May 07, 2005
When you are in the business of selling a commodity product one of the few ways you have to differentiate yourself is price. But in Maryland if you attempt to charge a price that the government considers to be too low, they will step in and tell you to raise that price.
A gasoline price war erupted in St. Mary's County last week after one station slashed its price for regular to $1.999 a gallon and spurred three others to follow suit, giving drivers some hope of relief at the pump.Of course they don't do this for no reason. Of course they use the same sort of weak anti-business logic that betrays a typical regulatory lack of understanding for how markets work. O.K. so thats not entirely fair, they do understand half - the half that justifies their interference and in fact their very existence. It's the same tired old recycled socialistic opinion of markets that regulators have relied on for decades.But the price dip proved fleeting.
Maryland regulators quickly stepped in and told the stations that their prices were too low. They needed to go up by 5 cents.
They believe that if they allow some chain operator to dive the price down this will force the independent operators out of business. And yes, this can happen. Through functions of scale and better efficiency a larger operation can be profitable at a lower price. A small independent dealer who cannot match those attributes cannot must either charger a higher price, offer significantly better service or go out of business. A major player such as BJs who was one of the players in the price battle, can afford to operate at a loss further increasing pressure on small independents. As far as that theory goes, the regulators are correct. Unfortunately they try to eliminate this part of the competitive process in the name of preserving competition. When your in the business of regulating, clear thinking isn't exactly a job requirement.
It's with what happens next that they get really wobbly. They believe that once the big company had driven the little guy out of the market they can charge whatever they want. But it doesn't work that way. Given that the only barriers to entry into the business are those put in place by the government, if the big company that cornered the market tries to boost the price too much, they will lose.
Here's how it works. Assume that a gallon of gasoline costs the vendor $2.00. The average retail price in the area is $2.10. Then along comes the big guy who wants to own the market and starts selling gas at retail for $1.95 The little guy has no choice but to cut his price to the bone. And even if he sells gas at cost, he won't remain in the market all that long as his customers will all be going down the road to the $1.95 guy. So the plan works all the little guys are gone and it's just the bog guy he has cornered the market. It cost him a small fortune to get that position but he has it. Lets say the first thing he does is jack the price up to $2.02. He's no longer selling gas at a loss but the margin is still to thin for anyone else to enter market. He still has it cornered, and he is very slowly starting to recoup his losses. The independents may be gone but consumers are still paying $.08 less per gallon.
But lets say this big company that cornered the market isn't all that smart, and isn't patient when it comes to making their money back. Let's say they jack the price up to $2.20. They would be the quintessential Monopolist sticking it to the little guy. But it won't last. Somebody is going to look at this and say hey If I get into that market and sell gas at $2.15 I'm making a sweet margin over the $2.00 cost and by unde-cutting Monopoly Guy I'm going to do a great business. It's a no brainer. getting financing probably isn't going to be a challenge either.
Monopoly Guy is going to have to respond. He is going to have to drop his price to match or beat the New Guy. The New Guy says bring it on I've got margin to spare.
Sure the Monopoly Guy could go back to selling gas at a loss again and start the process over, but how many times are they going to do that before they are the ones going broke? Monopoly Guy's smart play once he has cornered the market is to set his price where he is getting just enough profit to make owning the market worth it, but not not so high that the profits attracts competitors to the market.
Either way the consumer, who the regulator claims to be protecting by forcing a price increase, is paying less for gas.
So if you live in Maryland, the next time you go for gas remember that you could be paying less per gallon. But the sate wont allow it.
Posted by: Stephen Macklin at 10:15 AM | Comments (2) | Add Comment
While the scenerio you've presented, where the actions of the "big guy" can only end up benefiting the consumer, might be appealing, it still wreaks havoc on the entrepeneur business owners.
I think it's rediculous that people will cross a busy intersection to get gas at $2.279 rather than the $2.229 they'll pay at the station on the right. Ooo, look, I saved a quarter! We don't consider pennies when we buy anything else. Why do we go so nuts about gasoline?
IMO, it's better not to make life miserable for all of the aspiring "little guys" (station owners) than to ensure a savings of two bits for the rest of us.
Gas station price wars were great back in the days when all the stations were owned by independent vendors. Nowadays, the big guys are so @#$% big and consolidated that they can bully the li'l upstarts ad infinitum. This is not good if you're the one trying to open, and keep for some time, a friggin' gas station.
I'm all for a free market. You know that that. But, I'm also for fair competition. Anti-monopoly laws exist for the very purpose of curtailing the inevitable whole-ownership of the market by the "big guy". Anything that hurts Competition hurts freedom in the market. And, yes, a truely free marketplace can and will eventually produce a competitor big/arrogant enough to go hellbent on attempting to monopolize it.
Wow, this argument can become circular in a hurry. I guess that's we're still talking about it...
Posted by: Tuning Spork at May 07, 2005 05:06 PM (M8jqp)
I have to disagree with this point - for the same basic reasons I pointed out in the main post. No matter how much someone's ego might be driving the decision to go after cornering a market, eventually it comes down to a business decision.
And call my heartless but if through fair competition (i.e. not burning down competitors business and such) a business cannot survive than it shouldn't. And I don't see why people should have to pay higher than the market price just so some guy can can have his dream of being in the gas business, If he wants it that bad he should figure out how to compete and do it.
The state stepping in and mandating a higher price to save an uncompetetive business is wrong.
Posted by: Stephen Macklin at May 08, 2005 02:24 PM (U3CvV)
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