More complaints about gasoline prices are appearing in the media, but with a new and different twist. This time, prices are too low for some people’s liking. The source of the problem? Price competition. As you might guess, though, it’s not consumers who are complaining.
The gasoline price wars that erupted briefly (and bloodlessly) in Fuquay-Varina several weeks ago have led at least one rival station to allege that the lead competitor, Sheetz gas, used unfair and illegal business practices after its initial entry into the market. At least five area stations matched the Sheetz gas prices, a move that drove down profits, but also caused buyers to flock to their stations as well as to Sheetz.
The casualties? Not consumers, who were able to benefit from not just one source of “cheap” gas, but several. What is more, participation in this war was entirely voluntary, so rival stations had the option to allow the newcomer to sell significantly below other stations on its own, or to join the fray, lower their own prices, and make a competitive bid for gas customers. Claims of harm are coming from station owners who voluntarily lowered their own prices to match the competition’s.
These “unfair” allegations may bring antitrust action in the state. Antitrust statutes, introduced during America’s early Industrial Age, are a series of laws designed to prevent or punish particular business practices. Under antitrust statutes there are legal and financial penalties that result from ‘predatory pricing,’ competing too hard for a customer’s business by lowering price below costs, even if consumers do not complain, or indeed, benefit significantly. North Carolina laws deliberately limit the ability of gas stations to lower prices by deeming it illegal (predatory and unfair) to sell below cost under most circumstances. A 10-day grand opening is an exception to that rule, as are price cuts that match your competitors’ lowered prices.
The original intent of antitrust law was to prevent any “restraint of trade” that might harm the consumer and lead to monopoly. In practice, antitrust charges are frequently brought by one or more of the less successful rivals (the ones losing business to a low-priced competitor) of the more aggressive firm. If you manage to attract consumer patronage, and it reduces your competitor’s profits or drives him out of business, a charge of predatory pricing may follow. In the world of antitrust, there is a legal line between success and excess, as successful firms have sometimes painfully discovered.
In addition, antitrust statutes can lead to indictments of virtually any pricing behavior—price too low, price too high, or price exactly the same as the competition’s. As a policy, predatory pricing has unfortunately been used to punish the more efficient producer, at the consumer’s expense.
In an open and competitive market, entrepreneurs have no right or reason to expect a guarantee of business and clientele. Most customers are responsive to price incentives, however, and given enough time and information, they will rationally gravitate toward the (identical) product with the lower price. They don’t and should not care whether the seller is absorbing a loss to attract their business.
Profit and loss are not only the language of entrepreneurial activity, they are at the core of sound business decisions. Even if one firm manages to outcompete all of its rivals at some moment in time, as long as new competition can enter the market, the successful firm must continue to provide what their customers want. If it doesn’t, it will lose out to the sharper competitor. Monopoly in an open market is not a real threat because it usually cannot survive. If it does, it’s simply an affirmation by consumers.
As for losses, at some point all suppliers have to cover their opportunity costs. Even large firms cannot afford to absorb losses forever, which is why price wars usually end well before every last competitor is defunct.