Saturday, June 5, 2004

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Now Wal-Mart is selling cheap gas!!

Alex Tabarrok at Marginal Revolution has a post showing that Minnesota and Maryland have enacted minimum price laws for gasoline, and are enforcing them against gas stations that are charging too low a price per gallon or are offering free coffee with gasoline as an inducement. In the case of Minnesota, many of the gas stations are attached to Wal-Marts.

This got the attention of Brad DeLong, who agrees with Tabarrok. Brad has an excellent rebuttal to claims that Wal-Mart-type organizations merely undercut prices to create exploitable monopolies for the future, a la Microsoft:

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.

Readers familiar with's position on Wal-Mart will chuckle at the last paragraph in DeLong's post:

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. 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.

Let me hear you say, "Amen!"

posted by Dan on 06.05.04 at 11:36 PM


Amen. Minnesota? Isn’t that the home of ultraliberals Hubert Humphrey and Walter Mondale? I agree with Brad DeLong on this matter---and also free trade and nuclear energy. This means, of course, that this gentleman is in deep trouble with the Democrat Party. Do they still burn heretics in the modern world?

There is some strange dude named John Kerry complaining about outsourcing and “Benedict Arnold Ceos.” The guy is obviously making a complete fool of himself. I’m sure that Professor DeLong will soon have to take Kerry to task.

posted by: David Thomson on 06.05.04 at 11:36 PM [permalink]

Absolutely amen. I am an antitrust attorney for the government and it is amazing to hear these gas station owners who presumably believe in the free market (and don't want to government interfering in their business)whine about Wal-Mart's low pricing. And, DT, by the way, it's not just liberal states like Minnesota that have fair pricing laws. Alabama and several other states that you would not consider liberal have them too. Gas station owners and soft drink distributors have a lot of influence in state legislatures. And, when I was a teenage in the 70s, my father ran a small grocery in Georgia. At that time, Georgia had a fair pricing law for milk, ie, you couldn't price milk below a certain price.

posted by: MWS on 06.05.04 at 11:36 PM [permalink]

California STILL has a minimum price for milk. See:

posted by: EKR on 06.05.04 at 11:36 PM [permalink]

The arguments for minimum pricing have nothing to do with the morality of gas station or other small business owners. The arguments against Wal-Mart generally have to do with the fact that money given to a small business owner in a small community arguably remains in circulation and is reinvested in that community (Jane buys Bob's gas, who buys Al's hardware) while most of the money given to a Wal-Mart or McDonalds leaves that community forever. Also when Bob looses his gas station he then either has to move or presumably work for less at Wal-Mart or somewhere else, reducing the overall capital within a community.

Cheaper gas and other goods yes, but less overall capital to buy those goods with. Amen?

posted by: zarathustra on 06.05.04 at 11:36 PM [permalink]

Um, why say Amen to someone who "laughs" at the idea that small shopowners are morally worthy people.

That's just sad.

In the ivory tower of neocon economics, there is only one value: material wealth. There is only one good: material wealth. There is, indeed, only one thing: material wealth. And small business owners are losers, and nothing more.

You just can't argue with people like that. It's useless. They live in a kind of bizarro world where black is white and up is down.

posted by: Voice of the Democracys on 06.05.04 at 11:36 PM [permalink]

VotD, you miss the point. Nobody is saying that small shopowners are bad people. Rather, there's nothing about being an independent gas station owner that makes you worthy of special government subsidies. (Or, more accurately, _consumer_ subsidies. The extra money isn't coming from the pocket of a state assemblyman. Rather, the state assemblyman is forcing ordinary people to give extra money to independent gas station owners.) Are the independent gas station owners morally superior to WalMart owners? Are they better human beings? If not, why should they get these special subsidies?

posted by: David Nieporent on 06.05.04 at 11:36 PM [permalink]

Let's play devil's advocate here: Service stations make most of their money selling sundries, convenience items they can mark up a lot more than they mark up gasoline. Wal-Mart, by undercutting what the service station can charge for gas, can get some of that business and very likely drive some of the service stations out.

So far, so good. But unless Wal-Mart ends up buying up the service stations, how do we not end up with something similar in this market to what we seen in the retail sectors Wal-Mart competes in -- fewer stores each selling to vastly larger numbers of customers? A smaller number of toy stores, lawn equipment vendors and clothing outlets matters mostly to business owners; I'm not so sure that is the case with a smaller number of service stations, at least not in some areas (for example, heavily trafficked areas around major cities). Do not traffic flow considerations come into play here at some point? Why would this not be something state or local governments would have an interest in?

posted by: Zathras on 06.05.04 at 11:36 PM [permalink]

Zathras, there's a reason gas stations sell newspapers, sodas, snacks, etc. Convenience. People want gas right away, and they stop to get other things they want right away.

You're inverting that completely, making people drive out of their way to get gas.

We're not going to have many fewer stations selling to vastly larger numbers of customers, because people don't drive out of their way to get gas.

Oh, and to the extent that gas stations are at the superstore Walmarts, why would there be any traffic flow considerations for gas greater than for the superstores themselves?

posted by: David Nieporent on 06.05.04 at 11:36 PM [permalink]

“And, DT, by the way, it's not just liberal states like Minnesota that have fair pricing laws. Alabama and several other states that you would not consider liberal have them too.”

I’m actually not surprised at all. The South has not completely renounced the idiotic economic views of the reactionary conservative “I’ll Take My Stand” crowd. One should never forget that Jesse Jones, a very major player in FDR’s New Deal coalition was from my hometown of Houston, Texas. Our next door neighbor, Louisiana, will almost certainly give its electoral votes to President Bush. And yet, the majority of this state’s voters elected Democrats for the U.S. Senate and governorship mainly because of their anti-trade positions.

posted by: David Thomson on 06.05.04 at 11:36 PM [permalink]

What gas stations need to do is learn how to compete with WalMart just like the neighborhood hardware store has done. WalMart, and subsequently the three or four other big box concerns that will invariably build across the street or down the block, WILL bring more traffic to the particular demographic they're in. Truly entrepreneurial small business gasoline station owner's have to find what brings customers into their station. Maybe it will be a return to the "service" station. Someone will figure it out and profit from it. That's how our system works best. Government price controls has never, ever worked. Now government is even making it harder by prohibiting free coffee and "ladies nights" at other establishments. This is insane. Free enterprise can be tough during periods of transition. But our law makers attempt to soften the blow will only succeed in the further deterioration of the foundation of America's success story.

posted by: RD on 06.05.04 at 11:36 PM [permalink]

What gas stations need to do is learn how to compete with WalMart just like the neighborhood hardware store has done...Maybe it will be a return to the "service" station. Someone will figure it out and profit from it.

Bingo. The complaints about Wal-Mart's "unfair" competition and its "harmful effects" on the community typically are focused on the firm's ability to deliver lower prices to consumers, and competitiors' inability to match these prices. But this focus on prices alone misses the obvious point that a small business need not compete on price alone, and indeed usually cannot compete on price. Small businesses must find other areas in which to compete, and that ususally means delivering better service. Consumers will pay a premium for better service, and do so every day.

posted by: P.B. Almeida on 06.05.04 at 11:36 PM [permalink]

In any event, Wal-mart is not trying to be a gas station. It is simply using gasoline to bring in customers for its other goods. There is no way that Wal-mart can drive out gas stations because there aren't enough Wal-marts around. People might be willing to drive some extra distance to get cheaper gasoline, but they are not going to drive miles and miles, especially if they need gasoline right now. The draw area for a typical gasoline stations is a couple of miles--obviously Wal-mart draws from a larger area but they don't actually compete with gasoline stations, except for those directly near-by. Wal-mart might effect the overall price of gas in the market, depending on how large the market is (in sort of a ripple effect), but it is not going to seriously harm the number of customers going to other gas stations outside the direct service area because they are too far away.

I do have sympathy for gasoline station owners, who are really small businesspeople and don't benefit much from high gasoline prices. Their distributors and/or the oil companies are the ones that really benefit. But I thought it was silly to have a fair pricing law for milk even though it benefitted my father's business. But, no matter how you cut it, these are special interest laws. Wringing your hands over "materialism" doesn't change the fact that such laws benefit a small group at the expense of the many.

posted by: MWS on 06.05.04 at 11:36 PM [permalink]

Zarathustra wrote: "while most of the money given to a Wal-Mart or McDonalds leaves that community forever."

Same for the mom & pop store at the corner. At Wal-Mart, McD or any retailer that I know of the cost of goods is almost always much more than 50% of retail. Most products are sold at a smaller markup, and you have to factor in salaries, overhead costs at the store, etc. In any general retail business the bulk of the dollars spent leave the community.

Profits, that's another story.

posted by: ech on 06.05.04 at 11:36 PM [permalink]

I have a grad student who immigrated from Jordan some years back. He has made an excellent living by purchasing "Stop-and-Grab" type gas stations across from big box stores from panicked owners. He now has, I think, four, mostly employing family and friends. He strives very hard to break even on gas and makes his money on "sundries." As he says, if you want a gallon of milk at midnight, you can be in and out of his store in 2 minutes. At Wal-Mart or Meiers, it's a minimum 15 minutes. He well understands what people are trading their money for.

Almost all his profit comes from things that are quite a bit higher priced than in the big box stores (or even the CVS pharmacy on damn near every corner), but they are things that move fast, for people in a hurry or making impulse buys. He keeps very careful track of what sells and what doesn't, when to whom. The guy is a crackerjack marketer.

And, he LOVES doing this in the US. My kinda immigrant.

posted by: JorgXMcKie on 06.05.04 at 11:36 PM [permalink]

*And since new entry is easy and cheap--*

The accuracy of that statement is highly questionable.

And in addition to the "local money staying local" scenario; vibrant, successful corner gas stations and convenience stores make more attractive neighborhoods than abandoned, decaying street corners that drive taxpaying homeowners out. As MWS states, it's not everywhere, but it does occur.

posted by: wishIwuz2 on 06.05.04 at 11:36 PM [permalink]

Points are being made, and although cheap and easy entry may be oversimplifying the matter somewhat, most residential neighborhoods are not vibrant due a glut of corner gas stations. What we should also be interested in is that station owners be financially stable enough to maintain high standards of storage tank inspection, leak detection and vapor recovery. If WalMart pushes out marginal operators we may want to mark that down in the plus column. Another argument may be the "nodal" one where excessive fuel consumption due to sprawl and multiple errands is aided by the ever expanding one stop shopping concept that fuels Wal-Mart’s success. A market consisting of Wal-Mart’s buying power pricing and strongly marketed service providing entrepreneurs can only make neighborhoods more attractive.

posted by: RD on 06.05.04 at 11:36 PM [permalink]

Going back up thread to David Nieropont's comments:

People do want gas right away. But they need gas if they drive cars. They have some choice in where they get gas, no choice in whether they have to. This is why selling gas is attractive to Wal-Mart (as you point out, and I did earlier, gas is what lures customers in to buy the things stations make money on). The calculation is that lower gas prices at Wal-Mart will outweigh the loss of convenience that getting gas at Wal-Mart instead of the corner station entails.

Now, the calculation may be wrong. My personal opinion is that this whole idea sounds like Wal-Mart getting greedy and overreaching. My point is that if the calculation is right and Wal-Mart attracts enough customers to drive local stations out of business, we can predict costs that everyone except Wal-Mart will have to bear.

Also, the reason Wal-Mart superstores with attached gas stations could produce more traffic problems than the superstores without stations is the added flow of traffic. Added to people who park at the store for long periods you have people who drive in, stay for a few minutes, and drive out. There are good reasons to want to keep all this traffic dispersed.

posted by: Zathras on 06.05.04 at 11:36 PM [permalink]

Admittedly I come into this debate as a pro-union, semi-protectionist, but since I'm from Minnesota I'd like to chime in with the real reason why this Minnesota law exists.

As I recall the debate that preceded passage of this law, the history cited was that of the '70s when big gas chains used the gas shortage crisis to put independent stations out of business. That is exactly what happened in the '70s, and anyone who was driving back then surely remembers a landscape littered with countless more gas station logos.

Large companies ALWAYS benefit from elimination of independent competition. Many posters have pointed out that it would be "easy" to go into competition with a Wal*Mart selling $12/gallon gas, but I haven't seen any posters suggesting where these new indies would buy that gas! It all comes from the same refineries each of which has finite capacity and a set group of customers.

Ma and Pa Patel might be able to open their KwikkiMart gas station, but what do they do when the gas arrives late or not at all? What control do they have over the prices they are charged? Do they build a coop refinery to service themselves and other like-minded entrepreneurs? And how do they compete with a Wal*Mart that's content to use gas as a loss leader to bring in customers?

It's a little facile to call cheaper prices a boon for consumers if those cheaper prices depress wages, restrict consumer choice, and contribute to the further Wal*Martizing of America.

Sorry for the rant but the need for this law is pretty obvious to anyone who's studied American corporations and how they do business. In an industry where supply is so carefully controlled, it's a bit naive to think that competition could flourish if it wanted to.

posted by: Mark Gisleson on 06.05.04 at 11:36 PM [permalink]

There's irony for you. Wal-Mart being taken to task by a union guy, the only group of organizations arguably putting more companies out of business than Wal-Mart ever could. Now we know who was behind the voting in Minnesota. This was never about the 70's. This is retaliation for union grocery stores not being able to compete. We would expect no less than a rant. Semi-protectionist?? If Ma and Pa Patel, the Kettle's neighbors, can't run a business well enough to get their primary product delivered, maybe a nice job a Wal-Mart would serve them better. A lot less stressful, a few bennies, a weekly paycheck and some time to spend with the grandchildren. That's what that's a'boot.

posted by: RD on 06.05.04 at 11:36 PM [permalink]

And how do they compete with a Wal*Mart that's content to use gas as a loss leader to bring in customers?

Wait, are they charging $12/gallon or using it as a loss leader? You've really got to make up your mind.

posted by: David Nieporent on 06.05.04 at 11:36 PM [permalink]

Ah yes, I remember gassing up at Ma and Pa Pattelle's service station on family trips. Rack of potato chips in the corner, you had to ask for the key to use the restroom around the back - if you dared enter. I generally prefferred the going in the bushes.

posted by: Jason Johnson on 06.05.04 at 11:36 PM [permalink]

"In an industry where supply is so carefully controlled, it's a bit naive to think that competition could flourish if it wanted to."

There are a lot of reasons gasoline supply is limited other than the way corporations do business. First, it is IMPOSSIBLE to build a new refinery in the United States because of environmental considerations. Second, environmental regulations in some places (e.g., California) have driven independent refiners out of business. Moreover, the EPA requires so many different types of gasoline depending on location that it screws up the distribution system. None of this is bad in itself--certainly improving the environment is important--but it affects the supply of gasoline. Now, its true, the major refiners would prefer not to sell to independents-in part because their retailers scream bloody murder. I am not claiming the utter virtue of oil companies, just pointing out that there are a lot of factors besides greed that affects gasoline supply.

As far as Wal-Mart driving out local gas stations, I think that is exaggerated. Arguably, it affects stations right near the store, but only to the point that they have to lower prices. If they are a branded station, the oil company will presumably lower wholesale prices to keep them in business. I just don't think Wal-Mart is really driving a significant number of gas stations out of business. Moreover, I think Wal-mart has essentially moved away from its VERY low price gasoline strategy that it initially practiced. My impression is that, while Wal-mart prices somewhat below the brands, it is not that much lower. There are other national or regional gasoline discounters (Sheetz, WaWa, Racetrack, for example) that probably price like Wal-mart these days.

posted by: MWS on 06.05.04 at 11:36 PM [permalink]

Humans seem to always have wanted everything in one cave.

posted by: Dave on 06.05.04 at 11:36 PM [permalink]

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