The government: forcing you to pay more for gasoline is good for competition

September 03, 2010 | By PACIFIC LEGAL FOUNDATION

Author: Timothy Sandefur

The Seventh Circuit Court of Appeals today upheld a state law that bars gas stations from charging low prices. What’s wrong with low prices? Why, they discourage competition, donchyano.

If that seems bizarre to you, welcome to the world of antitrust law, a twilight zone where nothing means everything and the exact same conduct can be characterized as anti-competitive and illegal, or as pro-competitive and good for consumers, depending entirely on spin.

Laws like that involved in the Wisconsin case are aimed against so-called “predatory pricing,” which is the notion that, say, a gas station might cut its prices so low that all the other gas stations in the area go out of business—and then the “predator” can raise its prices again, and be a monopoly. Of course, the problem with this theory is obvious: once the “predator” raises its prices again, all those gas companies can open their stations again, and undercut the “predator.” In the end, the “predator” will simply have wasted a lot of time and money. The theory of “predatory pricing” is so costly and ineffective that Judge Frank Easterbrook, back when he was a law professor, wrote that such a tactic would not be “a very good gamble, because it is quite unusual for a firm without a patent to hold a 100% market share and charge a monopoly price for very long.” Unsurprisingly, there doesn’t appear to be much historical evidence of “predatory pricing” actually being tried. Some people have claimed that Standard Oil used to do this in the early 20th century, but in fact, Standard Oil did not engage in “predatory pricing.” And, even if businesses did try this, the consequences would only be good for consumers, since it would mean low prices for goods and services.

Laws against low prices are actually a huge drain on America’s economy, because they encourage businesses to sue each other instead of just competing economically. It isn’t customers who file “predatory pricing” lawsuits—they like low prices. It’s businesses that can’t compete fairly that sue other businesses for charging low prices. As the news article observes, “The ruling is a victory for the Wisconsin Petroleum Marketers & Convenience Store Association, which argued its members would be driven out of business from larger competitors without the law.” Why would they be driven out of business? Why, because customers like you would choose to buy from the cheaper alternative if you were given that choice—so the Wisconsin Petroleum Marketers & Convenience Store Association has decided to use the government to force you to pay more for gasoline, against your will. The fact that the Association’s president told the newspaper that laws against low prices “protect[] all consumers by ensuring a competitive marketplace” is an example of Newspeak which George Orwell himself would have admired.

To learn more about the dangerously vague and intellectually bankrupt notion of laws against “predatory pricing,” check out Dominic Armentano’s oustanding book Antitrust And Monopoly: Anatomy of A Policy Failure, which has recently been reprinted by our friends at the Independent Institute.

Update: here is the court opinion.