The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)

July 24, 2008

Your 8 cents (per gallon) worth

Today’s Milwaukee Journal Sentinel reports on a Wisconsin Policy Research Institute study that the state’s minimum markup law adds 8 cents to the price of a gallon of gasoline beyond a normal wholesale-to-retail profit margin.

Eight cents per gallon isn’t much. But $990 million is, and that’s what WPRI estimates the minimum markup law costs Wisconsin residents in gasoline prices — up to $278 million more than we would pay without the law. Since the minimum markup of either 6 percent on the wholesale price or 9.18 percent of the posted terminal price is a percentage, rather than a flat cents-per-gallon fee (as is the case with the 32.9-cent-per-gallon gasoline tax), the higher wholesale gas prices go, the higher the minimum markup is. (For example: In January 1998, when the wholesale gas price was 64 cents per gallon, the minimum markup was 5.9 cents per gallon. Earlier this month, when the wholesale price was $3.29 per gallon, the minimum markup was 30.2 cents.)

The rationale for the minimum markup law, to prevent predatory pricing by larger oil companies, doesn’t hold water, so to speak. The WPRI study cites 2003 research by the Federal Trade Commission:
“Economic studies, legal studies, and court decisions indicate that below-cost pricing that leads to monopoly occurs infrequently. Below-cost sales of motor fuel that lead to monopoly are especially unlikely. For these reasons, we believe Wisconsin’s Unfair Sales Act likely harms consumers and restricts competition. Moreover, at best, the Act is unnecessary because the federal antitrust laws already protect against predatory pricing.”
That rationale applies only if you believe that government should be in the business of telling businesses what to charge for their products. To believe this rationale requires belief in conspiracy capitalism, that these big evil (insert kind of company here) corporations are conspiring to squash their small competitors like a bug so they can stick it to the consumer and charge whatever they want. Note the line from the Federal Trade Commission: “Below-cost sales of motor fuel that lead to monopoly are especially unlikely.”

Service station owners will tell you that they don’t make much profit, even with the minimum markup law, on gasoline. The Journal Sentinel quotes Matt Hauser, president of the
Wisconsin Petroleum Marketers and Convenience Store Association, as saying that service station owners are “lucky” to get 2 to 3 cents per gallon in profit.

I’m certain that Hauser is correct. I am also certain that that’s not the problem of consumers, including businesses whose livelihood depends on transporting products by land and are now charging more and/or enjoying less profit as a result of higher gas prices. It is also not an issue the government should be deciding, whether it’s gas prices, food prices (which also were subject to the minimum markup law before the 1980s) or the prices of anything else. If Megalomart decides to set its gas prices at whatever their costs are, so what? Is the next government step, as the Wisconsin State Journal wrote in 2001, “
more laws to protect Joe’s Hamburger Stand from lower hamburger prices at McDonald’s, or to shield Ann’s Hardware Store from cheaper tool prices at Wal-Mart”?

WPRI calls the minimum markup law “one of the most overt examples of select businesses reaping the benefits of government-mandated profits at the expense of the consumer.Aside from the additional cost of fuel to the consumer, high gas prices seep into the price of all goods and services transported throughout the state. When it costs more to truck candy bars to a grocery store, that price will be reflected in the cost of those candy bars. As a result, Wisconsin consumers end up not only paying higher prices at the pump, but they end up paying ancillary costs hidden within goods and services they need.”

Government interferes enough in the free market as it is without also telling companies what they must charge for gasoline, tobacco and alcohol, or to try to pick winners and losers (small = good, big = bad). The Minimum Markup Law, like a lot of legislation passed during the Great Depression, was a bad idea then and is an outmoded law now.

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