Revised New York Gasoline Bill Could Still Harm Consumers, Says FTC Staff

In comments provided last Friday at the request of New York Attorney General Eliot
Spitzer, the staff of the Federal Trade Commission’s Office of Policy Planning and Bureau of
Competition stated that there is a “significant risk” that the Motor Fuel Marketing Practices Act
(MFMPA, Bill Nos. A.8398 and S.4947) could harm consumers by reducing competition in the
sale of motor fuels. Last August, the FTC staff sent a letter expressing the same types of
concerns to Governor George Pataki regarding state bill S.4522-B, a similar bill that the
Governor ultimately vetoed. As with that bill, the staff commented that the current legislation is
at best unnecessary and, at worst, could discourage pro-competitive pricing.

The MFMPA, as currently drafted, would prohibit refiners and nonrefiners of motor fuels
from selling these fuels below 98 percent of the bills’ definition of refiner and nonrefiner cost,
respectively, where the effect is to injure competition. The bill also would create a de minimus
exception, which would grant authority to the state consumer protection board to dismiss
complaints that, in the board’s view, stem from de minimus injuries to competition.

According to the FTC staff, these changes do not correct the fundamental problems with
the previous bill. In particular, the staff said, the bill defines “cost” in a way that is “inconsistent
with most antitrust precedent and economic and legal literature.” Likewise, the 98 percent
measure “appears arbitrary, with no basis in legal precedent, federal antitrust law, basic economic theory, or empirical studies.” The staff also commented that the de minimus exception, while better than no exception at all, “still appears too narrow to allow vigorous competition.” For example, the bill’s text “suggests that injury to one competitor would constitute a violation of the MFMPA,” even if there are dozens of competitors in the relevant geographic market, and even if there is no likelihood that the price-cutter could recoup his short-term losses.

“This bill is inconsistent with the antitrust laws,” said Deputy Bureau of Competition
Director Susan Creighton. “The bill defines ‘cost’ in a way that makes little economic sense, and
it defines ‘competition’ in a way that appears designed to protect suppliers, not consumers.”
Added Todd Zywicki, Director of the FTC’s Office of Policy Planning, “The 98 percent measure
is particularly arbitrary. There is no explanation of where this number came from.”

In summarizing its comments, the staff wrote:

• Low prices benefit consumers. Consumers are harmed only if, because of low prices, a
  dominant competitor is able later to raise prices to supracompetitive levels.
• Economic and legal studies and court decisions indicate that below-cost pricing that leads
  to monopoly rarely occurs. Below-cost sales of motor fuel that lead to monopoly are
  especially unlikely.
• The federal antitrust laws deal specifically with below-cost pricing that has a dangerous
  probability of leading to monopoly. The FTC, the Department of Justice’s Antitrust
  Division, state attorneys general, and private parties can bring suit under the federal
  antitrust laws in response to anticompetitive below-cost pricing.
• When there is no danger that a monopoly might later be created, consumers are harmed by
  public policies that have the effect of increasing low prices that are the product of the
  competitive process.
• The MFMPA has the potential to discourage pro-competitive price reductions. Under the
  bill’s definition of “competition,” a supplier likely could face antitrust liability for pricing
  below a single competitor, even if consumers benefit from the lower prices and even if
  there is no risk that the supplier could recoup its lost profits. Moreover, the 98 percent of
  cost measure appears arbitrary and unrelated to any rational antitrust or economic
  standard. Finally, the MFMPA’s de minimus exception appears too narrow to allow
  vigorous competition.

In concluding its comments, which are available on the Commission’s Web site as a link to
this press release, the staff wrote, “For these reasons, and the reasons outlined in the attached
letter, FTC staff concludes that this version of the MFMPA, like its predecessor, is more likely to
harm than to promote competition.”

The Commission vote authorizing the staff to file the comments with the New York Office
of the Attorney General was 5-0. The comments represent the views of the staff of the FTC’s
Office of Policy and Planning and Bureau of Competition and are not necessarily those of the
Commission or any individual Commissioner.

Copies of the documents mentioned in this release are available from the FTC’s Web site at
http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600
Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.

(FTC File No. V020019)