Opinion
Minimum markup law vital for preventing monopolies
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On Thursday Aug. 20, it was announced that an appellate court will rule as to whether Wisconsin’s minimum markup law is constitutional. This comes on the heels of a ruling by Judge Rudolph Randa last February stating the law was unconstitutional and in violation of the federal Sherman Act.
The Sherman Anti-Trust Act was passed in 1890 and prohibits business practices, as well as laws, that prevent or hinder competition. One of the earliest examples of the Sherman Act’s application was its use by Theodore Roosevelt to break up the Northern Securities Company. A large part of the law also focuses on the prevention of monopolies.
Judge Randa’s ruling is based around the presumption that Wisconsin’s minimum markup law hinders competition because it forces all gas stations to maintain a standard. All gas retailers in Wisconsin are required to sell their gas for 9.18 percent more than the cost to purchase it.
This thinking seems to have some validity. By forcing all gas stations to maintain a set price, the stations power to price competitively is eliminated. If individual stations lose their ability to control their own price, the law does seem to violate the Sherman Act.
Another aspect of the Sherman Anti-Trust Act, however, is the importance of its restrictions on monopolies. Section II of the Sherman Act states, “Every person who shall monopolize, or attempt to monopolize … any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony.”
It’s important to analyze another aspect of thinking concerning the minimum markup law. By creating a floor to regulate the sale of gas, companies are prevented from forming a monopoly.
Say for example, companies A and B sell gas in an area. Company A has sufficiently more resources than company B, and can afford to sell gas for far under the price paid. Because of this, company B would be unable to compete with company A’s business practices.
Over time, company B would be driven out of business and at that point company A would be the only seller of gas in the area. Thus, company A would have driven B out and created a monopoly on gas.
Therefore, the minimum markup law would prevent situations like this from happening, encouraging competition between various retailers. In this sense, the law would help to coincide with the Sherman act.
It seems more likely that the minimum markup law prevents more damage than it causes. It could easily be argued that the law is unnecessary as the Sherman Act would be used to break up monopolies should they occur.
But by using the law to maintain a healthy business landscape for Wisconsin gas retailers, the difficulties of applying the Sherman Act and attempting to revitalize business is altogether avoided.
Another interesting aspect of the law’s debate is the appealing party. Attorney General J.B. Van Hollen chose not to appeal, but the Wisconsin Petroleum Marketers and Convenience Store Association did.
WPMCA believes the minimum markup law to be an integral aspect of Wisconsin’s gas sales. They state on their website that by having a minimum markup, all gas stations are able to compete at a price where some profit is still made.
For example, without the law, gas stations that can make more money off of “non-gas” or convenience store items can drive down the cost of gas. This greatly hurts other stations which rely more heavily on their direct gas sales. In instances such as these, the minimum markup helps to encourage fair trade practices.
Finally, it is integral to remember the minimum markup law was never a steadfast standard. The minimum markup law is a part of the Wisconsin Unfair Sales Act. This fact opens up an exception to markup rule.
Under the law, if a retailer lowers his price out of good faith to competitively meet the price of another retailer, it is not in violation of the law. This tenet can apply in many ways. One common example is border cities that often lower their prices to meet those of stations in nearby states.
Overall, the minimum markup law has been an important part of Wisconsin’s business law, and its reinstatement would help allow for competition as well as profits boosts for the retailers struggling in the law’s absence. With unemployment rates high, cutting away at our businesses profits seems unnecessarily detrimental.
Dan Rose (drose2@wisc.edu) is a sophomore majoring in journalism.
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I’d recommend that you take Econ 101, kid. Small gas companies may be helped some by minimum markup, but all consumers suffer from the higher fuel prices that result. The benefits, although disparate, definitely outweigh the costs, which are much more concentrated.
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From your reply, it appears that you don’t understand the opinion – this opinion revolves more around the legal implications of the Sherman Act, as oppose to the economics of it (although they are an implicit part). And even if you wanted to debate this purely on economics maybe you should look a little bit further into the future – remember the all-important term “monopoly”?? As soon as said ‘Large’ Company forces the closure of ‘Small’ Company, they will be free to set the price of gasoline, therefore creating a monopoly. So yes, it is possible that the minimum markup law may cost buyers a couple of cents per gallon. However, this law helps to assure that the small corner convenience store that has been around for 50 years can stay in business. And on further thought, maybe you should take Econ 101 AGAIN.
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Company C will start selling gas once Company A starts raising prices.
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Interesting, in states where no such minimum markup laws exist, there seems to be plenty of competition. So much for Sherman.
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I second the taking Econ 101. There are some reasonable points to be made both ways on this and this column fails at making any of them.
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12:42 do you have a cite for that? Most of the competition is between large gas companies which can afford to suffer the temporary losses of a price war.
11:52 do you remember what barriers to entry are? You don’t make a lot of profit off of a gas station and they’re expensive to buy all the equipment for. The only way C would start up is if C had deep pockets and thought it could take A
7:21 profits on gas stations are razor thin and barely pay off the overhead. Minimum markups only prevent companies from selling below cost in order to drive out competition and start up a monopoly (which would obviously hurt consumers).
To all of you, economic theory does not translate into substantive economic fact. The article did a very good job laying out the risks and the overwhelming benefits of the minimum markup law. I personally don’t want to return to the days of standard oil, and the minimum markup act does a good job of assuring just that.
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Standard Oil was probably the biggest boon to the world’s standard of living ever. Rockefeller EARNED his market share many times over.
See: http://www.theobjectivestandard.com/issues/2008-summer/standard-oil-company.asp
IP hash: 1ea80dc2
What would make company A’s monopoly such a bad thing? Its “resources” presumably come from increased efficiency, and its “business practices” seem like a strange euphemism for selling consumers what they want for less.
A’s monopoly would result in higher prices only if A could effectively engage in predatory pricing (i.e. operating at a loss to drive out competition, then raising prices far above the competitors’ original prices). Success here would be a surprise; the history of predatory pricing has been a string of failures, for reasons that become obvious on closer examination (See http://www.cato.org/pubs/pas/pa-169.html).
So if a naturally-emerging, non-coercive monopoly results in lower prices to the consumer, what dangers might deregulation actually pose?
“WPMCA believes the minimum markup law to be an integral aspect of Wisconsin’s gas sales. They state on their website that by having a minimum markup, all gas stations are able to compete at a price where some profit is still made.”
If a business wouldn’t be profitable under actual competition, why keep it on life support?
“For example, without the law, gas stations that can make more money off of “non-gas” or convenience store items can drive down the cost of gas.”
If consumers wish to frequent stations that run gas as a loss-leader, why should the law prevent stations from switching to such a system?
“With unemployment rates high, cutting away at our businesses profits seems unnecessarily detrimental.”
The profits in question are generated by artificially high prices and are accruing to Wisconsin’s least efficient gas stations. Yes, regulatory changes of any sort may raise unemployment in the short run, but repealing this law would have tremendous long-run benefits.
Finally, how are business owners intended to deal with this portion of the law:
“Under the law, if a retailer lowers his price out of good faith to competitively meet the price of another retailer, it is not in violation of the law.”
Any exemption to this misguided law is cause for at least some relief, but this has the potential to create bureaucratic nightmares in establishing intent. Yes, “it is integral to remember the minimum markup law was never a steadfast standard.” But vagueness doesn’t sound to me like such an advantage.
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10:47 You just nailed the coffin shut. “Most competition is between large gas companies …” The competition exists, it works. Just because Cletus can’t open a convenience store because Mr. Shell or BP can charge less does not make Mr. Sherman a restless man.
I can say from experience, living in many states, WI has few independent gas stations compared to many states. Honestly, I have never seen a higher percentage of Shell, BP, or Citgo stations anywhere I have lived than I have in WI.
What is even more interesting is in the state (Commonwealth) I recently moved from (VA), the independents are usually CHEAPER than the big boys… so much for Sherman.
I guess the reason we think this minimum markup is a good thing is because we have never paid attention to the world outside WI.