FTC Staff Comment to the Hon. W.D. Moore, Jr. Concerning the Arkansas Petroleum Trade Practices Act

,- .
~,
100 N. CenIr1IIlxpr_..
Suote 500
D8llas. TX '&201
(214) 7l!7·5S0~
tlNJTED STATES OF AMERICA
FEDERA!~ TRADE COMMlSSl0N
DALLAS REGIONAL OFFICE
V910008
COMMISSION AUTHORIZED
Office of the RqionaI Director
1
March 22, 	1991
The 	Honorable W.D. 	Moore, 	Jr.
Arkansas 	Senate
General Assembly
Little 	Rock, 	AR 	72201
Dear Mr. 	Moore:'
The 	staffs 	of 	the 	Dallas 	Regional 	Office 	and the 	Bureau 	of
Competition of 	the 	Federal 	Trade 	Commission1 are 	pleased to
submit 	this 	letter 	in response 	to your 	request 	for 	comments 	on
the 	potential 	competitive effects 	of 	proposed 	legislation 	that
would 	create the 	MArkansas 	Petroleum 	Trade Practices Act." 	The
bill 	would, 	in general, 	prohibit 	"below cost" 	retail 	pricing, 	as
"cost" 	is 	defined 	in 	the 	bill, 	and price discrimination 	in 	the
sale of 	gasoline.
It 	is 	our understanding 	from 	conversations 	with your 	office
that, 	although the bill 	has 	not 	yet 	been 	filed, 	you 	would 	like
our 	analysis 	and comments 	on 	the competitive effects 	both of 	the
legislation as 	well 	as 	any 	similar 	legislative 	proposals 	that 	may
be 	introduced. 	As we discuss 	below, 	we believe that 	this 	bill
and 	similar legislation that 	we 	have 	previou~ly reviewed are
likely 	to be 	anticompetitive 	and 	that, 	if 	enacted, 	Arkansas
consumers 	and visitors 	could pay higher prices 	for 	gasoline.
Iotereat 	and experience of the 	ataff 	of the 	r.deral 	Zrade
Cowi.aiop
The 	Federal Trade Commission 	is 	charged by 	statute with
preventing 	unfair methods 	of 	competition and unfair or deceptive
acts 	or 	practices 	in or 	affecting commerce. 	15 U.S.C. 	S 45.
Under 	this 	statutory mandate, 	the Commission seeks 	to 	identify
restrictions 	that 	impede competition or 	increase 	costs without
These comments 	are 	the views 	of 	the 	staff of 	the 	Dallas
Regional 	Office and the 	Bureau of 	Competition of 	the'Pederal
Trade Commission. 	They are not 	necessarily the views 	of 	the
Commission or any 	individual 	Commissioner.

3
4
." offering countervailing benefits 	to 	consumers. 	In 	particular,
the 	Commission 	and 	its 	staff 	have 	had considerable 	experience
assessing 	the 	competitive 	impact 	of 	regulations 	and business
practices 	in 	the 	oil 	industry.2
Description 	of 	the 	proposed 	legislation
The 	proposed 	legislation, 	the 	Arkansas 	Petroleum Trade
Practic~s Act, 	would address 	below-cost 	retail 	pricing and
discrimination by vertically-integrated petroleum refiners 	in
prices, 	allocations, 	and 	rebates.
Section 	4(a)(i) 	of 	the 	bill 	would prphibit 	retail 	sales 	of
gasoline 	below 	the 	retailer's 	cost 	of 	motor 	fuel, 	"where~he
effect-m~-y injure competition. "3 	The 	retailer's 	cost-"is 	defined
to 	include 	the ~um of 	(1) 	the 	lesser of 	the 	purchase 	price, 	less
trade 	discounts, 	and 	the 	replacement 	cost 	of 	the 	fuel1 	(2)
transportation costs; 	(3) 	taxes1 	and 	(4) 	the 	reasonable 	cost 	of
overhead.' 	Section 	4(a)(1i) 	provides 	that 	a 	retailer who 	stores
motor 	fuel 	in 	one-hundred gallon or 	larger containers 	and 	who
makes 	or 	offers 	to 	make 	"below cost" 	sales 	to 	the 	public 	may 	not
refuse 	to make 	sales 	to 	another dealer or distributor at 	the 	same
price.
2 	. The 	staff 	of 	the Commission has 	gained extensive
experience with energy competition 	issues 	by conducting 	studies,
investigations, 	and 	law enforcement 	actions. 	FTC 	staff comments
and testimony 	to 	legislative bodies 	have 	identified 	the 	costs 	of
proposed gasoline retailing divorcement, 	"below-cost 	selling,h
and other petroleum marketing 	legislation 	for 	Virginia,
M~ssachusetts, Louisiana, 	Montana, 	North Carolina, 	South
Carolina, 	Georgia, 	Alabama, 	Tennessee, 	Washington, 	Hawaii,
Nevada, 	and 	for 	the 	United States 	Senate and 	House 	of
Representatives. 	The Commission and 	its 	staff 	have 	also 	gained
considerable experience 	with gasoline 	refining and marketing
issues 	affecting consumers 	from 	premerger antitrust 	reviews
pursuant 	to 	Sections 	7 and 	7A of 	the 	Clayton Act, 	15 U.S.C. 	SS
18, 	l8a.
The bill 	would 	permit 	sales 	below 	cost when made 	in
good 	faith 	to meet 	competition and 	includes 	specific 	exemptions
for 	unusual 	circumstances, 	such 	as 	sales 	of discontinued
products, 	liquidation 	of 	a 	business, 	or 	sales 	pursuant 	to 	a 	court
order. 	Section 	4(c),(d).
Section 	2(d). 	"Cost of 	overhead M 	is 	defined 	in 	Section
2(c) 	to mean the 	fully 	allocated costs 	of conducting business,
including but not 	limited to 	labor, 	executive 	salaries, 	rent,
interest, 	depreciation, 	and 	all 	sales, 	general, 	and
administrative 	costs.
2

Section 	4(b) 	of 	the proposed 	law would prohibit vertically
integrated refiners 	from 	transferring motor 	fuel 	to 	refiner-owned
or 	affiliated' 	retail 	dealers 	at 	a 	price 	lower 	than 	the price
ch~_~9..!~.. to 	franchised or 	indepeiiaent 	dealers 	within t.he 	same
competJ,tIv.e:::-a-re·if~' 	Section 5 would enjoin refiners 	from
dis6r!minating 	in allocations 	of 	gasoline between 	refiner-owned
or 	affiliated retailers 	and 	franchised dealers, 	unless 	the
allocations 	are 	-reasonable" 	and 	-nondiscriminatory." 	Section 	6
would make 	it 	illegal 	for 	a 	refiner 	to discriminate 	in rebate.
and 	concessions 	·where the 	effect may 	injure 	competition.-'
Section 	7 of 	the 	bill would 	require 	all vertically 	integrated
refiners 	doing business 	in Arkansas 	to disclose, 	upon 	request,
the 	transfer prices 	charged 	to 	their own business 	units 	and
affiliates.
Violations 	of 	the Arkansas 	Petroleum Trade Practices 	Act
would 	be 	subject 	to 	prosecution by 	the 	state 	attorney general 	and
would 	SUbject "the violator 	to 	injunctions 	and civil 	penalties 	of
up 	tv 	$1000 	per day. 	The bill would 	also permit 	private 	actions
for 	injunctive 	relief, 	civil 	penalties, 	and 	actual 	and special
damages. 	Treble damages 	could be awarded 	for willful 	or knowing
violations. 7
Claims 	of 	predato~·, moDgpolistlc 	or collusive
activities 	by refiners 	against 	gasoline 	dealers
"I not 	b. well-founded.
The 	premise of 	the proposed 	law 	appears 	to be that
franchised 	and 	independent 	retail 	dealers 	are being victimized by
subsidized pricing by 	the major 	gasoline marketers. 	Proponents
of 	legislation 	that 	would impose 	restraints 	on vertically
integrated petroleum refiners 	have maintained that 	such laws 	are
necessary to protect dealers 	from 	unfair and 	anticompetitive
practices 	by 	their suppliers. 	According to 	this 	view, 	vertically
integrated refiners 	can and do 	set 	retail 	prices 	charged by their
company-owned and operated outlets 	below the wholesale 	prices
charged to 	franchised 	or 	independent 	dealers. 	They 	allege 	that
the 	reason 	for 	such 	·subsidization" 	is 	to 	drive 	franchised 	and
independent 	dealers 	out of 	business 	in order to 	replace 	them wIth
company-owned stations.
The 	claims 	that vertical 	integration by refiners 	into
gasoline 	retailing 	is 	anticompetitive do not 	appear 	to be well
.5 	An 	·affiliate" 	is 	a 	dealer 	(other 	than 	by 	franchise)
controlled by the 	refiner. 	Section 2(a).
6 	The 	bill would allow refiners 	to meet 	rebates 	and
concessions 	granted by competitors. 	Section 6.
7 Section 	8(a)-(c), 	(e).
3

founded •. 	Major oil companies 	have historically been 	·integrated
by contract,· 	relying heavily on 	franchised 	dealer networks 	to
sell their 	refined products. 	Several 	studies 	of competition 	in
gasoline 	marketing 	in the 	Qnited States since 	1981 	have concluded
that 	gasoline 	dealers 	have not 	been 	and are 	not 	likely 	to become
targets 	of 	antlcompetitive practices 	by their 	suppliers. 	We
bri~fly 	summarize 	the results 	of 	these 	studies 	below.
rodera1 	Studi•• 	- 	Following 	enactment of 	Title 	III 	of 	the
Petroleum Marketing Practices 	Act 	("PMPA") 	in 	1978, 	15 	U.S.C.
S 	2841, 	the Department of 	Energy 	("DOE") 	studied whether the
alleged 	"subsidization" 	of 	retail 	gasoline operations 	by the
major 	refiners 	actually existed, 	and, 	if 	it did, 	whether 	the
practice was 	predatory or 	anticompetitive. 	The 	final 	report 	to
Congress, 	published in 	January 	of 	1981, 	was 	based on 	an extensive
study 	of 	1978 pricing data 	in 	several 	Standard Metropolitan
Statistical Areas. ("SMSAs H), 	as 	well 	as on 	internal 	oil 	company
documents 	subpoenaed 	by DOE 	investigators. 	The study concluded
that 	there 	was 	no evidence of 	such 	"subsidization.·1
4
10
cited as 	1984_D9EReport).
, , ... -::... >~~,::,-~: .. <>. 	.
Id. 	at 	125-32.
In 	1984, 	DOE published an 	UPdated study 	that 	further
substantiated and elaborated on 	its 	1981 	findings.' 	The 	study
showed that 	company-operated stations were 	not 	increasing 	as 	a
percentage of 	all 	retail 	outlets, 	except 	among 	the 	smaller 	0
refiners. 	In the 	1984 	report, 	DOE concluded that.th~,increased
pressures 	on gasoline 	retailers 	since 	1981· were not~caused by.··
anticompetitive 	behavior on 	the 	part 	of 	th~major o~~:~ompanies.
Rather, 	the 	decline 	in 	the 	overall 	number .9.f 	retail~;:Qutlets and
the 	intensification of competition among9a-soline: c
marketers 	were
at.tr ibutable to 	decreased consumer demand ::for ~9asol£ne'~ianda:~"T~:
continuing trend toward the 	use 	of more,: 'iffic:ierit';~fii:gh:voliiDMt 	.
retail 	outl~~;;~4~~hro+:?;.. 	..~; 	' . .T._o •. ~i'1~:
State Studi•• - 	In 	1986, 	the washi~~Ol\1:!.~~~~~!torn4!,Y)\~~i;;<~F;·:
<Jeneral 	initiated a 	study of motor 	fuelp~Xi!J).q'E;"J'Ii~l'f.~;.~t:eto
determine 	whether claims 	of 	refiner 	subsid~za!~9~r~~ra~j~st~fi~d.
The study 	focused on whether major 	oil ooiDP.an~ei(f(ir~g.~:~~~'4f;:t'<;,.:
competition by charging 	lessee-dealers 	h~9!i!:;~ef.g:Et~!!2,¥:~~9.a8?,~~z:te
than 	the companies were charging 	their o~~e~~l':~",9P!-~~~o~.;,E\~\:'~}}~~o·
retail 	stations. o. The 	study also 	sought tC?;~!.!~~ne,~;~~_!~_~.,!:r:;;L~h~ ...
major oil 	companies 	injured competition by~!!!,;abli,~nl!1~oa pric:ing
structure 	between retail 	and 	wholesale pr.i,ces7that1.f9recolC?s~c:lthe
• 	. 	'. 	~;:";~{~,J,'
Gasoline""-'-'-':

13
ability of 	dealers 	to cover 	their 	costs. 	Information was
gathered on 	the 	practices 	of 	all 	eight of 	the major companies 	in
Washington 	for 	a 	three-year sample 	period. 	The study 	covered
regions 	throughout 	the 	state where 	the companies 	maintained both
retail 	operations 	and lessee-dealer 	operations. 	The Washington
study 	found 	that 	less 	than one percent 	of 	all 	observed pairs 	of
prices 	of 	lessee dealers 	and company-operated stations 	disclosed
any 	significant 	price variations, 	and concluded that 	such
instances 	were 	"clearly too 	infrequent" 	to show that 	lessee
dealers 	were 	being systematically driven 	from 	the market 	because
their 	gasoline 	purchase 	costs 	were 	the 	same 	as 	or higher 	than 	the
retail 	prices 	of 	competing 	refiner-operated 	stations. l1
More 	recently, 	in 1981, 	the Arizona 	legislature created 	a
Joint 	Legislative Study Committee 	on 	Petroleum Pricing and
Marketing 	Practices 	and 	Producer Retail 	Divorcement. 	In December
1988, 	after more 	than a 	year of 	extensive 	inquiry and 	analysis,
the 	Committee "recommended that 	no 	new 	legislation be enacted,
concluding 	that 	"[t]he marketplace 	for 	petroleum products 	is 	very
competitive 	in A.cizona ... 12
The 	state 	and DOE 	studies 	have 	revealed no 	instances 	of
predatory behavior by major gasoline 	refiners. 	Rather, 	they 	show
that 	the 	fortunes 	of 	refiners 	and 	their 	franchised 	retailers 	are
closely 	linked, 	and 	that 	these 	firms 	"form a 	mutuall~ 	supporting
system backed by company advertising 	and promotion." 3
Franchised 	retailers 	have continued 	to 	be by 	far 	the 	predominant
form 	of 	outlet 	for 	the 	gasoline 	sales 	of major, 	integrated
refiners. 	Indeed, 	major refiners 	operate only 	a 	small percentage
11 	Final Report 	to 	the Washington State Legislature 	on 	the
Attorney General's 	Investigation of 	Retail Gasoline Marketing,
August 	12, 	1981, 	at 	14.
12 	Final 	Report 	to the Arizona 	Joint" Legislative 	Study
Committee on Petroleum Pricing and Marketing Practices 	and
Producer Retail 	Divorcement, 	December, 	1988, 	at 	35. 	Some 	data
contained 	in 	the 	1984 	DOE 	study 	indicate 	that 	gasoline markets 	in
Arkansas 	are 	unconcentrated. 	~ 	1984 	DOE Report 	at 	90-91.
Generally, 	as 	a 	market becomes 	less 	concentrated, 	the 	likelihood
of 	anticompetitive conduct 	in 	the 	market declines.
1984 	DOE Report 	at 	ii. 	We 	do 	not mean 	to 	suggest
that 	the 	fortunes 	of 	refiners 	and 	their 	franchised 	retailers
are perfectly 	linked, 	only 	that 	the 	studies 	have 	found 	that 	in
general 	the 	refiners 	and 	their 	retailers 	share common goals.
Although our 	information 	for 	these propositions 	comes 	from 	1984
reports 	and 	articles, 	we have 	no 	reason to believe that 	the
distribution structure has 	significantly changed since 	that 	t~e.
5

of 	the 	gasoline 	stations 	in 	the United 	States. 14 In 	1981, 	the
eight 	largest 	refiners 	nationally, 	who 	in 	the 	aggregate 	accounted
for 	about 	half of 	all 	gasoline 	sales, 	sold 	approximately eight
times 	more 	gasoline 	through 	lessee dealers 	than 	through company-
operated outlets. u
Gasoline Marketing 	in Arkansas 	- 	The 	national 	pattern 	is
reflected 	in 	the 	distribution 	systems 	of 	the 	leading branded
refiners 	in Arkansas. 	The 	1984 	DOE 	study 	indicates 	that
vertically 	integrated gasoline marketers 	accounted for 	only 	3.3
percent of 	total 	sales 	in Arkansas 	in 	1981. 16 None of 	the 	eight
leading branded refiners 	in Arkansas 	f9r 	which data 	are 	available
use company-owned 	and 	operated outlets 	as 	the predominant 	form 	of
retailing 	on a 	national 	basis. l7 	However, 	company operated
outlets 	may be 	a 	predominant 	form 	of 	retailing 	for 	smaller
independent 	refiners. 	For 	example, 	Total 	Petroleum, 	which 	has 	a
presence 	in Arkansas, 	has 	more than 	three 	times 	as 	many company-
owned outlets 	as 	franchised 	dealers 	selling 	its 	product.
!4 	Lundberg 	Letter, 	Vol. 	XI, 	No. 	36, 	July 	6, 	1984,
at 	3, 	where 	it was 	reported that 	the major refiners 	operated
only 	about 	3.3% of 	all 	retail 	stations. 	The 	1984 	DOE 	Report
confirmed 	a 	similarly 	low 	proportion. 	A recent 	study 	conducted
for 	the American 	Petroleum 	Institute 	noted that 	the 	fourteen
largest 	integrated 	refiners, 	representing 	approximately 	67\ 	of
the 	nation'S 	refining 	capacity, 	had only 	about 	10\ of 	their 	gross
gasoline 	sales 	and 	4.5% 	of 	their outlets 	devoted 	to company-
operated retail 	stations. 	Temple, 	Barker 	& Sloan, 	Gasoline
Marketing 	in the 	1980's; 	Structure. 	Practices, 	And 	Public 	Policy
2-3 	(1988).
1984 	DOE 	Report 	at 	146 	(Table 	A-I0).
16 	1984 	DOE 	Report 	At 	82. 	This 	contrasts 	with a
nationwide 	figure 	of 	13.1 	percent.
11 	National 	Petroleum News 	1989 	Factbook 	34-51. 	Of 	the
major branded 	refiners, 	Chevron has 	the 	largest-selling brand 	in
Arkansas, 	followed 	by 	Exxon, 	Phillips 	66, 	Texaco, 	Kerr-McGee,
Citgo, 	Conoco, 	and American 	Petrofina. 	Nationally, 	Chevron,
Exxon, 	Texaco, 	and American 	Petrofina use 	company-owned 	stations
in 	fewer 	than 	6% 	of 	their 	branded outlets, 	while Conoco 	operates
9.8\ 	of 	its 	branded stations. 	Kerr-McGee 	operates 	30% 	of 	its
branded stations 	nationally but 	is 	a 	relatively small 	refiner,
with a 	market 	share of 	refining capacity 	at 	1.09\ and only 	one-
sixth as 	many branded outlets 	as 	Chevron 	or Bxxon. 	1989 Factbook
at 	140. 	Phillips 	66 	is 	exceptional 	in 	favoring 	company-operated
service stations, 	OPerating 	four 	times 	as 	many as Chevron or
Exxon. 	(Data 	are 	unavailable 	for 	Citgo.)
6

18
19
Given the 	importance 	of 	the branded, 	franchised marketing
distribution system, 	major 	refiners 	lack 	incentives 	to charge
discrLminatory prices 	that-would cause 	their 	franchised 	retailers
to 	seek new sources 	of 	supply or to go out 	of 	business. 	A
refiner 	that 	undertook 	such a 	course of 	action would probably
face 	a 	loss 	in 	sales, 	a 	decrease 	in market 	share, 	an 	increase 	in
excess 	refining capacity, 	and higher per unit 	costs. 	Thus, 	the
major 	integrated refiners 	are 	not 	likely to engage 	in predation
against 	the mainstay of 	their own 	retail 	distribution systems,
their 	franchised 	retailers. 	Moreover, 	it would 	be 	difficult 	for
major 	refiners 	to target 	independent 	dealers 	without 	injuring
their own 	franchised 	retailers.
Eyen 	if predato~ behavior or price 	diBeri_Ipation
were 	found, 	it 	Is 	alreAdy 	subjegt 	to »ro••eutlon
. under eXisting 	.tate and 	fedoral 	lAMS
Predatory conduct 	in 	the petroleum 	industry is 	subject 	to
the 	Sherman Act 	the Clayton Act, 	and 	the 	Federal 	Trade
Commission Act. U In 	addition, 	price discrimination 	that 	injures
competition is 	subject 	to 	the 	Robinson-Patman Act, 	15 	u.s.c.
S 	13, 	(which is 	Section 	2 of 	the Clayton Act).19 	These 	statutes
address 	possible 	anticompetitive practices 	in 	the 	industry 	and
deter 	firms 	from engaging 	in predatory behavior 	and/or 	illegal
price discrimination. 	In contrast, 	the proposed 	legislation may
make 	it 	more difficult 	for 	firms 	to 	adjust 	their prices 	in
response 	to changing conditions 	of ~emand and 	supply. 	Such
legislation 	is 	likely 	to 	add costs 	to 	the 	distribution of
gasoline 	in Arkansas 	that 	do 	not exist 	in other states, 	costs
that 	would be borne by Arkansas 	consumers 	and visitors.
~ho price 	aDd 	allocation 	regul.to~ feature. 	of the 	bill
MAY 1.a4 to 	higher ga.oll»o pric••
Enactment 	of 	the proposed 	legislation may 	have adverse
consequences 	for 	consumers. 	Short term price 	discounts 	designed
to 	attract new customers 	may be deterred. 	The 	legislation mal
also 	limit the 	availability of 	certain 	functional 	discounts. 2
--"
The Arkansas 	Antitrust 	Statutes, 	Ark. 	Code Ann. 	S 	4-75-
201 	~ ~ 	(1987), 	may 	also 	address 	predatory behavior.
~ Texaco, 	Inc. 	y. 	Hasbrouck, 	u.s. 	~ 	, 	110 	S.
Ct. 	2535 	(1990), 	a 	Supreme Court case where 	franchised 	96soline
retailers 	successfully 	challenged price 	discrimination by a
vertically integrated refiner.
20 	The Supreme 	Court 	recognized 	in the 	recent 	case of
Texaco, 	Inc. 	y. 	Hasbrouck, 	that 	it does 	not 	violate 	the antitrust
laws 	for 	a 	gasoline wholesaler 	to charge different 	prices 	to
(continued ••• )
7

22
Refiners may be prevented 	from 	realizing 	all 	the 	efficiencies 	of
vertical 	integration, 	which can often reduce 	transaction 	and
search costs 	and 	lower prices 	to 	consumers. 21 As 	a 	broad
generalization, 	economic 	theory 	says 	that 	vertical 	integration 	is
likely 	to 	harm 	consumers 	only when market power exists 	in at
least 	one 	stage of 	production. 22
An unintended effect 	of 	the 	propos~d legislation may be 	to
encourage vertically-integrated 	refiners 	who 	distribute 	gasoline
in Arkansas 	to change otherwise 	lawful 	pricing practices. 	In
enforcing the 	federal 	price discrimination 	law, 	the 	Robinson-
Patman Act, 	the Commission 	is 	careful 	to 	avoid discouraging 	firms
from 	engaging 	in 	lawful 	price 	competition and grice 	differences,
which often operate 	to 	destroy 	cartel 	pricing. 	However, 	such
lawful 	price competition may be 	discouraged by 	a 	number 	of
provisions 	in the 	proposed bill, 	including the 	recordkeeping 	and
disclosure 	obliqations 	imposed by Section 7 	thereof. 	Firms 	may
simply 	decide 	to 	set uniform prices 	across 	broad 	geographic
2o( ••• continued)
distributors 	for 	retail 	gasoline 	if 	the wholesaler can 	show 	that
the 	buyer pe~forms a 	wholesale 	function that 	reduces 	the
wholesaler's 	cost. 	110 S. 	Ct. 	at 	2545, 	2550. 	Such a 	"functional
discount" 	will 	normally qualify as 	legitimate and will 	not 	injure
competit~on. 	As 	the 	court 	notes, 	"[a]t 	the 	least, 	a 	functional
discount 	that 	constitutes 	a 	reasonable 	reimbursement 	for 	the
purchasers' 	actual 	marketing 	functions 	will 	not violate 	the Act."
110 	S. 	Ct. 	at 	2550.
21 	For example, 	a 	vertically 	integrated refiner may be 	able
to 	achieve 	greater efficiency 	in coordinating 	its 	different
levels 	of 	distribution than 	is 	possible 	in market 	transactions.
In 	a 	competitive 	industry, 	such 	as 	retail 	gasoline 	sales, 	it may
be 	expected that 	these 	cost 	savings 	would be 	at 	least partially
passed on 	to 	the 	consumer. 	However, 	the proposed 	legislation may
inhibit 	such 	firms 	from 	using these 	savings 	to 	lower prices 	to
consumers. 	This 	is 	a 	result 	of 	Section 	4(b), 	which may
effectively prohibit vertically 	integrated refiners 	from 	passing
their 	cost 	savings 	on 	to company operated outlets 	(because 	they
would 	be 	prohibited 	from 	transferring gasoline to 	these 	outlets
at 	prices 	below 	that 	charged 	to 	competing outlets) 	and Section
4(a)(i), 	which 	would 	further 	preclude 	such 	savings 	from 	being
passed 	through 	to 	the consumer 	(because 	retail 	sales 	below 	the
transfer cost 	to 	the 	outlet would be 	prohibited).
~, 	~, 	Department 	of 	Justice Merger GUidelines,
Section 	4.21 	(1984).
2' 	~,~, 	F.M. 	Scherer & D. 	Ross, 	Industrial Market
Structure 	and 	Economic 	PerfOrmance 	515 	(3d ed. 	1990).
8

24
'.
regions 	to avoid 	violations. 24 The 	bill, 	~herefore, if 	enacted,
could 	result 	in higher profiLs 	for 	all 	gasoline 	refinars 	and
n,arketers 	through higher prices 	for 	Arkansas 	consumers 	and
visitors.
Conclusion
For the 	reasons 	stated above, 	we 	believe 	that 	the 	bill, 	if
dnacted, 	would 	tend 	to 	insulate 	gAsoline 	refiners 	and marketers
from 	competition, 	and 	thereby could cause 	gasoline 	prices 	in
Arkansas 	to 	increase. 	'
To 	the 	extent 	that 	individual 	firms 	would have 	an
incentive 	to 	set 	a 	single 	price 	in a 	geographic 	area to 	avoid
violating the 	proposed 	bill, 	the 	law would resemble 	"uniform
price 	laws," 	the 	possible 	effects 	of 	which were discussed as
follows "in the 	1984 	DOE 	report, 	supra, 	n. 	9, 	at 	122:
In a 	market 	where 	there 	are 	no 	restrictions 	on pricing,
price reductions 	tend 	to 	spread 	throughout 	the 	geographic
area providing 	lower 	prices 	for 	consumers. 	• 	•• 	If 	the
geographic 	area within which the 	price cutting occurs 	is
limited, 	it 	is 	very 	likely that 	the 	refiners 	will 	respond 	in
kind. 	• 	• 	• 	Thus, 	a 	price cut 	in one 	area often will 	lead
to 	price cuts 	across 	broad market 	areas. 	In 	this 	situation,
competition has 	worked effectively 	and consumers 	in all
areas 	affected are better off.
In markets 	where 	there 	are 	uniform price 	restrictions, 	it
is 	more 	likely that the 	responses 	will 	be different. 	Again,
a 	refiner may decide 'to 	lower prices 	in 	a 	geographic 	area
where 	sales 	traditionally 	have 	been weak. 	Refiners'
responses 	must 	now 	take 	into account 	the 	uniform price 	law.
• 	• 	• 	[R]efiners 	must 	lower prices 	throughout 	the 	area
covered by 	the 	law. 	·In 	this 	situation, 	the 	refiners 	are
more 	than 	likely 	to maintain their 	prices, 	since they 	may
decide 	it 	is 	less 	costly to 	forego 	some 	sales 	in the 	initial
market where price cutting 	is 	occurring than 	lower prices
throughout 	the 	region. 	• 	• 	• 	Competition has 	been 	adversely
affected 	and most consumers 	are 	no 	better off, 	since 	price
reductions 	have 	not occurred in areas 	where 	they would 	have
without 	the 	uniform price 	law.
9

We 	appreciate 	the 	opportunity 	to 	comment 	on ~his bill.
Please 	feel 	free 	to 	contact 	us 	if 	we 	can be 	of 	further
assistance.
Sincerely,
------	~ 	.. -,-~" 	,
Thomas 	B.'" Carter
Director
Dallas 	Regional 	Office
10