Identical bills have been introduced in Michigan’s House
and Senate to impose government price controls on retail gasoline sales. Gov.
Jennifer Granholm remains undecided on signing the proposed legislation into
law. Despite claims by supporters, the bills could bring higher prices and less
real choice to Michigan motorists. It could also create shortages and gas lines
by reducing the ability of sellers to respond to short-term demand spikes.
Fines of up to $10,000 per day could be
imposed on any stations that sell gasoline at too low a price.
The bills are a reaction by the service station industry to
competition from large retail chains such as Meijer and Wal-Mart. Existing
station owners claim the big firms are selling gas below cost in order to drive
them out of business, at which point the price will be raised and consumers will
have nowhere else to go.
Although this sounds like a diabolically clever strategy for milking a cornered
market, there’s just one problem: Economic history shows that the idea of
“predatory pricing” is not credible. The classic example is John D.
Rockefeller’s Standard Oil Company. Textbooks continue to perpetuate the myth
that Rockefeller used his near-monopoly in the kerosene market to gouge
The facts show otherwise: First, there was only a brief
period during which Rockefeller held a 90 percent market share. The rest of the
time, from 1870 to 1897, Standard dominated the kerosene market by a comfortable
margin, but nothing like the “monopoly” of legend. Did Rockefeller price all
competition out of the market and then raise prices to enrich himself and his
company? You be the judge: From 1870 to 1897, the price of kerosene fell from
26 cents per gallon to about 6 cents, a boon for consumers. Higher prices were
constrained by the presence of remaining competition, and by Standard Oil’s sure
knowledge that any attempt to exploit its position would only spur new rivals.
There have been genuine predatory pricing attempts, and economic history is replete with explanations of how they failed. (See
“Remembering a Classic that Demolished a Myth” by Mackinac Center President
Lawrence Reed, at https://www.mackinac.org/3884 .)
While “predatory pricing” may not be a threat to consumers,
price-control laws like those being proposed for Michigan most certainly are.
Throughout history, the only price-fixing monopolies or oligopolies that have
ever been sustained were those protected by governments. In recent decades,
long-distance phone service, air travel, and interstate trucking provide
examples of markets in which prices tumbled following the dismantling of
government sanctioned monopolies or cartels, with huge benefits for consumers.
This is no time to be creating a new gasoline retailers’ cartel in Michigan,
which would have to be dismantled later to relieve economic problems it has
Markets are dynamic. They
change and react much faster than politicians and laws. Elected officials
respond to many competing interests, including the advantages to be gained by
protecting organized special interests. Markets respond only to the desires of
consumers and the realities of supply. Holding prices artificially low when
supplies are tight kills the incentive of producers to bring more product to market and thereby
ease the supply crunch. Holding prices low when demand is high allows massive
buying that depletes supply. Both create the potential for shortages. They
also subvert conservation efforts, which would otherwise smooth out market
Big retailers like Meijer and Wal-Mart have simply come up
with an innovative way to deliver lower gas prices. The winners are motorists.
The losers are smaller service stations. Rather than discovering their own
innovative way to compete, the latter group has run to the politicians for
protection. Lawmakers have responded with legislation to freeze the gasoline
retail market in its current form. Even if new marketing strategies do drive
some sellers out in some places, half-a-dozen small stations selling at the same
high price don’t serve the public better than two or three big ones with really
cheap gas. Yet that is the kind of false “choice” this legislation would
These bills are not about protecting consumers from “predatory pricing.” Grass-roots citizens are not
begging legislators to “save our Shell station.” This is a classic example of a
special interest using its political muscle to gain protection from
competition. The threat of “predatory pricing” may be imaginary, but as George
Mason University economist Donald Boudreaux points out, "Court records overflow
with actual examples of how disgruntled competitors alleging predatory behavior
clamor for government to hamstring their more efficient rivals."
Consumers want two things from service stations:
Competitive prices and no shortages. They don’t care how tasty a station’s hot
dogs are, or how nifty its logo looks. But if price competition is regulated by
law, sellers will compete only over frills, not savings.
Ironically, the ultimate result of price controls on gas is
that prices will rise. The availability of gas will be less assured. A few
existing gas station owners may benefit, but millions of Michigan consumers will