Dr. Sowell's recent article reminded me of a law that struck me as particularly amusing. I am talking about laws that exist in many states which prohibit the pricing of gasoline too far below market price.

I am sure some will tell me they support this type of law, as it prevents the "big guys" from running the "little guys" out of business, but as with my essay on populist dogma, the arguments in favor of these laws are not not quite as reasonable as they seem.

The basic logic is that were there no such laws, big companies would come into town and offer cheap gas to attract customers, thus driving their higher priced competitors out of business. Some stop arguing at this point, taking it for granted that driving the "little guys" out of business is reason enough to oppose something. Others go a bit farther and bring up the tried and true fear monger tactic of "they will drive everyone out of business then jack up the prices".

In reality, most businesses effected by this were not businesses whose primary interest was the sale of gasoline. Grocery store chains and others, such as Wal-Mart, would either offer gas a few cents cheaper in order to attract customers, or sell gas at a discount to their regular customers to build store loyalty. It likely did take some business from local retailers, but the fact that they retained enough money and political clout to get these laws passed suggests that their businesses were not crushed by this competition. In the long run, had thse laws never passed, it appears the most likely outcome would be that consumers would have had the option of getting gas a few cents cheaper and local sellers would have suffered some decline in sales.

But let us suppose that the rationale is true, instead of what experience tells us. Let us suppose there is some predatory corporation out there planning on using "predatory pricing" to drive every mom and pop shop out of business.

My first reaction is "so what?" If this corporation can price gas a few cents cheaper, then why should the more expensive competitors stay in business? If anyone wants to pay more for less, they can continue to support mom and pop, but if all consumers choose to buy from the lower priced competitor, why should that be a crime? I know someone will reply "there is more to it than just economics", to which I reply as I did above, you are free to shop where you want, why am I not allowed to buy cheaper gas if I want to do so? If you think life is about keeping every last inefficient business running because it is "quaint" or whatever reason, then feel free to do so, but by what right do you force me to keep them in business as well?

Of course, some will not argue that mom and pop shops have a "right" to stay in business, instead they will try to argue that it is "unfair" competition they despise. To which I again have to say "so what?" If the size or resources of a company allow them to get my goods cheaper, why should I not shop there? Who cares if they are bigger, if they can bring more pressure to bear on suppliers, get efficiencies of scale, whatever? So long as they break no laws, why should I care how they get low prices, provided I get the goods I need cheaper? There is nothing unfair about taking advantage of one's abilities.And being bigger gives some companies an advantage, but why should they not pass that advantage along in terms of lower prices? If they didn't someone would complain about their "windfall profits" instead.

To which the obvious reply will be "But they aren't competing! They take profits from other businesses they run and subsidize this one!" However, as the experience of Japan's 1980's era subsidies shows us, that sort of economic model leads to bankruptcy, not success. Were Wal-mart to divert profits form one branch to subsidize gas prices, that other branch's profit would decline, Wal-mart would be at a competitive disadvantage against competitors, and, eventually, they would begin to lose their market positions as they diluted profits to try to drive mom and pop out of business.

In fact, the reality is much the opposite. The very slightly lower gas prices (and I have never heard of any chain charging lower than a few cents off) are intended to attract customers, making the loss an advertising cost. They make up for the lost gas revenues in increased sales. So, in a way they are "subsidizing" form other divisions, but only because the gas prices bring in sales, which is their whole point. It is not an evil scheme, it is an advertising gimmick.

However, there are those who go farther. Rather then trying to argue mom and pop are entitled to business, they say that maybe not Wal-Mart, but some big oil chain, could come into town, drop prices, drive everyone out of business and then raise prices to recoup their losses and then some. As this mirrors the Japanese efforts in the 1980's I have to say that reality proves this model does not work, but let me explain why.

Let us start by saying demand, even for oil, is elastic. lately there has been much talk of "inelastic" oil demand, but that is just wrong. As oil prices rise, people DO drive less, buy smaller cars, reduce oil heating used, and so on. When pundits say it is "inelastic" they usually mean it is not as elastic as they think it SHOULD be, but the evidence supports that it is elastic.

So, why is that important? Because it destroys this whole scheme on its own. When the evil corporation, let's call it Evilco, comes into town and competes against its two existing shops, let's call them Mom's and Pop's, they would have to lower prices significantly. Hwoever, to do so would entail selling at a loss. But, there is a problem. Yes, they would steal away Mom's and Pop's customers, but Evilco will also see new purchases as well, the lower price driving people to take longer car trips, take outt he Land Rover instead of the Prius, and so on. Their losses would be increased by all this new usage.

On the other hand, once Mom and Pop both shut their doors, Evilco will have to raise their prices to recoup these losses, probably far above Mom's and Pop's old prices. But there is a problem there, as the higher prices would cause usage to drop below the original levels, making it take a lot longer to recoup what they lost.

Some will now say "Why does that matter? After all eventually they will recover their losses and start gouging the consumers for a huge profit."

Except that we are talking about a free market. As soon as they start charging above the market price, which presumably was what Mom and Pop charged, they will have created a profitable situation for some investor. So along comes Junior, who buys up both Mom's and Pop's and starts selling gas at a price just below Evilco. Evilco sees all its sales going to Junior's, and has two choices. It can undercut him as it did with Mom and Pop, racking up even more losses until it drives him from business, or it can charge a fair market price, making modest but sustainable profits.

As you can see, the second choice results in our original situation with new owners. Instead of Mom and Pop we have Junior and Evilco, but consumers get gas at the market price, so no harm is done to the consumer.

Of course, most think Evilco will just charge money losing prices, bankrupt Junior and return to gouging. But the problem is, when they raise prices, they sell a lot less, so they most likely haven't even recouped their original losses when Junior appears. So to do that, they would have to continue accumulating losses. Every time they gouged to recoup them, another competitor would arise.

I just don't see any company constantly operating at a loss just to keep a monopoly they could never exploit.

In the end, it is just impossible* for a competitor to sustain continued losses to keep a market free of competitors. I suppose it is possible that promotional gasoline prices, such as those offered by grocery chains or others could be sustained, but they do not appear low enough to drive all competition from the market. Which means that the final result of these laws against low prices is that consumers are denied slightly lower prices while the higher priced competitors are protected from competition.

Which just doesn't seem to me to be the purpose of government.

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* I do not deny the theoretical possibility of maintaining a non-coercive monopoly. Economic theory is full of such peculiar situations. However, in this case, it is almost impossible to design such a situation as we are talking about a highly mobile culture which does not limit its shopping for gasoline to a limited area. I cannot see a way to establish a non-coercive monopoly in gasoline retailing which does not involve eventual bankruptcy on the part of the would be monopolist.
o