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Predatory Pricing — Let’s Get Real!

The following information was summarized from a position paper on Predatory Pricing developed by a diligent mid-western marketer. Meridian thanks him for his input and insight.

Whether we like it or not, price continues to be the driving factor in gasoline marketing. What has changed, however, is the rampant use of predatory, below-cost pricing techniques.   But what exactly is predatory pricing?

Predatory Pricing – pricing at levels purposely below the cost of doing business with the expressed purpose to gain market share at the expense of others in competition with the predator.

The Myth – the consumer wins from lower gas prices. The Truth – The average consumer saving 5 cents per gallon on a 12-gallon fill-up per week, saves $2.60 per week, the average price of a deluxe fast food sandwich. This same nickel will deprive the average retailer with 7 stations $252,000 per year. That $252,000 would likely be spent on real estate, equipment, technology, advertising, personnel education, etc. In essence, the spending that would have occurred in high-wage industries now gets spent on minimum wage establishments. In addition, this reduction in marketer spending, typically with local businesses, harms those small local businesses, which then trickles down to less funds for community supported not-for-profits. In essence, the fight against predatory pricing is not just a fight for small business; it is a fight for community.

The Consequences – Preferential wholesale pricing and below-cost selling have dire consequences. In the short-term, excluded or financially vulnerable marketers are deprived of capital. Squeezed for capital, these marketers then reduce their spending on goods and services, harming other businesses and the community. Government revenues from sales tax and income tax are both impaired.

In the intermediate term, deprived marketers are forced out of business, trickling down to other businesses and the communities their donations previously supported. All tax bases are victimized. In the long-term, there is risk that predatory pricers, through destruction of competition, will reach virtual oligopoly status. Through their purchasing power muscle, they will prevent entry of newcomers. The result? Damage to competition, damage to the business community, and damage to tax revenues.

The Solution – 1) A Fair Trade Act to Prohibit Wholesale Price Discrimination, and 2) Fair Trade Act to Prohibit Retail Below-Cost Pricing. Normally, businesses do not advocate government regulation. In order for consumers to be assured of value pricing through free-enterprise driving-force competition some sort of regulation is necessary. It’s important that both wholesale price discrimination and below-cost selling be addressed concurrently, not just one.

The Benefits – Adoption of fair trade laws goes beyond safeguarding competition in the motor fuels industry. It will drive the spending of accumulated capital, stimulate high-wage sectors, and ultimately lead to higher federal and state tax collection. Specific areas of investment would include real estate, improvements, equipment, technology, education, and advertising. In essence, fair trade bills shift capital into investment rather than depletion, building up rather than tearing down high-wage sectors.

Potential Coalition of Stakeholders – A lot of interests have much at stake in the battle against predatory pricing. Motor fuel marketers avoid unfair extinction. Financial markets win when loan defaults are avoided. Insurance agencies win, as the big players tend to self-insure. Small accounting and legal firms throughout American win. The durable goods industries win, as do local non-profit and community associations. Government wins from increased tax revenues.

If everyone wins, why are fair trade laws politically unpopular? Because those that are benefiting from the lack of those laws frame the laws as anti-consumer, stating that the laws result in increased prices. In addition, these laws are perceived as “big oil” manipulation, not a needed step to maintain the vitality and integrated of every community in America.

Common Objections – Government should not be allowed to tell anyone how to price their products. Normally this is true. Petroleum, however, is a special case. Petroleum is a strategic resource, an industry with high-dollar entry barriers, a commodity product, and price is the number-one differentiating factor. If one is arguing for free-market competition, then why are we tax-subsidizing so many Big Box projects?

Second objection — below-cost laws are anti-consumer, increasing prices. Nothing could be further from the truth — the less competition, the higher the price. Below-cost laws are pro-consumer and pro-community, but it takes education for people to understand economics. In addition, when left to their own devices, consumers often make choices for short-term gain at the peril of their long-term interests. Fishing, hunting, and farming are all excellent examples of beneficial regulatory environments.

Other Food for Thought – Below cost laws do not hamper an efficient company from gaining market share. The marketer who has the lowest cost can keep prices low.   What this legislation prevents are predators. When smaller-pocketed marketers are pitted against predators, they end up deprived of life-blood capital.

Today, the viability of many independent, family-owned motor fuel-marketing companies is threatened, irrespective of business competence, hard work and effort. This threat extends to suppliers and service provider businesses, as well as civic and not-for-profit organizations. Even the tax base of small communities is threatened! Ultimately threatened, however, is the consumer who depends on the driving forces of competition to best insure his or her needs are met.

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