Minimum Markup Laws

Minimum markup laws are just plain dumb. Michael from The Knowledge Problem points us to a recent example involving gas prices.

Have you noticed how low gasoline prices have been lately? No? Apparently you haven't been paying attention.

Fortunately, a representative of Burch Oil, which sells gasoline in Southern Maryland from Burchmart convenience stores, was paying attention. When prices dropped too low at gas stations down the street last week ? to 199.9 ? he knew just what to do: get on the phone.

The arguments for these laws go something like this...if a big firm is allowed to sell for less than cost they will do so temporarily, driving the smaller suppliers out of business. Then once the competitors are vanquished the large firm will begin acting like a monopolist, raise their prices thus harming the consumer.

I'll take my chances. Give me the cheaper gas now, I'll risk the potential higher future gas prices. Why? Because it won't happen, that's why. Entry into the gas station market is relatively easy (even with all the regulations they face), as evidenced partially by the fact that there is one on every street corner.

And isn't it funny that the main proponents of these minimum markup laws are always the small firms, barely hanging on? They claim to have the best interest of the consumer in mind. But economics teaches us they likely only have thier own interest in mind. Well except for one upstanding retailer recently interviewed on WPR.

The funny thing is that this very same argument is used to protect certain domestic industries from international competition. The so called anti-dumping laws are merely international minimum markup up laws. But the great thing here is (note the sarcasm) we get to decide what the foreign producers costs are. And of course the domestic producers who claim that they have been harmed help the USITC develop estimates of the foreign producer's cost. Funny how they also claim that they are doing this in the best long term interest of the consumer.

You can find a list of all the active antidumping investigations at the linked web site.

But even when entry barriers appear to be insurmountable, things change. Look at the threat Google poses to Microsft. (via Newmark's Door) And to think just a few years ago we thought Microsoft was a monopoly that needed to be spilt up.

Keywords: ECO120