FTC Staff Comment to the Honorable Shirley Krug Concerning the Wisconsin Unfair Sales Act, as Applied to Gasoline Sales

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
October 15, 2003
Shirley Krug
State Representative
12th Assembly District
Post Office Box 8952
Madison, WI 53708
Re: Wisconsin's Unfair Sales Act
Dear Representative Krug:
The staffs of the Federal Trade Commission's Bureau of Competition, Bureau of Economics, and
Office of Policy Planning are pleased to respond to your request for comments on Wisconsin's
Unfair Sales Act.(1) The Act prohibits the retail sale of motor fuel below a statutory definition of
"cost," where "cost" includes a minimum markup "to cover a proportionate amount of the cost of
doing business." The Act provides for fines and private actions against violators.
In your letter of May 14, 2003, you asked us four questions about the Act. Your questions, and a
summary of our answers, appear below:
• 	Does the law harm consumers by significantly raising prices to consumers?
Most likely yes. Minimum markup laws likely deter pro-competitive price cutting and
can ultimately lead to higher prices for consumers. They can prevent efficient vendors
from passing on savings to consumers, and they can discourage entry from new
competitors that may be more efficient. Moreover, when compared to other states with
similar laws, the Act exacerbates these problems by employing one of the steepest
minimum markups on retail fuel sales in the country.
• 	Does the current Wisconsin law duplicate existing protections against "predatory
pricing" found in the federal antitrust law?
The federal antitrust laws deal specifically with below-cost pricing that has a reasonable
prospect or dangerous probability of leading to monopoly. The FTC, the Department of
Justice's Antitrust Division, state attorneys general, and private parties can sue under
these laws in response to anticompetitive below-cost pricing. The Act, however, does
more than duplicate these protections; it exceeds them in ways that do not benefit

consumers. Federal law prohibits pricing that could harm competition and consumers, not
just competitors, whereas the Act prohibits pricing that could harm competitors even if
there is no harm to consumers.
• 	Does the current Wisconsin law discourage or encourage competitive pricing?
Current Wisconsin law discourages competitive pricing. The Act forbids below-statutory
cost price cutting that has the intent or effect of diverting trade from a competitor. Thus,
unlike federal antitrust law, the Act focuses on harm to competitors rather than harm to
competition. In fact, the Act subjects vendors to civil liability - including treble damages
and a $5,000 fine per violation - for cutting prices even if there is no likelihood of harm
to competition, such as if they price below statutory cost on a single occasion, and even if
the vendors have no intent to engage in anticompetitive conduct. Furthermore, the Act
defines "cost" in a way that lacks a firm economic foundation and likely leads to higher
prices. As a result, many vendors likely avoid pro-competitive price-cutting altogether.
• 	Are there any scholarly studies or court decisions in recent years that address the
effect of "below-cost" pricing in relation to the creation of monopolies?
Yes. Because low prices benefit consumers, consumers are harmed by "below-cost"
pricing only if, because of low prices, a dominant competitor is able later to raise prices
to supracompetitive levels. Economic studies, legal studies, and court decisions indicate
that below-cost pricing that leads to monopoly occurs infrequently. Below-cost sales of
motor fuel that lead to monopoly are especially unlikely.
For these reasons, we believe that Wisconsin's Unfair Sales Act likely harms consumers and
restricts competition. Moreover, at best, the Act is unnecessary because the federal antitrust laws
already protect against predatory pricing.
Interest and Experience of the Federal Trade Commission
The FTC is charged by statute with preventing unfair methods of competition and unfair or
deceptive acts or practices in or affecting commerce.(2) Under this statutory mandate, the
Commission seeks to identify business practices that impede competition or increase costs
without offering countervailing benefits to consumers. In particular, Commission staff have often
assessed the competitive impact of regulations and business practices in the petroleum industry.
In recent years, the Commission has investigated, among others, the mergers of several
diversified energy companies: Chevron and Texaco; Exxon and Mobil; BP and Amoco;
petroleum refiners Valero Energy and Ultramar Diamond Shamrock; and the combination of the
refining and marketing businesses of Shell, Texaco, and Star Enterprises.(3)
The Commission and its staff have also investigated, conducted workshops, and commented on
proposed regulations regarding motor fuel pricing. In 2001, the Commission completed
investigations of spikes in reformulated gasoline prices in several Midwestern states,(4) and of
gasoline price increases in West Coast markets.(5) In the last two years, the Commission held
two public conferences to examine factors that affect prices of refined petroleum products in the

United States.(6) Commission staff also filed public comments with the Environmental
Protection Agency concerning "boutique fuel" regulations.(7) On many occasions, Commission
staff has offered comments on proposed state laws covering various aspects of gasoline sales,
including laws that would ban sales of motor fuels below cost.(8)
Analysis of Wisconsin's Unfair Sales Act
The Unfair Sales Act prohibits vendors from selling motor fuel below a statutory definition of
"cost":
Any sale of any item of merchandise . . . at less than cost as defined in this section with the intent
or effect of inducing the purchase of other merchandise or of unfairly diverting trade from a
competitor, impairs and prevents fair competition ... Such sales are prohibited. Evidence of any
sale of any item of merchandise by any [vendor] at less than cost as defined in this section shall
be prima facie evidence of intent or effect to induce the purchase of other merchandise, or to
unfairly divert trade from a competitor, or to otherwise injure a competitor.
Wis. Stat. Ann. § 100.30(3) (West 2003). The Act defines "cost" in several ways depending on
the vendor, although none of the definitions focus solely on the vendor's own costs. In general,
the Act defines "cost" with reference to the greater of (1) the vendor's invoice or replacement
cost (adjusted for various factors such as transportation costs and taxes), or (2) the "average
posted terminal price" at the terminal nearest the retail sale in question, plus a minimum markup
of 3%, 6%, or 9.18% to "cover a proportionate part of the cost of doing business." The Act
provides for both fines of up to $5,000 per violation, and private causes of action with treble
damages or $2,000 per violation, whichever is greater. The Act permits a handful of exceptions,
including ones for clearance sales and meeting the competition.
We believe that, if followed by retailers, the Act restricts competition and likely leads to higher
prices for consumers. Unlike federal antitrust law, the Act aims to protect individual competitors,
not competition, thereby discouraging pro-competitive price-cutting. Moreover, the Act defines
"cost" in a way that that lacks a firm economic foundation and likely leads to significantly higher
prices. Finally, we believe that the Act is unnecessary, both because scholarly studies and court
decisions indicate that anticompetitive below-cost pricing happens infrequently, and because the
federal antitrust laws already prohibit anticompetitive below-cost pricing.
A. Anticompetitive below-cost pricing is already illegal under federal antitrust
law
i. Antitrust law protects consumers, not competitors
The federal antitrust laws are fundamental to national economic policy and our free market
system. The antitrust laws ensure that markets remain competitive, efficient, and dynamic. Under
these laws, both the FTC and the Department of Justice's Antitrust Division may bring
enforcement actions against anticompetitive below-cost pricing. The federal government has
launched several predatory pricing investigations and predatory unilateral conduct cases during
the past several years.(9) In addition, private plaintiffs and state attorneys general have the right

to bring predatory pricing cases. Under Section 4 of the Clayton Act, any person who has been
injured in his business or property as a result of conduct forbidden by the antitrust laws can seek
treble damages for that injury.(10) State attorneys general, acting as parens patriae, also may
bring such actions.
Although anticompetitive below-cost pricing is illegal, the United States Supreme Court has
cautioned that antitrust law should not prevent pro-competitive price-cutting. Congress designed
the antitrust laws for "the protection of competition, not competitors."(11) In other words, the
federal antitrust laws promote and maintain legitimate, vigorous price competition, irrespective
of how individual competitors may fare. Vigorous price competition allows consumers to reap
the benefits of lower prices, greater variety, and higher quality goods and services. In several
important antitrust decisions, the Court has been absolutely clear that consumer welfare is the
linchpin of the antitrust laws, and that as a general matter, low prices are "a boon to
consumers."(12)
ii. Only prices below the price-cutter's cost can be predatory
The Supreme Court has directly addressed low-pricing strategies. In Brooke Group v. Brown &
Williamson Tobacco Corp., the leading case in this area, the Court expressly held that a
defendant does not violate the federal antitrust laws by cutting prices merely because the low
prices decrease a competitor's profits. "Low prices benefit consumers regardless of how those
prices are set."(13) To be unlawful, the low prices must, at a minimum, be predatory. "[S]o long
as they are above predatory levels, [low prices] do not threaten competition . . . We have adhered
to this principle regardless of the type of antitrust claim involved."(14) The Court noted that
"[we] have rejected elsewhere the notion that above-cost prices that are below general market
levels or the costs of a firm's competitors inflict injury to competition cognizable under the
antitrust laws."(15)
The Court has defined predatory pricing, in turn, as "pricing below an appropriate measure of
[the defendant's] cost for the purpose of eliminating competitors in the short run and reducing
competition in the long run."(16) Although the Court has not stated what the appropriate measure
of cost should be, prominent antitrust scholars and several federal circuit courts have concluded
that the price-cutter's marginal costs, or a close proxy such as average variable costs, should be
the yardstick.(17)
It is critical to note that, whatever measure of cost is chosen, the pertinent comparison is to the
price-cutter's costs, not to some external benchmark, such as a rival's costs, which does not
necessarily reflect the costs actually incurred by the price-cutting firm itself. "To hold that the
antitrust laws protect competitors from the loss of profits due to such price competition would, in
effect, render illegal any decision by a firm to cut prices in order to increase market share."(18)
iii. Not all below-cost pricing harms consumers
By itself, below-cost pricing does not violate the federal antitrust laws. Under federal law,
below-cost pricing must also injure or threaten to injure consumers, and consumers are injured
by below-cost pricing only if sustained above-cost prices occur later:

[T]he short-run loss is definite, but the long-run gain depends on successfully neutralizing the
competition. Moreover, it is not enough simply to achieve monopoly power, as monopoly pricing
may breed quick entry by new competitors eager to share in the excess profits. The success of
any predatory scheme depends on maintaining monopoly power for long enough both to recoup
the predator's losses and to harvest some additional gain.(19)
Thus, even if a below-cost pricing strategy succeeds in temporarily reducing the number of
competitors, the price-cutter must keep competitors from returning after it tries to raise prices
again: "The second prerequisite to holding a competitor liable under the [federal] antitrust laws
for charging low prices is a demonstration that the competitor had a reasonable prospect, or,
under § 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost
prices."(20) Otherwise, the below-cost pricing strategy, which requires that the firm incur losses
on every sale, will not succeed. When a firm fails to recoup short-run losses (from sales at
below-cost prices) in the long run, consumers enjoy a windfall. And without harm to consumers,
an antitrust violation does not occur. "[U]nsuccessful predation is in general a boon to consumers
. . . That below-cost pricing may impose painful losses on its target is of no moment to the
antitrust laws if competition is not injured."(21)
B. Scholarly studies and court decisions suggest that predatory below-cost
pricing happens infrequently
In recent years, many scholars have studied anticompetitive below-cost pricing. In an exhaustive
discussion, Frank Easterbrook, now sitting on the U.S. Court of Appeals for the Seventh Circuit,
noted that "[s]tudies of many industries find little evidence of profitable predatory practices in
the United States or abroad. These studies are consistent with the result of litigation; courts
routinely find that there has been no predation."(22)
Other analyses largely confirm Easterbrook's conclusion. A leading textbook on industrial
organization economics notes that "[g]iven all the problems in identifying predatory pricing, it is
not surprising that economists and lawyers have found few instances of successful price
predation in which rivals are driven out of business and prices then rise. Although predation is
frequently alleged in lawsuits, careful examination of these cases indicates that predation in the
sense of pricing below cost usually did not occur."(23) Predation sometimes occurs,(24) but not
nearly as frequently as claimed.(25)
The Supreme Court has endorsed this scholarship. Because it is difficult to profit from
anticompetitive below-cost pricing, the Supreme Court has observed that "there is a consensus
among commentators that predatory pricing schemes are rarely tried, and even more rarely
successful."(26) Therefore, the Court has emphasized the need to take great care to distinguish
between procompetitive price cutting and anticompetitive predation because "cutting prices in
order to increase business often is the very essence of competition . . . ."(27)
C. Past studies show that anticompetitive below-cost sales of motor fuels are
especially unlikely

Several studies suggest that anticompetitive below-cost pricing is especially unlikely in gasoline
retailing. During the past two decades, many government agencies have investigated laws to
prevent anticompetitive below-cost pricing of motor fuels. The issue originally arose in the
1980s, when various parties expressed concern that major oil companies were selling gasoline
below cost to drive independent stations out of business. Numerous states considered enacting
legislation to ban below-cost pricing of motor fuel. The U.S. Department of Energy (USDOE)
comprehensively investigated these allegations.
In 1984, USDOE released a final report to Congress examining whether vertically integrated
refiners were "subsidizing" their retail gasoline operations in a way that was predatory or
anticompetitive. The study relied on extensive pricing data and internal oil company documents.
USDOE found no evidence of predation or anticompetitive subsidization. Instead, the agency
concluded that the decline in the overall number of retail outlets and intensified competition
among gasoline marketers resulted from decreased consumer demand for gasoline in some areas
and a continuing trend toward the use of more efficient, higher-volume retail outlets.(28)
Several states have conducted their own studies. In 1987, Arizona's Joint Legislative Study
Committee recommended no new legislation to restrict the pricing of motor fuels in Arizona.
"The marketplace for petroleum products is very competitive in Arizona," the Committee
concluded.(29) Similarly, in 1986, the Washington State Attorney General studied whether
refiners were subsidizing company-owned service stations in an anticompetitive manner.
Washington gathered information on the practices of all eight of the major companies in the state
for a three-year sample period. The Washington study found that lessee-dealers paid essentially
the same prices as company-owned stations more than 99% of the time.(30)
More recently, in 2000, the Commonwealth of Pennsylvania studied a variety of proposals for
bills affecting retail gasoline sales in the state. The report extensively analyzed "sales below
cost" laws and declined to recommend that Pennsylvania enact one. In fact, the Pennsylvania
study raised significant doubts about the theory that gasoline retailers were engaging in
anticompetitive below-cost pricing, and it warned that a "sales below cost" law could harm
consumers:
Unfortunately, such laws may serve to deter, rather than enhance, competition. The reason for
such deterrence is that it may open up firms who engage in low, but non-predatory, pricing to
litigation. Seeing the threat of litigation, such firms may change strategy and charge consumers
higher prices.(31)
Competitors will, of course, often complain that the competition charges prices that are "too
low." Competitors have an incentive to do so if they believe such complaints will lead to
legislation that will allow them to charge higher prices. To date, however, no systematic study
has produced evidence that predatory pricing is a significant problem in retail gasoline markets.
D. The Unfair Sales Act likely restricts competition and harms consumers
We believe that, if followed by retailers, the Act likely restricts competition and leads to higher
prices for consumers. In several critical respects the Act, which was first enacted in the 1930s,

breaks from federal antitrust law and prohibits conduct that benefits consumers. In particular, the
Act protects competitors, not competition, and the Act defines "cost" in a way that lacks a firm
economic foundation and discourages pro-competitive price-cutting. Moreover, we believe that
the Act is unnecessary, both because scholarly studies and court decisions indicate that
anticompetitive below-cost pricing happens infrequently, and because the federal antitrust laws
already prohibit anticompetitive below-cost pricing.
i. The Act protects competitors, not competition
Unlike federal antitrust law, the Act protects competitors, not competition. The Act states that
"any sale" below-statutory cost with the intent or effect of "unfairly diverting trade from a
competitor" impairs and prevents "fair competition." Accordingly, the Act bans all below-
statutory cost sales that take business from a single competitor, even if those sales result in lower
prices for consumers.(32)
For these reasons, the Act likely discourages pro-competitive price-cutting. The Act subjects a
vendor to liability for pricing below the statutory definition of cost on a single occasion if a
single competitor is hurt, even if there is no danger that the vendor would be able to recoup its
lost profits, and even if there are dozens of other competitors in the relevant market. Moreover,
because the Act imposes liability if there is an intent or effect to divert business from a
competitor, a vendor could be held liable for pricing below statutory cost inadvertently, even on
a single occasion. Similarly, the Act prohibits pro-competitive below-cost pricing, such as
special promotions or below-cost pricing that may accompany the launch of a new retail outlet.
The penalties include a fine of up to $5,000 and private litigation that could result in treble
damages or a $2,000 penalty per violation, whichever is greater.
In all these situations, there is no risk to consumers of monopolization or any other
anticompetitive effects, because there is no risk that the vendor could later recoup its losses. The
risk of damages and a substantial civil penalty, however, likely deter vendors from cutting prices.
Likewise, the mere threat of litigation may deter vendors from selling gasoline at prices that are
legal and above cost, but low enough to prompt complaints from competitors.
ii. The Act defines "cost" to include a minimum markup
In addition, the Act defines "cost" in a manner inconsistent with most antitrust precedent and
economic and legal literature. The Act defines "cost" to include costs other than average variable
costs, including a minimum markup of 3%, 6%, or 9.18%, depending on the vendor's identity
and location. The markup's stated purpose is "to cover a proportionate part of the cost of doing
business."
The minimum markup most likely leads to significantly higher prices for Wisconsin's consumers.
In the first place, if vendors have a lower "cost of doing business" than the minimum markup
percentage, the Act prevents those vendors from passing on the savings to consumers. Some
efficient vendors may have a "cost of doing business" less than 6% or 9.18%, while other
vendors may prefer to adopt lower prices and increase their profits through greater volume. The
Act prevents these vendors from offering lower prices, with no benefits to consumers. Instead,

the minimum markup simply protects the profit margins of vendors, efficient and inefficient
alike. One study found that, when penalties for violating the Act were increased in 1998, the
average markup of retail gasoline increased by two to three cents per gallon.(33) This study is
consistent with a growing body of empirical economic research from the past two decades that
has assessed the impact of state "sales below cost" laws on retail gasoline prices. Most studies
find these laws raise gasoline prices or leave them unchanged.(34)
Moreover, the Act discourages entry by new participants that may be more efficient. Some
potential entrants, including those with alternative station formats, may have lower average fixed
costs per gallon than older stations, and these competitors could pass on their lower costs to
consumers. The Act discourages such potential competitors from ever competing in the
marketplace.
The Act exacerbates these problems by employing one of the steepest minimum markups on
retail fuel sales in the country. A few other states have minimum markup provisions specifically
targeting motor fuel retail sales, but the highest outside Wisconsin is typically 6%.(35)
Wisconsin's minimum markup of 9.18% exceeds that rate by more than 50%. Furthermore, the
Act's use of the 9.18% measure - as well as the 3% and 6% measures - appears completely
arbitrary. FTC staff could locate no support for these measures from any authority on
competition policy, including Supreme Court precedent, federal antitrust law, basic economic
theory, or empirical studies. In fact, the minimum markup percentages do not, as the Act
suggests they should, accurately reflect a "proportionate part of the cost of doing business."
Because the Act ties operating costs to the wholesale price, the dollar value of the minimum
markup rises if wholesale prices rise. Operating costs, however, generally do not increase with
increases in the wholesale price. For example, rent is an operating cost that does not vary with
the wholesale price. Nevertheless, when wholesale prices rise, the Act increases the amount of
money consumers have to pay for a "proportionate part of the cost of doing business," even if
those costs remain unchanged. This link likely leads to even higher retail prices, with no
attendant benefits for consumers or competition.
iii. The Act defines "cost" by reference to other competitors' costs
The Act defines "cost" in another way that discourages pro-competitive price-cutting. Although
the Act's definition of "cost" varies with the location and identity of the vendor, the Act typically
defines "cost" to include the greater of (1) the vendor's invoice or replacement cost (adjusted for
various factors such as transportation costs and taxes), or (2) the "average posted terminal price"
at the terminal nearest the retail sale in question, plus a minimum markup. As a result, the Act
defines "cost" in a way that focuses not on the price-cutter's cost, but on the "average" costs
faced by the price-cutter's competitors.
This standard directly contravenes established antitrust doctrine. The federal courts, basic
economic principles, and virtually all prominent antitrust scholars agree that the relevant
measure of cost should be that of the vendor, not its competitors. If the vendor has lower costs
than its competitors and prices at or above those costs, consumers will benefit from the vendor's
greater efficiency. Predatory pricing can only occur when vendor prices are below some measure
of its own costs, even if those prices are below its rivals' costs.

Furthermore, the "average posted terminal price" may not accurately reflect the prices available
to vendors. For example, the average posted terminal price does not reflect discounts that jobbers
and retailers may receive. A jobber or retailer who negotiates a lower price cannot legally pass
on that price to consumers. Vendors sometimes negotiate volume-based discounts, but under the
law's definition of cost, such vendors may be unable to put gasoline on sale at the end of the
month to achieve volume-based savings. Consumers most likely pay higher prices as a result.
Timing presents another problem. A vendor may decide, for procompetitive reasons, to charge a
lower price based on the cost of gasoline when purchased, rather than the current average posted
terminal price. As a result, if the average posted terminal price subsequently increases, a vendor
could violate the law by selling gasoline above its own costs, but below subsequent prices. There
is no consumer benefit to punishing vendors in this situation.
Inversions present yet another problem. Jobbers and retailers usually pay a higher price for
branded than for unbranded gasoline; inversions occur when the unbranded price for gasoline
exceeds the branded price. When gasoline supplies are tight, the unbranded price rises and can
surpass average branded prices (and implicit branded wholesale prices paid by lessee-dealers and
company operated outlets). In this situation, branded stations could violate the proposed law
during a price inversion, even if the vendors charged prices that exceeded their actual costs.
Finally, the terminal at which a retailer's marginal cost of a gallon of gasoline is lowest may not
be "the terminal closest to the retail station." For example, if a retailer has lower laid-in costs
from a different, more distant terminal, it will be more profitable for him to buy gas at that
terminal.
iv. The Act is unnecessary
Aside from the problems with the Act's definitions and focus, the Act is simply unnecessary. The
Act addresses a problem, anticompetitive below-cost pricing, that is already covered by the
federal antitrust laws, and that is unlikely to occur in any event. Given the strong stance of the
Supreme Court in favor of low prices and the care the Court has devoted to explaining the types
of price cutting that are illegal under the antitrust laws, Wisconsin's Act is not necessary to
protect consumers.
Conclusion
For these reasons, the FTC's Office of Policy Planning, Bureau of Competition, and Bureau of
Economics believe that Wisconsin's Unfair Sales Act harms competition. The Act addresses a
problem that is unlikely to occur. To the extent that anticompetitive below-cost pricing is a
danger in the retail gasoline market, federal antitrust laws are sufficient to address the problem.
Moreover, we believe that the Act most likely deters pro-competitive price-cutting and causes
some vendors to raise their prices, to the detriment of Wisconsin's consumers.
Respectfully submitted,

Susan A. Creighton, Director
Bureau of Competition
Luke M. Froeb, Director
Bureau of Economics
Todd J. Zywicki, Director
Office of Policy Planning
Endnotes:
1. Wis. Stat. Ann. § 100.30 (West 2003). This letter expresses the views of the FTC's Bureau of
Competition, Bureau of Economics, and Office of Policy Planning. The letter does not
necessarily represent the views of the Commission or of any individual Commissioner. The
Commission has, however, voted to authorize us to submit these comments.
2. Federal Trade Commission Act, 15 U.S.C. § 45.
3. See Chevron Corp., Docket C-4023 (decision and order 2002); Exxon Corp., Docket C-3907
(decision and consent order 2001); British Petroleum Co. p.l.c., Docket C-3868 (decision and
order 1999); Valero Energy Corp., Docket C-4031 (decision and order 2002); Shell Oil Co.,
Docket C-3803 (decision and order 1998). All of these orders are available at the FTC's website.
4. FTC, Final Report, Midwest Gasoline Price Investigation (Mar. 29, 2001), at
http://www.ftc.gov/os/2001/03/mwgasrpt.htm.
5. FTC Closes Western States Gasoline Investigation, FTC Press Release (May 7, 2001), at
http://www.ftc.gov/opa/2001/05/westerngas.htm.
6. FTC to Hold Public Conference/Opportunity for Comment on U.S. Gasoline Industry, FTC
Press Release (July 12, 2001), at http://www.ftc.gov/opa/2001/07/gasconf.htm; FTC to Hold
Second Public Conference on the U.S. Oil and Gasoline Industry in May 2002, FTC Press
Release (Dec. 21, 2001), at http://www.ftc.gov/opa/2001/12/gasconf.htm.
7. FTC Staff comments, Study of Unique Gasoline Fuel Blends, Effects on Fuel Supply and
Distribution and Potential Improvements, EPA 420-P-01-004, Public Docket No. A-2001-20
(Jan. 30, 2002), at http://www.ftc.gov/be/v020004.pdf.
8. See Letter from Todd Zywicki, Director, FTC Office of Policy Planning, et al., to Eliot
Spitzer, Attorney General of New York (July 24, 2003), at http://www.ftc.gov/be/nymfmpa.pdf;
Letter from Zywicki, et al., to Roy Cooper, Attorney General of North Carolina (May 19, 2003),
at http://www.ftc.gov/os/2003/05/ncclattorneygeneralcooper.pdf; Competition and the Effects of
Price Controls in Hawaii's Gasoline Market: Before the State of Hawaii, J. Hearing House
Comm. On Energy and Environmental Protection et al., (Jan. 28, 2003) (testimony of Jerry Ellig,
Deputy Director, FTC Office of Policy Planning) at http://www.ftc.gov/be/v030005.shtm; Letter
from R. Ted Cruz, Director, FTC Office of Policy Planning, et al., to Gov. George E. Pataki of

New York (Aug. 8, 2002) at http://www.ftc.gov/be/v020019.pdf; Letter from Joseph J. Simons,
Director, FTC Bureau of Competition, and R. Ted Cruz to Hon. Robert F. McDonnell,
Commonwealth of Virginia House of Delegates (Feb. 15, 2002) at
http://www.ftc.gov/be/V020011.htm. See also Letter from Ronald B. Rowe, Director for
Litigation, FTC Bureau of Competition, to Hon. David Knowles, California State Assembly
(May 5, 1992); Prepared Statement of Claude C. Wild III, Director, FTC Denver Regional
Office, before the State, Veterans, and Military Affairs Committee of the Colorado State Senate
(Apr. 22, 1992); Letter from Claude C. Wild III, Director, FTC Denver Regional Office, to Hon.
Bill Morris, Kansas State Senate (Feb. 26, 1992); Letter from Claude C. Wild III, Director, FTC
Denver Regional Office, to David Buhler, Executive Director, Utah Department of Commerce
(Jan. 29, 1992); Letter from Thomas B. Carter, Director, FTC Dallas Regional Office, to Hon.
W.D. Moore, Jr., Arkansas State Senate (Mar. 22, 1991); Letter from Jeffrey I. Zuckerman,
Director, FTC Bureau of Competition, to Hon. Jennings G. McAbee, Chairman, Other Taxes and
Revenues Subcomm., Ways and Means Comm., South Carolina House of Representatives (May
12, 1989). All of these letters are on file at the FTC.
9. One notable example is United States v. Microsoft, 253 F.3d 34 (D.C. Cir.), cert. denied, 534
U.S. 952 (2001).
10. 15 U.S.C. § 15.
11. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (quoting Brown
Shoe Co. v. United States, 370 U.S. 294, 320 (1962)).
12. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). See
also Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990); Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).
13. Brooke Group, 509 U.S. at 223 (quoting Atlantic Richfield, 495 U.S. at 340).
14. Id. (quoting Atlantic Richfield, 495 U.S. at 340).
15. Id. (citing Atlantic Richfield, 495 U.S. at 340).
16. Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 117 (1986).
17. See Kelco Disposal, Inc. v. Browning-Ferris Indus., 845 F.2d 404, 407 (2d Cir. 1988), aff'd
on other grounds, 492 U.S. 257 (1989) (finding that "[p]rices that are below reasonably
anticipated marginal cost, and its surrogate, reasonably anticipated average variable cost . . . are
presumed predatory"); MCI Communications Corp. v. AT&T, 708 F.2d 1081, 1122-23 (7th Cir.
1983) (holding that no predatory intent can be presumed from prices at or above long run
incremental cost); International Air Indus. v. American Excelsior Co., 517 F.2d 714, 724 (5th
Cir. 1975) (holding that plaintiff must show that "either (1) a competitor is charging a price
below his average variable cost ... or (2) the competitor is charging a price below its short-run,
profit-maximizing price and barriers to entry are great enough to enable the discriminator to reap
the benefits of predation before new entry is possible"); P. Areeda and H. Hovenkamp, Antitrust

Law ¶ 724; Phillip Areeda and Donald Turner, Predatory Pricing and Related Practices under
Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975). In Brooke Group, the parties both
agreed that average variable cost should be the appropriate measure.
18. Brooke Group, 509 U.S. at 223 (quoting Cargill, 479 U.S. at 116).
19. Matsushita Elec., 475 U.S. at 589.
20. Brooke Group, 509 U.S. at 224.
21. Id. at 224, 226.
22. Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. Chi. L. Rev. 263,
313-14 (1981) (citations omitted).
23. Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization 342 (3d ed. 2000).
24. See Jeffrey Church and Roger Ware, Industrial Organization: A Strategic Approach 659
(2000).
25. P. Areeda and H. Hovenkamp, Antitrust Law ¶ 723a (2d ed. 2002) ("as the Supreme Court
has observed, although competitors allege predation frequently, it is probably quite uncommon").
26. Matsushita Elec., 475 U.S. at 589.
27. Id. at 594.
28. USDOE, Deregulated Gasoline Marketing: Consequences for Competition, Competitors, and
Consumers (Mar. 1984); Dr. James B. Delaney and Dr. Robert N. Fenili, U.S. Dep't of Energy,
Final Report: The State of Competition in Gasoline Marketing (Jan. 1981).
29. Final Report to the Arizona Joint Legislative Study Committee on Petroleum Pricing and
Marketing Practices and Producer Retail Divorcement 35 (Dec. 1988).
30. Final Report to the Washington State Legislature on the Attorney General's Investigation of
Retail Gasoline Marketing 14 (Aug. 12, 1987).
31. Commonwealth of PA. Legislative Budget and Finance Comm., Factors Affecting Motor
Fuel Prices and the Competitiveness of PA's Motor Fuels Market, A Report in Response to H.R.
451, 35 (Oct. 2000).
32. Gross v. Woodman's Food Mkt., Inc., 655 N.W.2d 718, 737 (Wis. Ct. App. 2002) (holding
that the Act "prohibits a sale at less than statutory cost if there is either the intent or effect of
injuring a competitor").

33. James Brannon and Frank Kelly, Pumping Up Gas Prices in Wisconsin: The Effects of the
Unfair Sales Act on Retail Gasoline Prices in Wisconsin, 12 Wisconsin Policy Research Inst.
Rep. No. 7 (1999).
34. See, e.g., Rod Anderson and Ronald Johnson, Antitrust and Sales-Below-Cost Laws: The
Case of Retail Gasoline, 14 Rev. of Ind. Org. 189, 203 (1999); Robert Fenili and William Lane,
Thou Shalt Not Cut Prices! Sales-Below-Cost Laws for Gas Stations, 9 Regulation 31, 32-32
(Sept./Oct. 1985). One study, currently in draft form, finds that these laws increase gasoline
prices initially and lower them (relative to pre-enactment levels) in subsequent years. The
authors, however, do not fully report the statistical significance of the price changes in
subsequent years. See M. Skidmore, J. Peltier, and J. Alm, "Do Motor Fuel Sales-Below-Cost
Laws Lower Prices?," unpublished manuscript, University of Wisconsin-Whitewater. Many of
the studies suffer from methodological problems that make it unclear whether they are measuring
the impact of sales below cost laws or something else. The most carefully-controlled study,
conducted by a senior economist in the FTC's Bureau of Economics, found that the laws had no
effect on retail prices. Michael G. Vita, "Regulatory Restrictions on Vertical Integration and
Control: The Competitive Impact of Gasoline Divorcement Policies," 18 J. of Reg. Econ. 217,
217-233 (2000). One possible explanation for these varied findings is that such laws are often
difficult to enforce or are enforced unevenly. Therefore, the mere existence of such a law may
have only a limited effect on retail gasoline prices. Vigorous and sustained enforcement,
however, could significantly chill competition and increase retail gasoline prices.
35. See, e.g., Minn. Stat. Ann. § 325D.01, 325D.04 (lesser of 6% or 8 cents).