Proposed New York Gasoline Legislation Could Harm Consumers, Says FTC Staff

In comments provided last week at the request of New York Governor George Pataki, staff of the Federal Trade Commission's Bureau of Competition and Office of Policy Planning noted that two pieces of currently pending legislation concerning retail gasoline prices and the operation of retail service stations are duplicative and unnecessary, and, if signed into law, would "have a significant potential to harm consumers."

The comments, submitted to the Governor at his request via letter, concerned Bill No. S04522, the "New York Motor Fuel Marketing Practices Act (MFMPA)," and Bill No. A06942, "An Act to Amend the General Business Law, in Relation to the Operation of Retail Service Stations (the Amendment)." The MFMPA would prohibit "below cost" sales of motor fuel, where the effect is to injure competition. The Amendment would prohibit a crude oil producer or refiner from opening new stations that compete with its own franchised dealers within certain geographic areas.

Each of these provisions could significantly raise the cost of gasoline to consumers; the FTC staff comments pointed out that "even a one cent increase in the retail price of gasoline would cost New York consumers approximately $57 million annually." The comments then detailed the reasons for FTC staff concerns regarding each piece of proposed legislation. According to the FTC staff, "the MFMPA merely duplicates existing protections against 'predatory pricing' found in federal antitrust law; at worst, it may discourage or even prevent competitive pricing. Similarly, considerable economic research shows that laws limiting intrabrand competition in gasoline [as the Amendment would] harm, rather than promote, the competitive process, and can result in significantly higher prices."

Joe Simons, Director of the FTC's Bureau of Competition, noted, "This legislation could outlaw more types of pricing behavior than federal antitrust laws do, and therefore it runs the risk of penalizing pro-competitive price-cutting that benefits consumers."

Ted Cruz, Director of the FTC's Office of Policy Planning, stated, "new laws to limit price-cutting and prevent refiners from opening new gas stations are especially inappropriate at a time when many Americans are concerned about gasoline prices."

The FTC staff letter provided specific comments related to each piece of proposed legislation, as detailed below.

With respect to the MFMPA, the comments stated:

• Low prices benefit consumers. Consumers are harmed only if, as a result of low prices, a dominant competitor is able later to raise the prices to supracompetitive levels.
• Scholarly studies and court decisions indicate that below-cost pricing that leads to monopoly rarely occurs.
• Past studies suggest that below-cost sales of motor fuels that lead to monopoly are especially unlikely.
• Consumers are harmed by public policies intended to increase low prices that arise as a result of the competitive process in situations where there is no danger that monopoly might later be created.
• 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 against anticompetitive below-cost pricing.
• If the proposed legislation leads to higher prices in circumstances in which there is no danger of the lower prices leading to monopoly, then consumers will be harmed.

With respect to the Amendment, the comments stated:

• Consumers benefit if a private company decides to increase the number of retail outlets selling gasoline. The benefits come from locational advantages for some consumers, potentially increased "variety" (there are a variety of types of gasoline retailers, such as convenience stores, service stations, high volume stations with car washes, etc.), and the potential for increased competition.

These potential benefits accrue whether new outlets are opened by existing retailers, wholesalers, or refiners.

• Economic research has demonstrated that retail gasoline prices increase when states enact laws prohibiting or limiting refiners' ability to own retail outlets that compete with the retail outlets of their branded dealers.
• Federal antitrust law recognizes that actions by a producer or manufacturer regarding geographic "intrabrand" retail competition can have substantial procompetitive aspects in promoting "interbrand" competition that outweigh anticompetitive aspects (if any) arising from "intrabrand" competition.
• "Interbrand" competition is the principal focus of federal antitrust law because vigorous interbrand competition maximizes consumer welfare.

In concluding its comments to the Governor, staff wrote, "In short, in the judgment of the Office of Policy and Planning and the Bureau of Competition . . . Bill No. S04522 and Bill No. A06942, if signed into law, are likely to raise prices significantly at the gas pump, to the detriment of New York consumers."

The Commission vote authorizing staff to send the comments in response to Governor Pataki's request was 5-0.

NOTE: The views expressed in the letter are those of the staff of the FTC's Bureau of Competition and the Office of Policy Planning, and do not necessarily represent those of the Commission or any individual commissioner.

The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. V020019 [PDF 43KB])