Market Power

Musings by an academic economist on the power of markets and the power over markets.

Thursday, March 31, 2005

Minimum Prices Combat Predatory Pricing?

I posted this piece and this piece on Minnesota’s minimum gas price law. Walter Williams has some comments on predatory pricing as it pertains to this sort of price regulation. In theory, a price predator is a business with a cost advantage that can price other firms out of business. Once the competition is gone, the predator takes advantage of its new-found market power and jacks its price back up. The key here is that the firm drives out competition and that there is no incentive for anyone to enter the market in the future. This will not happen in the gas price market.

Gasoline sold at Sam’s Club is virtually the same as gas sold at Casey’s, Texaco, Holiday, or Hy-Vee. There is very little (if any) product differentiation. Economists talk about a Bertrand duopoly. In this market structure, two firms producing perfect substitutes compete in price and they will price their product at marginal cost. They have no incentive to lower the price any further and incur marginal losses and they have no incentive to raise the price and thereby lose all their customers to the competitor. In a Bertrand market, all that is needed to have marginal cost-pricing is two firms. Do we really think Wal Mart is going to corner the market in gas and become the only seller?

Alex Tabarrok had this post last May about minimum gas price law law (which is where I found the link to the Walter Williams piece). Apparently, this isn't the only time that a gas station attached to a Wal Mart has been attacked under this law.