Minimum Gasoline Prices

A couple of weeks ago, heading down to George Mason University, I pulled into my favorite Wawa gasoline station just off the Bel Air, Md., exit on I-95 South. At each of the 20 gasoline pumps, there was a sign posted that Wawa would no longer dispense free coffee to its gasoline customers. Why? The station was warned that dispensing free coffee put it in violation of Maryland’s gasoline minimum-price law.

Here’s my no-brainer question to you: Do you suppose that Maryland enacted its gasoline minimum-price law because irate customers complained to the state legislature that gasoline prices were too low? Even if you had just 1 ounce of brains, you’d correctly answer no. Then, the next question is just whose interest is served by, and just who lobbied for, Maryland’s gasoline minimum-price law? If you answered that it was probably Maryland’s independent gas-station owners, go to the head of the class.

Let’s first establish a general economic principle. Whenever one sees statutory or quasi-statutory minimum prices, he is looking at a seller collusion against customers in general as well as against particular sellers, those who are seen as charging too low a price. This economic principle applies whether you’re talking about minimum wages, minimum dairy prices or minimum real-estate sales commissions. Members of a seller collusion call for statutory and quasi-statutory minimum prices so they can charge customers higher prices than they could otherwise in the absence of a statutory minimum.

You say, “Williams, that’s preposterous; how can they sell legislators on the idea? After all, buyers of gasoline are more numerous than sellers of gasoline.” To answer that question, you have to recognize a couple of other facts. First, legislators aren’t known for being rocket scientists. Secondly, legislators love campaign contributions, and satisfying the interests of lobbyists is more important to their political careers than serving the interests of consumers in general.

Lobbyists such as WMDA Service Station & Automotive Repair Association, the Gasoline Retailers Association and the Petroleum Marketers Association of America are able to sell legislators on the fairy tale that if high-marketing gasoline outlets such as Wawa, Sheetz, Wal-Mart and others are allowed to charge prices that are too low, they’ll drive all other gasoline stations out of business. Having done so, these high-marketing outlets could charge any price they pleased and make huge profits.

In economics, we call this strategy predatory pricing. It’s an argument that has a ring of plausibility, but there’s little evidence anywhere anytime that a predatory pricing scheme produced results even remotely close to what would-be predators envisioned. Questioning this fairy tale and asking for evidence would never cross the mind of a legislator.

Another reason legislators can get away with establishing these minimum-price laws has to do with another economic phenomenon called “narrow well-defined benefits and small widely dispersed costs.” The beneficiaries of the gasoline seller collusion are relatively few in number and well organized. The victims, mainly gasoline customers, are difficult to organize, and the costs they bear are relatively small and widespread.

In other words, how many gasoline consumers would be willing to spend their time and energy fighting to unseat a legislator whose actions imposed, say, a nickel a gallon additional cost upon them? It’s cheaper just to pay the nickel a gallon more and forget about it, but that’s not true about gasoline retailers. It is worth their time and energy to pressure legislators for minimum-price laws, and politicians know this.

Maryland is not the only state with statutory minimum gasoline prices. It’s joined by 12 other states, including New York, Michigan and Wisconsin. Wisconsin legislators have the gall to call its government-sponsored seller collusion the “Unfair Sales Act.”

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