Citizens Don’t Need To Be Protected From Low Prices
What a joke.
The Bismarck Tribune – Wal-Mart is the target of some legislators who want to prevent the retail giant from selling gas below cost just to get customers into its stores.
Russ Hanson, president of the North Dakota Retail Petroleum Marketers Association, said gas station owners across the state are worried about Wal-Mart driving them out of business.
“We don’t want to single out just Wal-Mart, but we know they are coming here,” Hanson said.
Wal-Mart is building larger stores across the state, including two supercenters and a Sam’s Club in Bismarck.
Senate Bill 2389, spearhead by gas retailers, would allow a business to be sued for selling gas below cost.
Wal-Mart really has the right idea about this sort of thing.
Nate Hurst, public and government relations manager for Wal-Mart, said laws regulating gas prices hurt the consumer.
“States like North Dakota that are trying to enact laws are doing so to protect profits for special interest groups,” Hurst said. “We don’t feel that the customers need protection from lower prices.”
Exactly. Free enterprise should control prices. They certainly shouldn’t be propped up by legislators looking to create a “fair” market environment. If legislators are truly interested in a fair market they should protect the citizens from this kind of price fixing.
Really, how much of an impact can Wal-Mart have? The whole idea behind Wal-Mart selling gas below cost is that they’ll recoup the loss in increased sales in their stores. Bearing that in mind, how many gas locations will Wal-Mart have in a community? Likely the same number as they have stores.
Selling gasoline is a location-intensive game. People are often willing to pay a few more cents per gallon if it means they don’t have to travel across town to fill up. This tells me that gas stations around the Wal-Mart stores might be hurt by the competition but other gas stations with convenient locations aren’t likely to feel much of a pinch.
And lets not forget that these gas station owners are the same people who crank up the price of fuel any time there’s a blip in the market or the whiff of trouble with oil supplies. I still remember when 90% of the gas stations in my hometown raised prices by a dollar or more per gallon shortly after the 9/11 attacks. I have a hard time feeling sorry for these people.
The increased competition from Wal-Mart will no doubt be hard on some gas stations, but it the impact isn’t likely to be the dire forecast being pushed by the petroleum retailer groups. I say let Wal-Mart come in and compete. It will be better for shoppers and better for the overall economy.
(via Dakota Pundit)
You know I’m a big believer in the free market. But a free market doesn’t mean you let monopolies or cartels thrive.
Look at California. California has the priciest gas in the country. Coincidentally, there is no law prohibiting people from selling gas below cost in the state. Six companies control 90% of the gas market in California.
Once you price your competition out of the market, subsidizing your loss with other profits, you can charge any price you want. Demand for gasoline is highly inelastic (meaning that a change in the price of gas doesn’t really change how much gas people buy).
New business that start up and try to undercut the resulting high prices will be crushed by further predatory price wars. But they know they can’t win, so they won’t try.
And that doesn’t even take into account vertical integration, whereby companies can artificially restrict supply to inflate prices.
Read all about it, here and here.
They may not be primarily interested in the gas business, but once all their competition is forced out business, they’ll be the only ones in the gas business.
The government isn’t shaping the market, it is preventing big companies from unfairly using their wealth to destroy their competition, instead of actually competing with them. If Wal-Mart wants to open up a gas station and sell gas for the minimum allowed by law (varies by state, but usually it is cost + X%), fine. That’s competition.
Being rich enough to simply skip the competition phase and set your prices lower than cost and lower than your rivals isn’t fair. It hurts consumers, in the long run, and it leads to monopolies.
Independent gas stations can’t find a business plan that allows them to compete with Wal-Mart, if Wal-Mart can give their gas away. It simply isn’t possible. That means fewer options for consumers, higher prices (again, California), and a negative effect on the economy.
I know Minot quite well.
No, let’s take a town a little smaller–say, 20,000 people or less. In a rural area, that town is probably the only commerce hub for quite a large radius. Thus, people aren’t going to be willing to drive 45 min or longer to save at the pump.
“I think BP would be very interested in moving in and stealing business away. ”
Gas stations are franchises. That is, someone buys into a franchise like Exxon or BP and agrees to purchase gas and other products from that company. They aren’t interested in getting into price wars where they’re selling gas at a loss.
Wal-mart is scared – high gas prices raise the real cost of goods bought there – dollars for gas can’t be used to buy their, seemingly, cheap products. By the way, their “cheap” imported goods cost less because you get less expensive stuff, like fabric, in their products. The real cost of ownership of Wal-Mart goods is, as always, higher than it is when you buy name brands. Somebody needs to do a study on this – everything I ever bought at Wal-Mart is broken, worn out, or unusable.
My prediction – Walmart will be out of business by 2015. Vendors won’t miss them. All their customers who got screwed won’t either. Bye bye Wal-Mart…
Convenience is worth pennies a gallon. Wal-Mart can afford to sell gas cheaply enough to make it worth your while to go the extra mile to fill up.
Sure, that varies with the distance, but gas stations within a certain radius of a Wal-Mart would suffer.
While most gas stations might have the name of a big oil company on the sign, many stations are franchised (privately owned, and merely pay royalties to use the big company’s name and reputation).
Their profit margin on gas is already very very low. If they tried to sell gas for below cost, they would have to boost the prices of their “convenience” items. Suddenly that $2.00 Snickers bar doesn’t look like such a great deal when you can get it for $0.65 at Wal-Mart and hey… get your gas much cheaper as well.
I don’t see how you can claim that Wal-Mart won’t be rivals with gas stations if they open up pumps outside Wal-Mart stores.
I think you’re operating under the assumption that Wal-Mart’s gas sales would only influence traffic immediately proximate to the Wal-Mart store. But then ask yourself if you’d be willing to go a mile out of your way to save $0.20 a gallon on gas? That savings is about $300 a year, depending on your gas usage. So while Wal-Mart’s intention was merely to get you into their store, the bait is the cheap gas. Even they might not be expecting to be profitable in the short run in the gas business, the artificially low price will still take customers away from other gas stations. Their radius of influence is bigger than you think. Make it 3 miles away. 6 miles is rather far to go for gas, but what if you were needing to pick up some groceries and household supplies anyway? That’s exactly the kind of thinking Wal-Mart wants you to have, and that’s going to hurt other gas stations.
BTW, if you do a google on “predatory pricing WalMart”–you get a lot of hits. It seems WalMart has been nailed in a number of states for this practice.
Mark J explains it well.
“And again, how do you know Minot? ”
I’ve been there a number of times; some hockey, some hunting.
That’s not really “price fixing.” The government isn’t setting the prices, they are just making it illegal for companies to sell gas for a loss.
All the government is doing is preventing predatory pricing. This is different than pure price competition, in which companies work to lower cost, lower prices, and get more customers. Predatory pricing is an antitrust violation and is anti-competitive. It isn’t really competition at all… it is a divergence from the free market system.
Pretend two farmers, Joe and Bob, go to the market to sell their tomatoes. Joe has been selling tomatoes for years, and has a couple thousand dollars in the bank. Bob is new to the business, and doesn’t have any money in the bank. What he does have, is a new method of growing tomatoes that allows him to do if for much less than Joe. When the market opens, Bob prices his tomatoes at $1.00 a pound, $0.50 less than Joe’s price. Joe is worried, because it costs him $1.25 per pound to grow tomatoes, so there is no way he can compete with Bob. But then he remembers the money he has in the bank, and does something sneaky. He sells his tomatoes for $0.75 a pound. Bob is screwed, because it costs him $0.80 a pound to grow tomatoes. After a few days at the market, Bob goes out of business. Joe takes a hit, because he’s been selling his tomatoes at a loss. The hit doesn’t matter in the long run, because the customers he would have fairly lost to Joe would have cost him much more.
“So you guys support government price fixing to alleviate all this?”
Had you read the references, you’d understand its not government price fixing. The price fixing goes on at oil company level.
The bottomline is you’re keen on seeing independent businessmen driven out of business by mega-corporations using monopolistic practices. Ultimately, it’s the consumer who loses.
“I am stating that, obviously, if the prices go high enough someone will move in and compete with them. This is the nature of business. ”
I understood the first time but I fear you aren’t getting it.
A gas company franchises out to individual owners; the owner agrees to pay for XYZ gas at the price set by XYZ. The franchise owner, in turn, sells the gas for that price plus a markup.
XYZ isn’t going to sell gas at a loss to anyone–they don’t have to.
Rob: I take it you live in Fargo–apologizing in advance if you don’t. Fargo is one of No. Dak’s largest cities, right?
“Those companies certainly have deep enough pockets to take on Wal-Mart.”
So, would BP be willing to open a franchise and sell gas at below cost in a single location? just to compete with WalMart? Not likely.
Rock on, Wal-Mart!
I’ve lived in Wal-Mart country all my life. I grew up in Northwest Arkansas (Rogers, the site of the first Wal-Mart store.) My first job was with a grocery store owned by Wal-Mart. One of my slogans is, “All good things come from Wal-Mart.”
And so someone is complaining about Wal-Mart’s low prices again? The bugaboo of monopolization is rearing its ugly head once more? Hah. Let the folks of the region deal with that if it ever occurs. They can handle it with far more savvy and flexibility than some general-purpose law (that ought not be passed in the first place; politicians ought not tell business owners what to charge.)
Happily, I see that Ben Stein wrote a little something on this very topic. Man, I like that guy.
Just say No to Low Prices!
Besides, if you pay a lower price, then your sales tax is also lower, which means you hate the state government. Which is why we always price compare and try to find the worst price before making a purchase.
When WalMart drives the competition under, what do you think will happen to the gas prices?
There’s a reason why WalMart does this in rural states like North Dakota.
Here’s a neat article about WalMart:
http://www.fastcompany.com/magazine/77/walmart.html
Yes, cheaper prices are something you’ll get from WalMart. But you’ll also end up with inferior quality plus exporting manufacturing jobs overseas.
“but lets say it does. ”
And when the enterprising businessman opens a gas station, what will WalMart do? Unless that enterprising businessman has deeper pockets than WalMart, he’s out of luck.
And to be practical, it’s doubtful any enterprising businessman will challenge WalMart–so there likely won’t be a competing gas station.
“What would that reason be?”
In rural–or less Metropolitan areas–there’s less competition and less choice. Consumer choices are more centralized and concentrated. In more metropolitan areas, the consumer might be willing to pay more for gas if the station is physically closer.
“If the quality if inferior enough people will shope elsewhere.”
Not if you don’t have a choice.
As someone who actually lives in a state like what you describe I can tell you that there aren’t too many Wal-Marts going up in one-gas-station towns. Location is just as much a concern for people in the average “Wal-Mart” town as it is for people in metropolitan areas. Your assertion doesn’t make sense.
Neither are many of our gas stations entirely privately owned either. Every gas station in my hometown is a franchise, be it Conoco, Cenex (Land of Lakes) or British Petroleum. I’m sure its much the same all over.
Those companies certainly have deep enough pockets to take on Wal-Mart.
Like I said, these are problems best left to be decided by the free market. If these businesses can’t afford to be in business…they shouldn’t be in business.
They may not be primarily interested in the gas business, but once all their competition is forced out business, they’ll be the only ones in the gas business.
I’m still not seeing where Wal-Mart’s plans result in total dominance of the gas station market. They’re putting stations at their stores. There is still going to be plenty of business left over in other, more convenient places.
The government isn’t shaping the market, it is preventing big companies from unfairly using their wealth to destroy their competition, instead of actually competing with them.
You’re working on the assumption that these gas stations are small companies. They’re not. These petroleum companies are more than capable of competing. The simple fact is that they don’t want to.
Being rich enough to simply skip the competition phase and set your prices lower than cost and lower than your rivals isn’t fair. It hurts consumers, in the long run, and it leads to monopolies.
Still not seeing where this applies. Gas stations are not “rivals” with Wal-Mart. Wal-Mart is not opening a chain of gas stations, and even if they did their selling-under-cost tactic wouldn’t work because the gas stations would be located away from the stores. The whole point of Wal-Mart doing this is to get people in the stores.
Independent gas stations can’t find a business plan that allows them to compete with Wal-Mart, if Wal-Mart can give their gas away. It simply isn’t possible. That means fewer options for consumers, higher prices (again, California), and a negative effect on the economy.
If Wal-Mart were opening up a chain of gas stations and selling their gas under cost for the express purpose of putting the competition out of business, I’d agree with you. But that’s not what is happening. Wal-Mart is selling gas cheap in order to increase profits in their stores. They cannot, by the very definition of this tactic, use it against gas stations away from their store locations.
No, let’s take a town a little smaller—say, 20,000 people or less.
This is exactly what Minot is, except a bit larger. The closest city of any real size is Bismarck, about two hours south. Devils Lake also has a Wal-Mart, I believe, but they are also two hours away. We are the center of economic activity for about 100 miles in any direction.
I’m interested, how do you know Minot?
Thus, people aren’t going to be willing to drive 45 min or longer to save at the pump.
Wasn’t this the point I was making? Wal-Mart isn’t likely to drive all gas stations out of business, just those in Wal-Mart’s immediate vicinity.
They aren’t interested in getting into price wars where they’re selling gas at a loss.
Again, in the example you stated you asked what would happen after Wal-Mart raised its prices again. I am stating that, obviously, if the prices go high enough someone will move in and compete with them. This is the nature of business.
Convenience is worth pennies a gallon. Wal-Mart can afford to sell gas cheaply enough to make it worth your while to go the extra mile to fill up.
Sure, that varies with the distance, but gas stations within a certain radius of a Wal-Mart would suffer.
I think you’re overstating this impact. Most people have a filling station near their home or on their route to work or school which they like to frequent, because its convenient. I don’t see many people going more than a few minutes out of their way in order to save a dollar or so on a tank of gas.
I don’t see how you can claim that Wal-Mart won’t be rivals with gas stations if they open up pumps outside Wal-Mart stores.
Did I make that claim? I think its pretty clear that Wal-Mart is not going to be opening gas stations away from their stores. If they did open locations that served only as gas stationd they wouldn’t be able to use the gas-under-cost tactic. It wouldn’t make sense. How would they recoup the loss? There’s no store to attract people to.
I think you’re operating under the assumption that Wal-Mart’s gas sales would only influence traffic immediately proximate to the Wal-Mart store. But then ask yourself if you’d be willing to go a mile out of your way to save $0.20 a gallon on gas? That savings is about $300 a year, depending on your gas usage.
A lot of its going to depend on just how much under cost Wal-Mart can sell the gas. $0.20 a gallon seems like a lot. If it were that much of a discount I could see people flocking to there. But unless you’ve got information to the contrary I don’t see Wal-Mart offering that large of a discount.
6 miles is rather far to go for gas, but what if you were needing to pick up some groceries and household supplies anyway? That’s exactly the kind of thinking Wal-Mart wants you to have, and that’s going to hurt other gas stations.
Six miles isn’t very far Mark. Think about how spread out most communities are. Think also of how most people buy gas. Its not something they can put off to do when its time to get groceries. When you need gas, you need gas and the nearest filling station is typically the one you go to.
I’m not against regulating against monopolies. I want shoppers protected as much as the next guy and I certainly don’t have any reason to carry water for Wal-Mart, but what I don’t want to see is for politicians to go mucking around with free enterprise when there really isn’t any need for it.
Wal-Mart doesn’t even have a gas station in North Dakota yet for crying out loud. Maybe this is a bridge that should be crossed when we arrive at it. No one can be 100% sure of how a market is going to react, I’m of the opinion that we should make sure what the impact is going to be before we try to fix something.
Your example makes sense, Mark, but how does it apply to this situation? Wal-Mart is not looking to open a chain of gas stations, they’re looking to pack people into their stores.
Why should the government shape the market so that it fits a certain industry’s business plan? Obviously the law needs to protect us from artificial price increases, etc. but when it comes to competition they need to butt out.
If these gas stations want to compete with Wal-Mart they need to find a business plan that allows them to do that, or else get out of the industry.
My state government is telling a private business what it can charge for a product in order to protect the interests of the oil companies. How in the world is that not price fixing?
But if Wal-Mart were to raise its prices, as you suggested in your example, they won’t have to sell their gas at a loss to compete.
And again, how do you know Minot?
I take it you live in Fargo—apologizing in advance if you don’t. Fargo is one of No. Dak’s largest cities, right?
No, I live in Minot. Population 35,000. Probably your typical midwestern town of the sort Wal-Mart likes.
So, would BP be willing to open a franchise and sell gas at below cost in a single location?
I was making that statement in response to your assertion that Wal-Mart would raise prices after all the competition was gone. If Wal-Mart did raise their gas prices to an unreasonable level I think BP would be very interested in moving in and stealing business away.
When WalMart drives the competition under, what do you think will happen to the gas prices?
I don’t see Wal-Mart putting all of the gas stations out of business, but lets say it does. After all the other stations are gone Wal-Mart raises its prices to rake in profits. Then what will probably happen is some enterprising businessman will re-open a gas station and undercut Wal-Mart’s higher prices.
That’s how free enterprise works.
There’s a reason why WalMart does this in rural states like North Dakota.
What would that reason be?
But you’ll also end up with inferior quality
If the quality if inferior enough people will shope elsewhere. Again, this is how free enterprise works.
So you guys support government price fixing to alleviate all this?
That seems incredibly foolish to me.