Measuring the effects of sales below cost laws in retail gasoline markets

Abstract

The retail gasoline market in some states is regulated by laws that prohibit the sale of gasoline at prices below the retailer's cost. The stated purpose of these laws is to offer protection from predatory pricing, a practice whereby one firm seeks to eliminate its competition through loss inducing prices. However, the assumption that predatory pricing is occurring in the retail gasoline business is questionable. If predatory pricing is not occurring, the laws may instead protect less efficient firms by establishing a price floor that results in higher prices for consumers. To test this hypothesis, retail margins in states with and without such laws are examined. The results suggest that retail margins tend to be slightly higher in states where sales below cost laws are effective. These results are not consistent with the idea that predatory pricing is a frequently occurring phenomenon in the retail gasoline sector.