A myth that continues to exist in the minds of the public and many a government regulator is the notion of predatory pricing, or “cutthroat” competition. The idea is that competition among businesses for customers can become so fierce that a market with several competitors may eventually reach the point where only one victor is left standing, allowing that firm to reap the spoils of monopoly profits.
While predatory pricing may be intuitively appealing, especially to politicians, proven instances of predatory pricing are quite rare, and the methods of preventing it often impose a social cost higher than any monopoly. The basic problem with the premise is that unless the remaining firm can keep other competitors from entering the market in the future, it does not stand to gain much from predatory pricing.
To prevent predatory pricing in the retail gasoline market, the State of Wisconsin enacted a number of laws designed to ensure “reasonable” profits and prevent excessive competition among gas stations. To that end, Wisconsin’s Unfair Sales Act (Wisconsin Statute 100.30(2)) requires that every gasoline retailer mark up the price of gasoline by at least 6% a gallon over the wholesale rate, or 9.18% from the posted terminal, or “rack” rate.1 Moreover, all gas stations are required to explicitly post all prices so as to be easily visible from the street, and stations may not change prices more than once every 24 hours. We argue that these regulations effectively transfer income from consumers to sellers via higher prices and profits. Our contention is that these laws facilitate tacit collusion amongst the retail gas stations in Wisconsin.
The primary objective of this research is to quantify the effect of the State of Wisconsin’s Unfair Sales Act on the price of retail gasoline in the state. A secondary objective is to determine whether the Unfair Sales Act pre- vented the demise of small, independent gas stations throughout the state, as was its intent. Legislators in the State Assembly have recently proposed a bill that would repeal the law, just one year after increasing the penalties for violating the terms of the act.
Our estimate is that strengthening the penalties associated with violating the Unfair Sales Act added approximately two cents to three cents to the price of a gallon of gasoline, costing Wisconsin drivers approximately $50 million a year in higher gasoline prices. This amount does not include the higher cost of transporting other goods within the state, which would increase the total cost of this law. We also find evidence that the Unfair Sales Act generally lowers the variation of prices in a given market, giving consumers less choice and ultimately giving the retailers of gasoline more market power.