Market Power

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

Tuesday, March 29, 2005

Predatory Pricing and Small Town Gas Stations

I blogged here and here about Minnesota's price floor on retail gasoline. A local Sam's Club gas station is being investigated for charging a price below the price floor. Sam's Club competition blew the whistle. I took a closer look at the article that got me thinking about this issue. Here is the article (subscription required). Here is a quote from the article that shows the predatory pricing argument is at work here:

But Cornish said the survival of small stations is at stake if major corporate sellers offer gas at below cost.

"It will be a way of closing down these stations - the little ones," Cornish said.

That could be devastating for smaller towns where there might be just a single option for purchasing gas, Cornish said. And if most competitors are eliminated, the big sellers would ultimately be able to sell at a higher price than they could if nearby rivals still existed.

First, if consumers in the small town have an option to buy low-price gasoline at a "corporate" gas station, why should the government restrict their options and how would this be devastating to the community? It would have just the opposite effect. Sure, the owner of the gas station would feel a negative effect, but the consumers of gas in the small town would gain. Not only could they get gas cheaper, but they can put the savings towards the purchase of other things.

Second, those who use the predatory pricing argument say they fear monopolization. Never mind that the evidence suggests that predatory pricing exists in models but not in practice. If there really is only one gas station in a small town, doesn't that station have market power which it can use to jack up its prices? Won't legislation designed to keep compeitors out enhance its market power and allow it to maintain its high prices? The answer to both questions is yes.

Third, do we really think that the small town gas station would actually go out of business? What if the nearest "corporate" gas station is 30 miles away? How often are residents of the little town going to drive 60 miles (30 miles there and back) just to get a full tank of gas?