its first fines for breaking the law."

At which point "related field" Ph.D. candidate Chun enters the lists in defense of the Minnesota (and Maryland) legislatures by making the standard argument made by non-economist social scientists who have never taken a course in industrial organization:

Chun the Unavoidable: Fining Wal-Mart for Underselling Gas: Perhaps they, being rich economics professors, won't mind when Wal-Mart is the only entity you can buy gas from, at $12/gallon. Though since this act of creative consolidation would probably spur unknown technological advances, of a likely nano-nature, I should probably just go to my local Supercenter and be thankful I don't live under socialism.

Microsoft could successfully follow the strategy of underprice, grab the whole market, and then raise prices (somewhat) because the market for operating systems is not contestable: it's really expensive to write an operating system, and if you are a new entrant with a small market share the magnitude of this up-front cost makes it impossible to make a profit--hence no new entrants into the operating system market (save for Linux, which works according to a very different logic than that of market profitability).

Walmart cannot successfully follow any analogous strategy. Suppose it sells gasoline cheap, wipes out all competitors in the area, and then raises prices to $12 a gallon. What happens then? Well, the underground storage tanks of its defunct competitors are still there. Gas pumps are cheap. $12 a gallon is a lot of money. You get lots of new entrants taking over the locations of the old gas stations, and competing with Walmart. If Walmart wants to maintain its monopoly, it must limit price to make new entry unprofitable. And since new entry is easy and cheap--since the market is contestable--the limit price is not that high above the competitive price.

Walmart cannot acquire a monopoly by underpricing--"predatory pricing," it is called--without giving a large present to consumers. And the contestability of the market means that it cannot take that present back once it has acquired a monopoly. Few industries have cost structures such that attempts at monopolization through "predatory pricing" harm consumers. Even in the case of Microsoft, it is not clear that Microsoft's success was bad for users: users got a lot of pretty good software cheap for quite a while, and even those who (like me) are Apple customers found the prices of our software reduced by competitive pressure from Microsoft. I think Microsoft's success was (probably) bad for consumers, but it is definitely an issue to be debated.

You can claim that minimum-gasoline-price laws are good because independent gas station owners are morally worthy people, the salt of the earth, the backbone of America, and they deserve to have the power of the state deployed to protect them and their livelihoods against the amoral efficiency calculus of the market. I will laugh at you if you do, but you can make that claim. You cannot make the uninformed and ignorant claim that minimum-gasoline-price laws actually lower the long-run price of gasoline by "protecting" us from rampant monopoly--unless you have some reason to believe that gas stations are not part of a contestable market.

Posted by DeLong at June 5, 2004 07:41 PM | TrackBack | | Other weblogs commenting on this post
Comments

If you think that having the unmaintained-for-a-year-or-more underground storage tanks of a former gas station already present is a good idea for people looking to open a new gas station, gosh have I got some sites to sell you. It's far more typical for the buyer of such properties to excavate the old tanks and put in new ones, praying all the while that nothing has started leaking. Banks have been known to thank their lucky stars they walked away from such properties rather than foreclosing on them and thus assuming liability for the tanks. So it may be that the gasoline market is not a contestable as it appears at first glance.

Obviously there's some price level, if it's sustained for long enough, and if the monopolist doesn't have the cash set aside for a price war, at which rehabilitating old stations or just opening new ones would offer a good risk-adjusted ROI, but it's not at all clear that the price in question would be cheaper for consumer than if competition (such as it is in the gasoline business) hadn't first been extinguished.

You also appear to be eliding a significant point from the Microsoft lesson, which is that a monopolist can engage in predatory pricing to gain a new monopoly because they have piles of money from an existing monopoly to subsidize their behavior. In Microsoft's case, monopoly rents on operating-systems sales subsidized, development and sales of browsers and other software. You got a lot of pretty good software cheap because you were paying through the nose for a bunch of other mediocre software whose sticker price you generally didn't get to see or negotiate.

The same would appear to be true for Walmart, which has a (short-to-medium term) noncontestable monopoly position in its low-end retail niche -- at least in the areas where it has driven many other local retailers out of business. (Anecdotal evidence suggests that Walmart doesn't always charge lower prices than all its competitors, but the cost to the consumer of finding out which items are priced better elsewhere still delivers an advantage to Walmart.) If Walmart were cross-subsidizing its gas prices by using its monopoly power to raise prices on other items, it could indeed engage in predatory pricing without giving a gift to consumers.

Posted by: paul on June 5, 2004 08:15 PM

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Around six years ago in Vancouver, there was a gas price war that drove prices down to below 40 c (Canadian) per liter. A few stations (mostly the independents, I think) did go under then. Now it's six years later and prices are just shy of a dollar a liter here (still Canadian figures), yet those stations have not reopened. Many of those sites are still dead gas stations rather than /anything/ else at all, and this during a tight real estate market.

All of which is to say that I agree with Paul that the retail gas business probably isn't quite as contestable as Brad says.

Posted by: ArC on June 5, 2004 08:32 PM

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Here's something that I've never quite grasped: A monopolist wipes out its competitors and raises prices in the market. The textbooks say that new entrants will enter the market, attracted by high prices. But why would anyone enter this market? The monopolist just wiped out the last set of competitors. Are not the new entrants just as likely to get wiped out by the same monopolist?

In the instant case, is it truly likely that new entrants would enter against Wal-Mart, only to get wiped out like the last set set of competitors? Is there any empirical evidence to show that new entrants really do enter such markets? It seems to me that the new entrants would get a better return on their money somewhere else.

Posted by: Larry Staton Jr. on June 5, 2004 08:35 PM

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Daniel Gross had a great column on Slate, which said gas stations are usually convenience stores that use gasoline as a loss leader for Budweiser, Marlboros, and Snowballs.
http://slate.msn.com/id/2100546

I doubt that Walmart's strategy for gasoline pricing has to do with securing a long-term monopoly profit on gasoline. I think it's being used as a loss leader for wooing current Walmart-haters by offering the only substance to which virtually all Americans are addicted. Cheap gasoline might not get these new customers to admit to their friends their new Walmart habit, but it might be enough to get them to fill-up the tank, then, "Why not, we're already there, let's get twenty rolls of Charmin." You can pay people to suffer their hypocrisy quietly.

I believe Dayton-Hudson owns Target, and they are both based in Minneapolis. Think the Daytons have some interest in protecting their Big Boxes from Walmarrt's Big Boxes? Think the Daytons have some pull in the Minnesota Legislature?

Posted by: jon on June 5, 2004 09:56 PM

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Not that I think it's likely to happen, but suppose WalMart does put up prices to $12 / gallon. Would someone enter the field and incur the expenses of beginning a new gas station, knowing that Walmart could, when it wished, undercut his price?

Posted by: Andrew Boucher on June 5, 2004 10:53 PM

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Long before the gas price went up to any thing like 12 dollar per gallon, the Gov'mint would enter the picture and regulate the market to make sure WalMart could not do as they damn well please to THAT extent.

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"...save for Linux, which works according to a very different logic than that of market profitability..."

Glad to hear that "a very different logic than that of market profitability" is possible.

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If this Chun feller is himself a Ph.D. candidate, how come he is worried that the economics Ph.D. get paid well?


Posted by: Bulent on June 6, 2004 12:07 AM

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Sorry. Missed the point about the exact expression: ".. related field Ph.D. candidate..."

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"...You can claim that minimum-gasoline-price laws are bad..."

You must have meant "good"?

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"...You can claim that minimum-gasoline-price laws are bad because independent gas station owners are morally worthy people, the salt of the earth, the backbone of America, and they deserve to have the power of the state deployed to protect them and their livelihoods against the amoral efficiency calculus of the market. ..."

If they need protecting, it must mean that "the gas stations are not part of a contestable market.." as far as independent gas station owners are concerned, in absence of regulation.

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Minnesota and Maryland State Governments appear to pursue a policy of keeping the independent gas station owners in the picture. Policy, of course, cannot be explained in economic terms alone.

Posted by: Bulent on June 6, 2004 12:28 AM

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Uncontestable markets belong in the same place as unapproachable beauties - a fairy tale.

Posted by: bubba on June 6, 2004 01:25 AM

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Granted, no "beauty" is absolutely and forever unapproachable, or else she is not a "beauty" but a saint; but some beauties may be unapproachable to some of the dudes at least for a while or perhaps for good, usually due to competition from better positioned dudes.

Once the rich dude Wall Mart is allowed to break the backs of the poor dudes the independents, they will stay away from the market unless they are sure, e.g., by State guarantee, that Wal Mart won't be allowed to do that again. Rich dudes other than Wal Mart, of course, may wish and indeed be able to enter the market. But that's a story different than the policy of keeping the independents in the picture.

Posted by: Bulent on June 6, 2004 03:15 AM

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Just to state the obvious- (my occupational specialty)-, do y'all think that Walmart wants to compensate its customers for gas-milage, given its basic business-model? (Do y'all think they'll give their employees the same consideration?)

Posted by: john c. halasz on June 6, 2004 04:01 AM

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It seems to be that Walmart's entry into the gas market is more analogous to Microsoft's entry into the web browser market than anything else. Walmart's interest, like Microsoft's, is to make sure that they leave no money on the table in a customer transaction. If Walmart can make it sufficiently exceptional to shop elsewhere for most Americans (the way that Microsoft, say, dominates the OS market), then it won't matter if another company has a better network stack or cheaper gas -- most people won't bother.

I'm not worried about $12/gal gas, but I am a little worried about Walmart going from having 10% (or so) of the US retail market to 90%.

Posted by: JO'N on June 6, 2004 06:09 AM

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Jon,
Target Corp is the name of the company (they changed their name from Dayton Hudson in 2001). Now Target Corp is trying to sell their Marshell Fields and Mervin's store brands after killing their Dayton's and Hudson's Brandings (Those brands had limited appeal to spacific 'smaller market areas' (Minneapolis and Detroit areas)). Target Corp is doing alright nationally by creating Super Targets that offer more up scale products then WalMart. They do not compete in gasoline market to my knowledge. What I find intresting about the Minneapois and even the Minnesota Markets is that the major national convenience stores chains don't exist here. There are no Seven Elevens or Circle K's here. Only Super America (called Speedway in most of the US) and Holiday stores which is a regional player. WalMart is here but I have not see any with a gas station attached.

Posted by: HinderLands on June 6, 2004 07:13 AM

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I've tended to follow the gas tank wars since my childhood when a.) I lived in two places where the groundwater got contaminated with gasoline, and later b.) my father bought the gas station next door to expand his pharmacy, and I got to see the game-playing as Esso and the former owner fought each other tooth and nail to throw onto each other any future liability for past leaks.

So Paul and ArC are, in my experience, correct above, and Brad is a little too optimistic about those tanks waiting to be used. Today when a Seven-Eleven goes out of business, they'll pull even quite new tanks out of the ground, rather than leave them there for somebody else to use, lest the future user should back-date the blame for future leaks.

(Incidental note. Seven-Eleven, like Timex, is a company of a type that should have a category-name: a company which is owned by one of its former subsidiaries. "Fallooncorps," cognate to "granfalloon," perhaps? Seven-Eleven was bought out of bankruptcy by its Japanese branch, while Timex belongs to the Hong Kong guy who used to supply it with watch-bands. Any bets of when US Steel -- and Stelco -- get bought by some Korean rivet grinder hey set up in business?)

Posted by: David Lloyd-Jones on June 6, 2004 08:32 AM

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Brad's application of constestable market theory to retail gasoline prices is mainstream orthodoxy for many/most economists but is it the whole story of what is going on?

Supermarkets and superstores periodically engage in loss-leading for popular product lines not with much hope of wiping out tranches of their competition but because it is a more cost-effective form of advertising in prevailing market circumstances. The hope and expectation is that the additional customers will take the opportunity to buy other products as well, thereby enabling the stores to recoup losses from negative margins on the loss-leaders.

Of course, there may be "collateral" casualties among competitors but that is potentially true also of other sales promotions, including the benefits to customers of one-stop shopping, which is one reason supermarkets generally have gained market share at the expense of small, specialist shops in high streets and local shopping centres, which may impose social costs. The wider policy issue becomes whether there ought to be any restrictions on the growth of supermarkets. Some argue that there should although I balk at that point.

A more challenging question for economists who say there should be no restrictions on loss-leading by supermarkets is whether they would apply the same analysis in international trade when it is termed "dumping".

Posted by: Bob on June 6, 2004 08:55 AM

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We’re hearing a lot about Reagan. He was a genial and friendly man. His heir is Arnold Schwarzenegger, not either Bush. His philosophy of "be happy and let the free market work its magic" looked good in the 1980s, when there was no imminent energy problem. The Soviet Union was built on quicksand and could not prevail, any more than the Confederacy could prevail against the industrial and more populous North. The US had a short-term winning hand, and Reagan upped the ante. Today the Asian countries have the best hand, in spite of their lack of petroleum, and China’s problems.

Our number one problem is thinking short-term; I agree that Chun is wrong. But who is thinking long-term? President Bush would distract us with a mission to Mars- the same amount of money in the same amount of time could get us off petroleum (conservation and Bio-diesel are good but not remotely enough, ethanol fuel is a crooked fraud, and hydrogen fuel cells unwise because hydrogen filling stations are a nice target for a one or two man terrorist team). Lacking its Afghan headquarters, Al-Qaeda can't mount an organized operation like the 9/11 attacks. Terrorists can mount small independent truck bomb attacks in almost any country- do we want concrete walls and military guards surrounding every hydrogen filling station? Other types of fuel cells seem much more desirable and would avoid the energy cost of the electrolysis of water.
We need better education, a living wage for all willing to work, and a 20-year energy plan. We must prepare for the collapse of the House of Saud- Islamic fundamentalists can't run a complex country, but I believe that they have a 50% chance of bringing down the House of Saud in the next 6 years. The dumbest thing we could do is land US troops in the kingdom when that happens. We can’t solve our energy problems in isolation from other issues. The American West faces years of severe droughts. Growth of our desert cities should be slowed. Decentralized energy production by fuel cells has much to offer. Nuclear power is top-down power and requires subsidies and protection from terrorists.
Monopolies are bad, religious fundamentalism is worse. Asian culture supports science and long-term projects, US culture does not.

Posted by: anciano on June 6, 2004 10:30 AM

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bubba:

"Uncontestable markets belong in the same place as unapproachable beauties - a fairy tale."

So you seriously believe that were Wal Mart
to charge 12$ per gallon for its gas there would
be NO competitors popping up and undercutting
that price? Jeez, talk about living in a
la la land.

Posted by: radek on June 6, 2004 10:52 AM

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"A more challenging question for economists who say there should be no restrictions on loss-leading by supermarkets is whether they would apply the same analysis in international trade when it is termed 'dumping'."

Most of us would in fact apply the same analysis here, so it isn't a challenging question. If Korea (or Gary, Indiana for that matter) wants to send us cheap steel, think of it as a gift. Even those of us of a conservative bent cried like bloody murder when Bush imposed those steel tariffs a while back.

One thing to keep in mind (Larry Staton, this means you) is this: Can Wal Mart (or Standard or whatever bogeyman you can think of) credibly commit to fighting each new entrant? That is, is it intelligent for Wal Mart to be willing to take a loss each time, if and when, someone enters the market? No. There are industries where this sort of thing may matter, but a more or less competitive industry like gas retailing isn't one of them. The problem for the incumbent is one of credibility.

Why stop here? Why not have laws to ensure minimum prices for things like food (to benefit certain grocery stores), books (to benefit certain bookstores), and houses (to benefit homebuilders)? It's not like consumers matter.

David, good point about the environmental issues and laws surrounding gas retailing. There are big fixed costs to be concerned about, but I think that people are confusing financing issues with economic issues. If a fixed cost has already been paid, it's worth it for existing gas stations to have a credible strategy of riding out attempts at predation. This might be one of the few useful applications of game theory.

Posted by: Chris on June 6, 2004 10:58 AM

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Whenever the “evils of WalMart” topic comes up I usually tell my “Pillow Story”.

After my last cross country move, from the Midwest to the sunny California, it so happened that amidst all the confusion and bedlam usually associated with moving I had forgotten to bring a pillow. I had a bed, covers; pajamas even, but no pillow. In general I’m a bit of an insomniac anyway and no pillow means no sleep. So after getting the basics unpacked I decided to set out on my bike – I was car-less – and look for somewhere to buy a pillow, thinking it wouldn’t be too hard of a quest.

Well, it turned out to be Odyssian. I ended up spending most of the day looking for a store, any store, which would sell me a pillow. I was quite willing to shell out some serious pillow money too since my demand was pretty inelastic at that point, twenty bucks even. It was at that point that I started asking the locals “where’s the WalMart in this town?” – since that evil store is usually where one can buy stuff that is useful with little problem. I got two types of responses: #1 (while the person’s nose makes a sharp turn upward) “we don’t have WalMart in this town, nor do we WANT one”, and #2 “WalMart? Here? Oh man, you’ve got to be kidding, ha ha. You’re either putting me on or are new here. Man, I wish…”


Finally I found one of them celebrated Mom and Pop stores that had pillows. Pretty nice ones. Hand crafted by Nepalese mountain peasants out of yak hair and of course organic hemp. Some “cultural” designs on the damn thing. Certificate of authenticity assuring me that neither the peasants nor the yak were exploited during the making of this pillow. A little pamphlet relating the pillow to Buddha and the wisdom of ancient Nepal. Apparently, if I slept on this pillow I’d be one step closer to Nirvana in the morning. Price tag: Eighty freaking dollars. 80$.

Now, I don’t know about you guys, but I’m not paying eighty bucks for a damn pillow, sleep or no sleep, Nirvana or no Nirvana. Disgruntled and full of bad karma (thinking to myself “%^*#$!, ^&$$*$($*!”), I went home and tossed and turned all night.

The epilogue is that a few days later I met another new arrival who was making a scouting expedition/shopping trip to the nearest town with a WalMart in it and bummed a ride, where I found a decent, no fancy thrills pillow for seven bucks.

Anyways, I can’t help but think that there’s class snobbishness involved in all of this. I remember in high school if you wore WalMart clothes you’d get picked on, because it meant you were poor (i.e. shopped where the prices where low). Now it looks like some of these same folks that did the pickin’ grew up and managed to attach some faux-liberal-cause-d’jour to their snobbery. Yes, yes, that’s a really big generalization and I’m sure it doesn’t apply to everyone who thinks WalMart is an evil place. But if you really think that WalMart raises its prices once they drive the independents out of business, well, that’s proof to me that you haven’t been in a WalMart in awhile. You’re probably one of the yak-hair eighty-dollar pillow buying folks. The WalMart by my folks home’s been there for more than ten years and it’s still the cheapest place to buy various necessitates. Empirical studies support the same conclusion – WalMart prices cheap because they’re the lower cost producer.

Posted by: radek on June 6, 2004 11:22 AM

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"Most of us would in fact apply the same analysis here [to anti-dumping restrictions], so it isn't a challenging question."

I'm glad to learn there is no challenge but perhaps someone here can then, please, explain the alacrity with which the US has invoked steep anti-dumping restrictions whenever there was a prospect of a Japanese electronics company supplying a competitively priced supercomputer to an American customer.

"On May 17, 1996, the University Corporation for Atmospheric Research in Boulder, Colo., became the first federally funded agency to agree to buy a supercomputer made by a non-U.S. company, awarding a $35 million, five-year leasing contract for a weather-simulating supercomputer to a subsidiary of NEC of Japan. Three days later, prompted by complaints from Reps. David Obey (D-Wis.) and Martin Olav Sabo (D-Minn.), the Commerce Department warned the contract price may be in violation of U.S. anti-dumping laws. Two months later, Cray filed a formal complaint with DOC. . . " - from: http://www.freetrade.org/pubs/articles/cd-supercomputer.html

Posted by: Bob on June 6, 2004 12:11 PM

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Let me add:

1- If you must use some form of protectionism, a minimum markup seems to be a relatively efficient way to do it. I wish Brad had acknowledged that a minimum markup is far preferable to a price floor. If WalMart is the low cost producer, a minimum markup does not give the independents any protection. If Walmart wants to strategically give one local area a subsidy to drive out competition, the minimum markup prevents that.

2- Microsoft. It's not expensive to compete with Microsoft, its effectively illegal. The primary selling point for windows is the vast field of software written it. Another company cannot make an OS that will run windows software because the interface between OS and software is protected by trade secrets, copyrights and patents. You can make an operating system almost for free since you can start with Linux or with BSD, a free Unix invented at UC Berkeley. You cannot make a windows compatible OS at all.

3- It is literally impossible to believe that WalMart does not raise prices in local areas where there is no competition. In Walton's autobiography he proudly recounts an episode where a competing chain came to town and he told the manager of the Walmart to lower prices as much as it takes to drive them out. (This was possible because stores in other areas would continue to be profitable) Heroically, Walmart succeeded in driving the out its competition. $12 a gallon is an example of where the exaggeration turns into a strawman, but every economist knows that competition equals lower prices.

Posted by: anon on June 6, 2004 12:19 PM

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bubba: Uncontestable markets belong in the same place as unapproachable beauties - a fairy tale.

radek: So you seriously believe that were Wal Mart
to charge 12$ per gallon for its gas there would
be NO competitors popping up and undercutting
that price? Jeez, talk about living in a
la la land.

Read what I wrote again.

Posted by: bubba on June 6, 2004 12:42 PM

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Let me also add

4- Dumping. For dumping to occur, a company has to strategically decide to lower prices and try to recover the lost money later after the competitive environment has changed.

Maybe it doesn't work, but maybe it does. A company, with its own stakeholders, which is trying to maximize overall profits makes the decision.

To say that in theory it shouldn't work, when the people closest to the situation, with their own money and/or careers at stake decide it should work seems to be ignoring reality in favor of doctrine.

Posted by: anon on June 6, 2004 12:49 PM

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Sorry bubba. I missed the "un".

Posted by: radek on June 6, 2004 12:56 PM

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anon:

"Let me also add

4- Dumping. For dumping to occur, a company has to strategically decide to lower prices and try to recover the lost money later after the competitive environment has changed."

Yes, but that's not the legal definition of
dumping as applied by DoC.


"Maybe it doesn't work, but maybe it does. A company, with its own stakeholders, which is trying to maximize overall profits makes the decision.

To say that in theory it shouldn't work, when the people closest to the situation, with their own money and/or careers at stake decide it should work seems to be ignoring reality in favor of doctrine."

No, no, no. In theory it could work. It's just
that the conditions for it to work are pretty
stringent. On the other hand, setting different
prices in the Home market and in the Foreign
market can easily be justified by differences
in demand in the two markets. So the people closest to the situation could simply be pricing to market rather than behaving strategically (trying to drive out competition in the hope of later recouping the loss via monopoly profits)

The problem is that ANY difference in prices between home and foreign markets is taken to be evidence of "dumping", when in fact it is nothing of the sort (i.e. not a strategic move by a firm).

And yes, economists tend to think that there isn't
much actual "dumping" going - contestable markets
and all that - like I said, the conditions for it
to work are pretty stringent. But the way dumping
laws are written it's really easy for US companies
to file frivolous anti-dumping cases. And either win them or stall the competition long enough so
that the potential competitor gives up. It's just
a back door for protectionist policies.

Posted by: radek on June 6, 2004 01:07 PM

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In Australia the two major grocery retailers have built up or taken over major nationwide Gas station chains. They are offering discounts worth 4 cents a litre (about 15 cents a gallon) to customers who shop at their grocery stores. That's an indication of how important the Gas stations are as loss leader's for the other retail business.

Posted by: still working it out on June 6, 2004 01:32 PM

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I still have not heard a political argument in favor of protecting the independents. Micro-economics just doesn't explain it. And I can't speculate on political reasons to protect the independents because this is a local situation; requires knowledge of local setting. The state Governments could be using this minimum profit revenues as a source of automatic funding for some sort of permamenet "active labor market program" (even if they don't call it that); assuring a volume of employment at these independent gas stations, which Wal Mart could automate or reduce their number, thus leading to some amount of labor redundancy.

Posted by: Bulent Sayin on June 6, 2004 01:54 PM

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Thanks for the response, HinterLands, but I think I need to put a finer point on it.

The reference to the Gross column should have been restricted to the idea that convenience stores use gasoline as loss leaders for products inside the store. I'm familiar with brands like Holiday and SuperAmerica - they are definely convenience stores. Exxon, Standard, Chevron, Mobil, BP, and Shell all have branded convenience stores...and virtually all gas stations also have convenience stores on the premises. I don't know which of these brands are in Minnesota, but some of them have to be.

Walmarts are undercutting the gas stations - while convenience stores can handle low margins for gasoline, Walmart is willing to lose money on gasoline. Therefore, they can increase market share by getting people consolidate their fuel stops with other shopping. Instead of paying a premium for Snowballs at the Mobil station, they can buy a whole box of Snowballs (or a cheap knockoff) discounted at Walmart.

Target doesn't sell gasoline and they probably don't want to get into the market. But Target and Walmart have some overlapping markets. If Walmart has people stopping consolidating shopping with fuel stops, it will stand to gain market share from Target (on paper products, lawn supplies, and kitchen supplies, for example). Target doesn't sell gasoline at any price, so they necessarily lose on such a trip consolidation.

Last, the Dayton aren't large shareholders in Target anymore? The Daytons don't have pull in the Minnesota lege anymore? Just checking.

Posted by: jon on June 6, 2004 02:57 PM

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Thanks for the response, HinterLands, but I think I need to put a finer point on it.

The reference to the Gross column should have been restricted to the idea that convenience stores use gasoline as loss leaders for products inside the store. I'm familiar with brands like Holiday and SuperAmerica - they are definely convenience stores. Exxon, Standard, Chevron, Mobil, BP, and Shell all have branded convenience stores...and virtually all gas stations also have convenience stores on the premises. I don't know which of these brands are in Minnesota, but some of them have to be.

Walmarts are undercutting the gas stations - while convenience stores can handle low margins for gasoline, Walmart is willing to lose money on gasoline. Therefore, they can increase market share by getting people consolidate their fuel stops with other shopping. Instead of paying a premium for Snowballs at the Mobil station, they can buy a whole box of Snowballs (or a cheap knockoff) discounted at Walmart.

Target doesn't sell gasoline and they probably don't want to get into the market. But Target and Walmart have some overlapping markets. If Walmart has people stopping consolidating shopping with fuel stops, it will stand to gain market share from Target (on paper products, lawn supplies, and kitchen supplies, for example). Target doesn't sell gasoline at any price, so they necessarily lose on such a trip consolidation.

Last, the Daytons aren't large shareholders in Target anymore? The Daytons don't have pull in the Minnesota lege anymore? Just checking.

Posted by: jon on June 6, 2004 02:57 PM

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Its a pity that economics professors only get paid for teaching theory, not practice. Over the twenty five years since Saint Margaret of Thatcher took over in the UK economics profs. seem to have made a pretty good living from stating the blatantly obvious, namely that free market ideology is no less faulty than that of Karl Marx.

The missing factor in most free market arguments is time. The fact that a market may be contestable does not mean that someone can be relied upon to contest it.

For a start, what banker in the area is going to lend to a new owner of a station forced into bankruptcy by predatory pricing?

Posted by: Phill on June 6, 2004 04:42 PM

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Radek:

We're literally talking about a number of cases you can count on one hand. Microsoft, Walmart/Kmart/Target in some communities, Standard Oil eighty years ago. So we're already talking about very exceptional circumstances.

A strategy of lower prices where/when you have competition, raise prices where/when you have no competition works almost by definition.

The question of can Walmart/Microsoft/Standard Oil impact the amount of competition through their pricing policies? In some cases its clear that they think they can. I don't think economists are in a position to argue with them.

Now you can also define "works" for the strategy as "create a permanent untouchable monopoly". In that case no strategy could ever "work". You can define "works" as "get back what you gave up in the initial low price entrance by higher profits in a less-competive environment." I'd say that the less stringent your definition of "works", the less stringent conditions you need to achieve it.

I followed someone else in using the term "dumping" which has international connotations. I'm just talking about national markets right now. Bringing in trade complicates the issue in ways I don't feel like thinking about now.

Posted by: anon on June 6, 2004 05:57 PM

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"If you think that having the unmaintained-for-a-year-or-more underground storage tanks of a former gas station already present is a good idea for people looking to open a new gas station, gosh have I got some sites to sell you."

They wouldn't be unmaintained for a year. There's no reason at all that the oil companies couldn't set up their own divisions to run stations. And they certainly would if Wal-Mart was making even 30 cents a gallon (let alone $11+ a gallon!) on dispensing the gasoline that the *oil companies* deliver to them!

Posted by: Mark Bahner on June 6, 2004 06:36 PM

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"If Walmart were cross-subsidizing its gas prices by using its monopoly power to raise prices on other items, it could indeed engage in predatory pricing without giving a gift to consumers."

You mean Wal-Mart doesn't allow people to *only* buy gasoline at their gas stations. (They have to buy something else?)

Posted by: Mark Bahner on June 6, 2004 06:41 PM

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"The same would appear to be true for Walmart, which has a (short-to-medium term) noncontestable monopoly position in its low-end retail niche -- at least in the areas where it has driven many other local retailers out of business."

I cannot name one single item that I can buy *only* at Wal-Mart (i.e., even one single item that is not available somewhere else). Of course, I live in the big city...Durham, NC. But I also can't think of a single item that my parents in Moosup, CT can find only at Wal-Mart.

Posted by: Mark Bahner on June 6, 2004 06:48 PM

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I haven't heard anything in discussions about gasoline pricing about fraud. I have friends who have worked in retail gas stations and they told me that there is a fair amount of ... what they described as "watering down the gas", giving the consumer less than he thinks he's getting. I don't remember what the mechanism was: "faulty pumps" or some sort of cheaper filler in the gas, but they had long stories about how critical this was to making sure that the gas stations didn't lose money on the gas side.

Shouldn't we see an increase of fraud by gas station owners as their margins shrink? Wont help them against walmart (doesn't mean walmart doesn't do it too), but it's an interesting side angle.

Also, in many parts of america gas stations are owned by non-white foreigners. In those areas, there is no political support for minimum pricing, even if the outsiders are now US citizens. To be "salt of the earth" you have to be white.

Posted by: Ennis on June 6, 2004 07:36 PM

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I haven't heard anything in discussions about gasoline pricing about fraud. I have friends who have worked in retail gas stations and they told me that there is a fair amount of ... what they described as "watering down the gas", giving the consumer less than he thinks he's getting. I don't remember what the mechanism was: "faulty pumps" or some sort of cheaper filler in the gas, but they had long stories about how critical this was to making sure that the gas stations didn't lose money on the gas side.

Shouldn't we see an increase of fraud by gas station owners as their margins shrink? Wont help them against walmart (doesn't mean walmart doesn't do it too), but it's an interesting side angle.

Also, in many parts of america gas stations are owned by non-white foreigners. In those areas, there is no political support for minimum pricing, even if the outsiders are now US citizens. To be "salt of the earth" you have to be white.

Posted by: Ennis on June 6, 2004 07:36 PM

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"I cannot name one single item that I can buy *only* at Wal-Mart (i.e., even one single item that is not available somewhere else). Of course, I live in the big city...Durham, NC. But I also can't think of a single item that my parents in Moosup, CT can find only at Wal-Mart."

Walmart has buying power and financial leverage. They can buy the same products cheaper and get the most favorable payment terms. I don't remember where I read this, but Walmart sells 80% of its merchandise before the invoice is due.

They will never be able to sell gasoline at $12/gallon (indexed). Their business model depends on cheap gasoline. When the price goes up that high, many people would have to give up their cars requiring the neighborhood shopping model to re-emerge. Also transportation would become a factor as to what retailers buy, then Walmart loses buying power or pays through the nose for trucking it across the country.

Posted by: jon on June 6, 2004 09:01 PM

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Brad,

All you need to do is survey the price of gas up and down I-5 between the Altamont Pass and Los Angeles.

Compare, over time, the average price of unleaded gas at off-ramps that have one or more "independent" chains (Flying J, TA, ...) to the average price of gas at offramps that have no independent chains and only the major brands (Texaco, Unocal, Chevron....)

Plot, over time, the average price of gas at off-ramps with the number of stations at the offramp.

My empirical experience (about 20 trips up and down over the past 18 months, sampling at 3-4 offramps at each trip) shows that gas cost is a function of the presence of independent stations, and not a function of the number of gas stations at on offramp.

This would be an easy dataset for a Ph.D in economics to accumulate. It would make for a nice web service. It may change your mind.

Posted by: haasalum on June 6, 2004 09:02 PM

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This is the kind of bullshit reasoning that makes industrial organization even more useless and meaningless than most areas of economic study. The market for Operating systems is "not contestable" but the market for gasoline is, because an operating system costs a lot, but, what? the infrastructure of retailing gasoline does not?

"Contestable markets" theory is just an outline for a particular line of narrative storytelling. It is not analytically sound. You could reverse the narrative and it would be just as plausible: operating systems are contestable, because much of the necessary code is in the public domain, and as an intangible bit of information is easily copied and imitated. Ownership of the tangible real estate necessary to gasoline distribution, however, cannot be easily duplicated or transferred.

I don't know whether the state legislatures in question are well-advised or not, but economists have no useful analysis to offer, and until they do, they should shut up and demonstrate the humility, which their ignorance of institutions requires.

Posted by: Brian Wilder on June 6, 2004 11:00 PM

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Brad, I think your commentors have one on you here. Donald Hay, who knows a thing or two about industrial organisation, took me through the UK Monopolies & Mergers Commission report "The Market for Petrol" as a young tyke, and I strongly seem to remember that its analysis was that predatory pricing was a quite severe problem in the UK at that time.

Posted by: dsquared on June 6, 2004 11:32 PM

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If the University of Washington Business School were to open an online degreed baccalaurette program for $1000/yr with unlimited enrollment, because after all it's just cheap bandwidth, I wonder if Brad would be so blase about minimum college degree pricing laws as his classes in Berkeley dried up and UC administration started cutting perks and raiding pension funds for O&M.
Heck, if UW went offline and jacked BS to $40K, UC could always draft Brad out of day-laboring, or sitting by the phone waiting for his agent to call with a speaking engagement about monopoly.

Predatory pricing is predatory pricing, Brad. It's what's destroying small businessmen and small farmers and small retailers, and one day very soon, you're going to be paying $250 for that shirt on your back. Think before you post.

Posted by: Tante Aime on June 6, 2004 11:47 PM

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The problem is that while "contestable markets" are a nice story and all, the economics profession knows very little empirically about what really makes markets contestable and what does not. As is so often the case in economics, the ideology (often quoted with sneering contempt to non-believers) is far ahead of the actual knowledge. My own belief is that every market is at least somewhat contestable, but every market is also a lot less contestable than you think. Businessmen are much smarter than economists at discovering and exploiting economies of scale. And bankers and investors are much more reluctant to actually fund a new entrant on the basis of a market being "contestable" than an economist is to conclude from his armchair that the entrant will make a profit.

And yes, I think the commentors win this particular go-round with the professor.

Posted by: MQ on June 6, 2004 11:56 PM

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"For a start, what banker in the area is going to lend to a new owner of a station forced into bankruptcy by predatory pricing?"

Assume Walmart has driven the competitors out and is charging $12 (or whatever their monopoly income-maximizing price is - probably a lot less than that) for a gallon of gas. I go talk to a few large retail gas buyers. Rental car agencies, package delivery companies, pizza delivery firms, that sort of thing. At each company, I talk to the CFO and say "Right now, you're paying $12 for gas. If I don't do anything, you'll keep paying that. If I enter the market, you'll have the opportunity to buy gas from me for a mere 20 cent markup over wholesale. But to give you that price, I need a /commitment/ from you. If you sign this contract promising to buy all your gas from me for the next 2 years after I open, I will enter the market and get you that low rate. There's no obligation on your part until and unless I open

Once I have enough corporate buyers lined up to make opening a small station profitable, I bring the contracts to the bank and ask for the loan.

Posted by: Glen Raphael on June 7, 2004 12:39 AM

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>"Assume Walmart has driven the competitors out and is charging $12 (or whatever their monopoly income-maximizing price is - probably a lot less than that) "

First, somebody has made a mistake by focusing on "Monopoly" as in not one single competitor. It may well have been the anti-monopoly side of the debate. Either way the result economists like where the price is the marginal cost and there is very little deadweight loss requires perfect competition. The further a market from perfect competition, the poorer job that market does in making sure what society pays for goods and services is really what those goods and services cost society.

In other words, driving many competitors out of the market can create misallocations even without a "monopoly". As soon as a single firm starts getting price setting power, as opposed to being a price taker, that firm will begin collecting rent.

The less price setting power, the better. Government action to prevent price setting market power is certainly defensible solely on economic grounds.

> "for a gallon of gas. I go talk to a few large retail gas buyers. Rental car agencies, package delivery companies, pizza delivery firms, that sort of thing. At each company, I talk to the CFO and say "Right now, you're paying $12 for gas. If I don't do anything, you'll keep paying that. "

Can you recover your fixed costs with just them as customers? Will they buy from you at higher prices than they can get from Walmart? Read on.

> "If I enter the market, you'll have the opportunity to buy gas from me for a mere 20 cent markup over wholesale. But to give you that price, I need a /commitment/ from you. If you sign this contract promising to buy all your gas from me for the next 2 years after I open, I will enter the market and get you that low rate. There's no obligation on your part until and unless I open"

Maybe the price setter can lower the price in our market until you are losing x per gallon where x is whatever the price setter wants. Do any of us think your wacko scheme will fly?

> "Once I have enough corporate buyers lined up to make opening a small station profitable, I bring the contracts to the bank and ask for the loan."

You, your corporate buyers and your bank will lose money on this deal. Then you'll be out of business and the Walmart will have its price setting power again.

Posted by: anon on June 7, 2004 01:13 AM

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anon, read Glen's post again. Were you tired when you wrote that?
I must agree with anon's conclusion. My reason is that the zoning restraints on gas stations is critical to whether you can open a competing gas station. If you can't easily get a gas station to compete with Walmart, you can't compete with Walmart. This is because there is a limited number of locations with a lot of traffic going home on the right in the afternoon. If they have been locked up or have buildings on them, you are out of luck.
A comparable situation is airlines. Many, many, small airlines were started to compete with the major airlines. They all went broke except for SouthWest. Airlines need airport gates. Gates are limited and were held off the market by the majors.
On the other hand, the major airlines went broke several times while fighting price wars with the small startups. I have read in the business magazines that the airlines' periodic price wars with the small startup airlines have lost them so much money that they have never made a net profit.

Posted by: walter willis on June 7, 2004 02:22 AM

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Walter:

You're going to have to be more specific. I actually quoted every sentence in Glen's post except one.

The one I didn't quote was where he quoted someone else arguing that banks would not lend to entrants into a price setting market. I think if banks are reasonably smart, the person Glen quoted was right and Glen was wrong.

Anyway:

I'm not really sure Walmart has greater than average market power. This would be easy if the issue was Microsoft which is much more clear. I hope Kerry wins and a Kerry DOJ will be more vigilant on antitrust matters than the Bush DOJ.

But if gas is a loss leader and below cost gas can drive independents out of the market, it seems clear to me that once the market is left to large chain gas stations and Walmart, prices are going to go up.

Large chain gas stations should in theory do a much better job coordinating price movements with each other than independents because a small number of people make centralized decisions for the entire chain (it doesn't hurt that many of them went to B school together). I take the guy who has made 20 trips over the last 18 months as decent evidence that the facts match the theory.

Walmart has the capacity to sell below cost, but it only has to if it has competitors selling near cost. When the independent competitors are gone and the chains realize Walmart is going to undercut them by a dime regardless of price, the chains will let the price ease up, maybe by 15 cents. Avoiding price wars is an important lesson they learned in b-school.

If you want low prices, the best way to get it is competition. If Walmart's loss leading gimmick threatens to interfere with competition, I have no problem with government stepping in and stopping it.

Posted by: anon on June 7, 2004 03:14 AM

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Glen:

That thing about "wacko scheme" was a joke, but I guess that may be how some guy might look walking into a CFO's office with a plan to take on the local monopoly.

Posted by: anon on June 7, 2004 03:22 AM

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"If Walmart's loss leading gimmick threatens to interfere with competition, I have no problem with government stepping in and stopping it."

By statutory prices controls or through amending previaling competition laws to allow the revival of retail price maintenance?

Posted by: Bob on June 7, 2004 04:28 AM

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"..And yes, I think the commentors win this particular go-round with the professor...."

Nope, not yet. See what the Professor has said:

"..You can claim that minimum-gasoline-price laws are good because independent gas station owners are morally worthy people, the salt of the earth, the backbone of America, and they deserve to have the power of the state deployed to protect them and their livelihoods against the amoral efficiency calculus of the market. I will laugh at you if you do, ...."

Once again, this is a political decision, a matter of policy. Unless the social and political situation down there is examined both for short term and long term and show that the policy is right at least for the short and at least from the point of view of decision makers, and thus prove to Professor that no, he is not at a position to "laugh at you", then the commentors have not won.

The second part of the Professors comments in the same paragraph is absolutely correct, as far as I can see. In fact I can visualize gas (energy), as well as food, ending up having negative prices, yes negative prices, through competition between Wal Mart and other comparable actors. Yes I'm talking about possibility of redistribution of income through market competition mechanisms. Super-duper-mega productivity is going to make it possible.

Posted by: Bulent Sayin on June 7, 2004 07:53 AM

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For what it's worth, in the UK petrol/gas sales are definitely a loss leader for the big supermarket chains. When they first started putting petrol stations in their big out of town stores in a big way about five years ago, they were selling below cost. I don't know whether this was an attempt to drive other petrol stations out of business, or to attract business from other retailers, but it worked. Supermarkets have become an enormous part of the petrol retail business in a very short time and consolidated their hold over the UK retail industry - the top five supermarket chains are responsible for 80% of all food sales. Prices have gone up since then - they're still cheap, but they've stopped selling below cost.

Posted by: Ginger Yellow on June 7, 2004 07:57 AM

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Does this sudden concern with predatory monopoly mean we're no longer worried that business is too concerned with short-term profit?

Posted by: Paul Zrimsek on June 7, 2004 12:14 PM

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There are already big-box retailers (other than Wal-Mart) in Minnesota selling gasoline in addition to their main focus. Fleet Farm comes to mind (A Home Depot type chain). If Wal Mart really wanted to sell gas below cost to drive out all small players only to raise the price later they would have a very difficult time of it. I cannot speak of Maryland but in MN many suburbs have an ample supply of gas stations but few empty buildable lots in convienent high traffic areas where new gas stations could be built. In addition, Wal Mart does not have enough stores where they could add gas stations to effectivly service enough of the market. Therefore, to service large segments of the market, they would need to either acquire vacant lots (which will be difficult or impossible to do) or they will have to acquire existing stations from their current owners causing the price of the average gas station to rise. Furthermore, if Wal Mart decided to sell gas at all of its stores and do so as a loss leader it would only segment the market. Those people who were only buying gas would do so at Wal Mart provided it was convienent based on where they lived/worked/etc. Wal Mart would also get those customers who were going to shop at Wal Mart anyways but found it convienent to fill up at the same time. Mom and Pop gas stations would stay in business because they have largely located themselves in very accessible and convienent locations and because they are selling something Wal-Mart doesn't sell....convience. Nobody is going to go to Wal-Mart to buy a pack of cigarettes and a scratch off ticket. They will go to the mom and pop store. This is especially true if Wal-Mart is 10 miles away but the mom and pop store is around the corner as is the case in much of the Minneapolis/ St. Paul area. Finally, when it comes to selling a product as a loss leader, it may be possible to put a handful of competitors out of business by selling below cost, but to try to simultaneously put hundreds of different competitors out of business at the same time is inviting disaster.

Posted by: Andy on June 7, 2004 02:17 PM

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From what Andy is saying I gather that Wal Mart wants to sell below cost only to get more people to shop more often -- I don't think they have given a thought to the possibility of becoming a gas retail monopolist.

However, I understand, the State is concerned that such subsidiy of gas prices by Wal Mart might drive at least some of the independent retailers out of business and thus some neighborhoods would lose gas stations in a way that could be expensive to reverse because of the real estate situation.

And so it appears that perhaps as matter of energy security policy, at some level, even perhaps more than voting-related policy, the State government would like to keep up minimum gas prices and the current network of gas stations.

That of course is speculation, in absence of information.

Incidentally, as I recall, economics is a positive science -- it seeks to explain economic behaviour; not a normative science -- it does not seek to prescribe behavior or policy.

Posted by: Bulent Sayin on June 7, 2004 02:51 PM

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I used to work for a company (part of a university) that checked gasolene for the big oil companies. I would get a list of stations to visit, and some sampling bottles to fill with specified grades of gas. If you really care, they were seamless aluminum cans, and both FedEx and Airborne take hazmat shipments. They would then be sent back to TX for analysis. Part of the analysis was whether the station had been mixing gas (putting regular in the super tank to make some bucks, or purchasing brandX for even more mark up). The refiners add some marker chemicals to gasolene, so that a chemist can look at a sample and go "this is Chevron" or "this is Shell." Nothing that changes how it works in a car, but just enough to act as a serial number.

Looking back at what I had done over the years, it became clear that several things could trigger my getting sent to a dealer: mostly drops in sales (like road construction, or change in season at marinas). Some were random, some were seasonal, some were because the dealer organization made a fuss. Sometimes they had changed ownership (sales of existing stations usually do so with dry tanks, sometimes pumping the tanks dry to make accounting easier). Sometimes the station would be closed because they were replacing tanks, and/or adding vapor recovery systems. Sometimes I would drive past a station a month or 2 later and they would no longer be selling that brand: they got caught mixing gas.

Adding a vapor recovery system to a station is going to run in the high 5 digits. Replacing the tanks is going to run in the 6 digits. The above posters are correct when they say that stations that go out of business tend to get their tanks yanked out of the ground. The liability for toxic waste is along the lines of "everyone who ever had any ownership gets to open their wallet." Banks are becoming more likely to write off loans than become liable for 7 and 8 digit clean up expenses: that's what the superfund is for.

Sometimes I would get chewed out by the guy owning the station (they knew why I was there). Usually not ("hey, buy all you want, why stop at 1 gallon per grade?"). The difference between name branded gas (say, Texaco or Chevron) was 20 cents a gallon higher than BrandX gas. The franchise agreements that stations have required them to purchase it only from the company whose sign is out front.

Some stations are someone who only owns one station. Some stations are owned by a company that owns 20+ stations in town (pretty common actually). Some stations are owned by the gas company whose sign is out front, and those are actually pretty rare. Look for a name over the door next time you walk into a station. If it says John Doe, then its owned by one guy. If it says DoeCo #12, then its the 12th station owned by DoeCo. If it says the same name as the big company on the sign out front, then its really owned by that company (and that is rarer than you might think for most brands, Hess is the biggest exception I can think of, I think all their stations are owned by Hess).

Profit at stations? Almost all the profit is in the convenience store. When you see a branded convenience store (like ETD at Shell), Shell takes a comission of all the sales in the store. Larger stations, and companies that own more than one station are able to negotiate (or demand) lower prices for gas than the smaller stations. This exagerates the difference between the corner station and the larger guy that owns 20 stations in town. If your example walmart is selling unbranded gas, they can be paying as much as 30 cents a gallon less than the Shell (just to pick on 1 brand per paragraph) station across the street. Are they selling the gas for 30 cents a gallon less? I didn't think so. Fair? Can anything be fair? If such a thing could exist, what would it look like?

Most of the guys posting stuff here are long on opinion and kinda short on facts. Buying gas every week does not make you an expert on gas. If you want my opinion on the matter: I am amused.

Posted by: Peter on June 8, 2004 08:12 AM

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anon:
I guess I didn't write clearly enough. Let's try again.

If Walmart is charging $12/gallon for gas, I could make make a lot of money charging merely, say, $5/gallon for gas. So I go find enough customers to make doing that a viable business - it wouldn't take many - and lock in contracts that guarantee me the business I need. Assuming it takes 2 years to pay back, with interest, the initial cost of opening a very small gas station that sells $5 gas, all I need is some kind of guarantee that I won't lose all my customers to Walmart for 2 years. So I sell gas with long-term contracts to large stable corporate employers.

FedEx is always looking for ways to save money. If the alternative is paying Walmart $12 for gas for the next two years FedEx would be happy to pay me $5 instead. So I sign a contract with FedEx, effective upon the opening of my gas station, obligating them to buy 1000 gallons of gas per week from me for two years and obligating me to sell it to them for no more than $5/gallon. I do the same with other companies until I have enough contracts to cover my regular expenses.

Now I have a guaranteed source of income.

FedEx isn't risking anything: at worst they keep the status quo and at best they save $7/gallon.

I'm not risking anything: I don't open the gas station unless I have enough corporate customers to cover my variable costs and most of my fixed costs.

The bank isn't risking anything: No matter what Walmart does, my long-term contracts keep me in business long enough to pay off the loan.

It's a no-risk proposition. I go into business, I sell my corporate customers enough gas to stay in business, and with a small amount of spare capacity I offer service to anyone else who wants to buy cheap gas. Gradually I expand the spare capacity and serve more and more customers. Walmart might be able to undercut me in the general consumer market but they can't do anything about the contracts. So I win, my customers win and the bank wins. Only Walmart loses.
===
That's why Walmart can't profit from abusing their market power, which is why they keep prices low.

Posted by: Glen Raphael on June 8, 2004 01:17 PM

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First, let's stop using $12 per gallon as a real number. It was meant 50% exaggeration 50% joke.

The minimum markup is 8 cents per gallon. Lets use 16 cents per gallon which would return the lost competitive 8 cents per gallon in a period just as long as the predatory pricing period.

Is FedEx going to sign a long term contract to buy gas from your tiny shop at a 12 cents per gallon markup? When they can buy gas from Walmart at 16 cents per gallon and worry about package delivery?

Could you supply FedEx, a national chain, with the small firm you're talking about?

It doesn't work.

Walmart does not keep prices as low in competitive markets as it does in market power environments.

Sam Walton expressed shock that anyone would think for a second that Walmart would not take advantage of a situation where there is no competition.

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