FTC Staff Comment to the Honorable Roy Cooper and the Honorable Daniel Clodfelter Concerning North Carolina H.B. 1203 / S.B. 787 to Amend North Carolinas Motor Fuel Marketing Act

1 This letter expresses the views of the Bureau of Competition, Bureau of Economics, and
Office of Policy Planning of the Federal Trade Commission. 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.
1
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of Competition
Bureau of Economics
Office of Policy Planning
May 19, 2003
Senator Daniel G. Clodfelter
Chairman, Judiciary I Committee
300 N. Salisbury Street
408 Legislative Office Building
Raleigh, NC 27601
Re: House Bill 1203 / Senate Bill 787 (proposed amendments to North Carolina’s Motor Fuel
Marketing Act)
Dear Chairman Clodfelter:
The staffs of the Federal Trade Commission’s Bureau of Competition, Bureau of Economics,
and Office of Policy Planning welcome the opportunity to submit this letter in response to your request
for comments on North Carolina House Bill 1203/Senate Bill 787 (“the bill”).1 We have received a
similar request from Attorney General Roy Cooper and are responding to his request with a letter
identical to this one.
The bill would amend North Carolina’s Motor Fuel Marketing Act (“the Act”), which declares
that it shall be unlawful “where the intent is to injure competition” to sell motor fuel below cost “with
such frequency as to indicate a general business practice of selling [below-cost].” The bill would
eliminate the intent and business practice requirements, so that vendors could be liable for inadvertently
pricing motor fuel below cost, even on a single occasion. The bill also would redefine “cost.” For most
vendors, the Act currently defines “cost” as the vendor’s own invoice or replacement cost, plus taxes
and freight expenses. The bill would redefine “cost” as the average or low Oil Price Information
Service (“OPIS”) rack price, plus taxes and freight expenses. In addition, the bill would prevent
vendors from limiting the quantity of motor fuel sold or offered for sale to any customer.

2 See U.S. Energy Information Administration data available at
http://www.eia.doe.gov/emeu/states/oilsales_trans/oilsales_trans_nc.html (showing North Carolina
average daily gasoline sales of 11.65 million gallons between March 2002 and February 2003).
2
We believe that there is a significant risk that the bill could harm consumers. Gasoline is a
significant consumer expenditure; assuming no change in demand, even a 1 cent increase in the retail
price of gasoline would cost North Carolina consumers approximately $42.5 million annually.2
Our views are summarized below:
• Low prices benefit consumers. Consumers are harmed only if low prices allow a
dominant competitor to raise prices later to supracompetitive levels.
• Scholarly studies indicate that below-cost pricing that leads to monopoly rarely occurs.
The Supreme Court has found such studies to be credible.
• Past studies suggest that below-cost sales of motor fuels that lead to monopoly are
especially unlikely.
C The federal antitrust laws deal with below-cost pricing that has a dangerous probability
of leading to monopoly. The FTC, the Department of Justice’s Antitrust Division, state
attorneys general, and private parties can bring suit under the federal antitrust laws
against anticompetitive below-cost pricing.
C If the proposed legislation leads to higher prices in circumstances in which there is no
danger of the lower prices leading to monopoly, then consumers will be harmed.
C The bill likely would deter procompetitive pricing. By eliminating the Act’s intent and
business practice requirements, the bill could subject vendors to civil liability – including
treble damages and a $10,000 fine per violation – for cutting prices, even if the vendors
have no intent to engage in anticompetitive conduct, and even if the vendor prices
below cost on a single occasion. As a result, many vendors likely would avoid
procompetitive price-cutting.
C There is a substantial risk that the bill will cause some vendors to raise their prices. In
redefining cost as the average or low reseller rack cost rather than the vendor’s own
cost, the bill could force vendors to sell motor fuel based on their competitors’ costs
rather than their own costs. This requirement likely would
cause some vendors to raise their prices.

3 Federal Trade Commission Act, 15 U.S.C. § 45.
4 See Valero Energy Corp., Docket C-4031 (2001) (consent order), Chevron Corp.,
Docket C-4023 (2001) (consent order); Exxon Corp., Docket C-3907 (2001) (consent order);
British Petroleum Company p.l.c., 127 F.T.C. 515 (1999) (consent order); Shell Oil Co., 125
F.T.C. 769 (1998) (consent order).
5 Midwest Gasoline Price Investigation, Final Report of the Federal Trade Commission (Mar.
29, 2001).
6 FTC Closes Western States Gasoline Investigation, FTC Press Release (May 7, 2001).
7 FTC to Hold Public Conference/Opportunity for Comment on U.S. Gasoline Industry,
FTC Press Release (July 12, 2001); FTC to Hold Second Public Conference on the U.S. Oil and
Gasoline Industry in May 2002, FTC Press Release (Dec. 21, 2001).
8 Comments of the Staff of the General Counsel, Bureaus of Competition and Economics, and
the Midwest Region of the Federal Trade Commission, Study of Unique Gasoline Fuel Blends
(“Boutique Fuels”), Effects on Fuel Supply and Distribution and Potential Improvements, EPA
420-P-01-004, Public Docket No. A-2001-20 (Jan. 30, 2002).
3
I. Interest and Experience of the Federal Trade Commission
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.3 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 Chevron and Texaco,
Exxon and Mobil, and BP and Amoco; the proposed merger of petroleum refiners Valero Energy and
Ultramar Diamond Shamrock; and the combination of the refining and marketing businesses of Shell,
Texaco, and Star Enterprises.4
The Commission and its staff have also investigated, conducted workshops, and commented on
proposed regulations regarding motor fuel pricing. In 2001, the Commission, using the competition
analysis principles in the Merger Guidelines, completed investigations of spikes in reformulated gasoline
prices in several Midwest states in the spring and summer of 2000,5 and of gasoline price increases in
West Coast markets.6 In the last two years, the Commission has held two public conferences to
examine factors that affect prices of refined petroleum products in the United States.7 Commission staff
also has filed public comments with the Environmental Protection Agency concerning “boutique fuel”
regulations.8 On numerous 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

9See, e.g., Testimony of Jerry Ellig, Deputy Director, Office of Policy Planning, Before the
State of Hawaii Joint Legislative Hearing (Jan. 28, 2003) available at
http://www.ftc.gov/be/V030005.htm; Letter from Joseph J. Simons, Director, FTC Bureau of
Competition, and R. Ted Cruz, Director, FTC Office of Policy Planning, to Gov. George E. Pataki of
New York (Aug. 8, 2002) available at http://www.ftc.gov/be/V020019.pdf; Letter from Joseph J.
Simons, Director, FTC Bureau of Competition, and R. Ted Cruz, Director, FTC Office of Policy
Planning to Hon. Robert F. McDonnell, Commonwealth of Virginia House of Delegates (Feb. 15,
2002) at http://www.ftc.gov/be/V020011.htm; 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, Ways and Means Committee, Other Taxes and Revenues Subcommittee,
South Carolina House of Representatives (May 12, 1989).
10 See N.C. GEN. STAT. § 75-80 et seq.
4
cost.9
II. Analysis of House Bill 1203 / Senate Bill 787
Currently, North Carolina’s Motor Fuel Marketing Act prohibits vendors from selling motor
fuel below cost.10 The Act declares that it shall be unlawful “where the intent is to injure competition” to
sell motor fuel below cost “with such frequency as to indicate a general business practice of selling at . .
. less than the cost of the [fuel].” The Act defines “cost” for refiners or terminal suppliers as “the
refiner’s or terminal supplier’s prevailing price ... or the lowest prevailing price within 10 days prior to a
sale alleged to be in violation of [North Carolina law],” plus freight expenses and taxes. For all other
vendors, the Act defines cost as “the invoice or replacement cost, whichever is less . . . of motor fuel
within 10 days prior to the date of sale,” plus freight expenses and taxes.
If signed into law, the bill would amend the Act in several ways. Most important, the bill would
redefine “cost” for all vendors as freight charges, taxes, and the lesser of (1) the “most recently
published average reseller rack cost of motor fuel by grade and quality, as calculated by the Oil Price
Information Service” or (2) the “low OPIS Rack Price as reported by OPIS,” in either case for the
particular terminal from which the motor fuel was delivered. As a practical matter, the “low OPIS
Rack Price” will be lower than the “average reseller rack cost.”

11 Predatory pricing claims are brought under Section 2 of the Sherman Act, 15 U.S.C. § 2.
Plaintiffs can also claim anticompetitive predation under the Robinson-Patman Act, 15 U.S.C. § 13(a)
(as amended).
12 Notable examples include American Airlines and Microsoft. See, e.g., United States v.
AMR Corp., 2001-1 Trade Cas. (CCH) ¶ 73,251 (D. Kan. 2001); United States v. Microsoft
Corp., 253 F.3d 34 (D.C. Cir.), cert. denied, 534 U.S. 952 (2001).
13 15 U.S.C. § 15.
5
The bill has several other notable provisions. Under the Act, below-cost pricing is unlawful
only where “the intent is to injure competition” and where the below-cost sales occur “with such
frequency as to indicate a general business practice of selling [below-cost].” The bill would eliminate
both requirements. In addition, the bill would raise the maximum civil penalty for each offense from
$1,000 to $10,000, and would allow private entities to recover treble damages and attorneys’ fees for
offenses (rather than actual and exemplary damages, and costs). The bill would retain the Act’s
exception for meeting competition. Finally, the bill would prevent vendors from limiting the quantity of
motor fuel sold or offered for sale to any customer.
We believe that the bill is unnecessary to protect North Carolina’s consumers. Anticompetitive
below-cost pricing is already illegal under federal antitrust laws.11 Moreover, by eliminating the Act’s
intent and business practice requirements, and by redefining costs to the average or low reseller rack
cost, the bill likely would deter procompetitive price-cutting and cause some vendors to raise their
prices.
A. Anticompetitive below-cost pricing is already illegal under federal antitrust law
and North Carolina 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 Federal Trade Commission and the Antitrust Division of the United
States Department of Justice 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.12 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.13 State attorneys general, acting as parens patriae, also may bring
such actions.

14 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)).
15 Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993);
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).
16 Brooke Group, 509 U.S. at 223 (quoting Atlantic Richfield Co. 495 U.S. at 340).
17 Id. (quoting Atlantic Richfield Co., 495 U.S. at 340).
18 Id. (citing Atlantic Richfield Co., 495 U.S. at 340).
19 Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 117 (1986).
6
Although anticompetitive below-cost pricing is illegal, the United States Supreme Court has
cautioned that antitrust law should not prevent procompetitive price-cutting. Congress designed the
antitrust laws for “the protection of competition, not competitors.”14 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
low prices, as a general matter, are “a boon to consumers.”15
ii. Only prices below the price cutter’s costs can be predatory
The Supreme Court has directly addressed low pricing strategies. In Brooke Group, the
seminal case in this area, the Court expressly held that a defendant does not violate the antitrust laws by
cutting prices merely because the low prices decrease a plaintiff’s profits. “Low prices benefit
consumers regardless of how those prices are set.”16 Rather, to be unlawful, the low prices, at a
minimum, must 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.”17 “[W]e 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.”18
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.”19 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-

20 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.),
cert. denied, 464 U.S. 891 (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), cert. denied, 424 U.S. 943 (1976) (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; P. Areeda and D. 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.
21Brooke Group, 509 U.S. at 223 (quoting Cargill, 479 U.S. at 116).
22Matsushita Elec., 475 U.S. at 589.
7
cutter’s marginal costs, or a close proxy such as average variable costs, should be the yardstick.20
It is critical to note that, whatever cost measure is chosen, the pertinent comparison is to the
price-cutter’s costs, not the costs of its rivals. If the price-cutter has lower costs, and thus is more
efficient, than its rivals, no predatory pricing occurs when it prices above its own costs, irrespective of
whether those prices are below its rivals’ costs. “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.”21
iii. Not all below-cost pricing harms consumers
Below-cost pricing by itself, however, is insufficient under the antitrust laws to constitute a
violation. Under federal law, consumers must also be injured, and consumers are not harmed by
below-cost pricing unless sustained above-cost prices occur later on:
[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.22
Thus, even if a below-cost pricing strategy succeeds in temporarily reducing the number of
competitors, the price-cutter must find a way to keep competitors from returning after it tries to raise
prices again. 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

23 Brooke Group, 509 U.S. at 224, 226.
24 Under federal law, competition is not considered harmed unless consumers are harmed.
Mere injury to competitors is insufficient. See, e.g., Rebel Oil Co., Inc. v. Atlantic Richfield Co., 51
F.3d 1421, 1433 (9th Cir.), cert. denied, 516 U.S. 987 (1995) (“Of course, conduct that eliminates
rivals reduces competition. But reduction of competition does not invoke the Sherman Act until it
harms consumer welfare.”). Whether or not North Carolina’s state courts would interpret injury to
competition similarly is not clear. Courts construing below-cost pricing statutes in other states have not
always done so. See, e.g., Home Oil Co. v. Sam’s East, Inc., 2002 WL 857391 (M.D. Ala. Apr.
26, 2002).
25 Frank H. Easterbrook, “Predatory Strategies and Counterstrategies,” 48 U. Chi. L. Rev.
263, 313-14 (1981).
8
prices) in the long run, consumers enjoy a windfall. And without harm to consumers, an antitrust
violation does not occur. “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. ... Evidence of below-cost pricing is not alone sufficient to permit an inference of probable
recoupment and injury to competition. ... Although unsuccessful predatory pricing may encourage some
inefficient substitution toward the product being sold at less than its cost, unsuccessful 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. ...”23
Given the strong stance of the Supreme Court in favor of the benefits of low prices and the care
it has devoted to explaining what types of price cutting are illegal under the antitrust laws, the North
Carolina bill is not necessary to protect consumers from anticompetitive below-cost pricing.24
B. Scholarly studies and court decisions suggest that anticompetitive below-cost
pricing rarely happens
To assess further whether this legislation is necessary, it may be helpful to consider the
extensive scholarship on anticompetitive below-cost pricing. In an exhaustive discussion of the topic,
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.”25
More recent 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

26 Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization 342 (Addison-
Wesley, 2000).
27 See Jeffrey Church and Roger Ware, Industrial Organization: A Strategic Approach 659
(Irwin McGraw-Hill, 2000).
28 Matsushita Elec., 475 U.S. at 589.
29 Id. at 594.
9
lawsuits, careful examination of these cases indicates that predation in the sense of pricing below cost
usually did not occur.”26 Predation sometimes occurs,27 but not nearly as frequently as claimed.
Because it is difficult to profit from anticompetitive below-cost pricing, the Supreme Court, in
keeping with scholarship on this point, has found that “there is a consensus among commentators that
predatory pricing schemes are rarely tried, and even more rarely successful.”28 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. . . .”29
In short, the bill appears to address a problem that not only is already covered under federal
antitrust law, but also is unlikely to occur in any event.
C. Past studies show that anticompetitive below-cost sales of motor fuels are
especially unlikely
A series of studies suggests that anticompetitive below-cost pricing is especially unlikely in
gasoline retailing. Laws to prevent anticompetitive below-cost pricing of motor fuels have been
investigated extensively during the past two decades. The issue originally arose in the 1980s, when
various parties expressed concern that major oil companies were selling gasoline below cost in order 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) conducted a
comprehensive investigation of predatory pricing allegations in gasoline markets.
In 1984, USDOE released a final report to Congress examining whether vertically integrated
refiners were “subsidizing” their retail gasoline operations in a way that might be predatory or
anticompetitive. The study was based on extensive pricing data and internal oil company documents
subpoenaed by the USDOE. USDOE found that there was no evidence of predation or
anticompetitive subsidization. The agency concluded that increased pressures on gasoline retailers were
not caused by anticompetitive behavior on the part of the major oil companies. Rather, the decline in
the overall number of retail outlets and the intensification of competition among gasoline marketers were
attributable to decreased consumer demand for gasoline in some areas and a continuing trend toward

30 USDOE, Deregulated Gasoline Marketing: Consequences for Competition,
Competitors, and Consumers (Mar. 1984); USDOE, Final Report: The State of Competition in
Gasoline Marketing (1981).
31 Final Report to the Arizona Joint Legislative Study Committee on Petroleum Pricing and
Marketing Practices and Producer Retail Divorcement 35 (Dec. 1988).
32 Final Report to the Washington State Legislature on the Attorney General’s Investigation of
Retail Gasoline Marketing 14 (Aug. 12, 1987).
10
the use of more efficient, higher-volume retail outlets.30
Since 1996, the Commission has investigated the pricing practices of virtually every major oil
company, and Commission staff have found no convincing evidence of predatory pricing in the retail
gasoline market. In several recent investigations, the FTC has expressed concern about unduly high
concentration levels in certain gasoline markets. In these cases, however, the Commission was
concerned that concentration, among other things, could lead to higher, not predatory (lower), gasoline
prices.
Several states have also conducted their own studies. In 1987, a Joint Legislative Study
Committee created by the Arizona legislature recommended that no new legislation be enacted to
restrict the pricing of motor fuels in Arizona. “The marketplace for petroleum products is very
competitive in Arizona,” the committee concluded.31
In 1986, the Washington State Attorney General initiated a study of motor fuel pricing to
determine whether refiners were engaged in anticompetitive subsidization of company-owned service
stations. Information was gathered on the practices of all eight of the major companies in Washington
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 percent of the time.32
More recently, the Commonwealth of Pennsylvania conducted a study examining a variety of
proposals for legislation 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 might harm consumers
more than it would help them:
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

33 Commonwealth of Pennsylvania, Legislative Budget and Finance Committee, Factors
Affecting Motor Fuel Prices and the Competitiveness of PA’s Motor Fuels Market 35 (Oct.
2000).
11
higher prices.33
Competitors will, of course, sometimes 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. Thus far, no systematic study has produced evidence that
predatory pricing is likely to be a significant problem in retail gasoline markets.
D. The bill likely would deter procompetitive price-cutting and cause some
vendors to raise their prices
By eliminating the Act’s intent and business practice requirements, and by redefining costs to
the average reseller rack cost, the bill likely would deter procompetitive price-cutting and force some
vendors to raise their prices. The provision prohibiting quantity limits also likely would deter
procompetitive price-cutting.
i. The intent and business practice requirements
The Act’s intent and business practice requirements preclude vendors from being held liable for
isolated or unintended instances of below-cost pricing. By eliminating these requirements, the bill likely
would deter procompetitive price-cutting. Under the bill, vendors could be liable for treble damages,
attorneys’ fees, and a civil penalty of up to $10,000 for inadvertently pricing motor fuel below cost,
even on a single occasion. Similarly, the bill would prohibit procompetitive below-cost pricing, such as
special promotions or below-cost pricing that may accompany the launch of a new retail outlet. For
such short-term price cuts, there is no risk to consumers of monopolization or any other anticompetitive
effects. The risk of damages and a substantial civil penalty, however, likely would deter vendors from
cutting prices. Moreover, the mere threat of litigation may deter vendors from selling motor fuel at
prices that are legal and above cost, but low enough to prompt complaints from competitors.
In short, by eliminating these requirements, the bill likely would deter vendors from offering
consumers low prices, without providing consumers with any corresponding benefit.
ii. The redefinition of cost
Similarly, by redefining “cost” to the average or low reseller rack cost, the bill likely would
deter procompetitive price-cutting and could even cause some vendors to raise their prices. In the first
place, the bill calculates cost based not on a vendor’s own costs, but on costs to other competitors.
Unless the vendor happens to purchase its gasoline at a price greater than or equal to the bill’s definition
of cost, the definition will not correspond to the vendor’s actual cost. The federal courts, basic

34 See notes 19 and 20, supra, and accompanying text.
12
economic principles, and virtually all prominent antitrust scholars agree that the relevant measure of cost
should be that of the vendor, not its competitors.34 If the vendor has lower costs than its competitors
and prices equal to or above those costs, consumers will benefit from the vendor’s greater efficiency.
Predatory or anticompetitive pricing can never occur when a vendor prices at or above its own costs,
even if those prices are below its rivals’ costs.
There are additional problems with the bill’s definition of cost. In particular, data from OPIS
may not accurately reflect the prices available to vendors. OPIS data is simply a rack posting and does
not reflect discounts that may be available to jobbers and retailers. A jobber or retailer who negotiates
a price better than those reported by OPIS would not be able to pass that price reduction on to
consumers. Vendors sometimes negotiate volume-based discounts, but under the bill’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 would pay higher prices as a result.
The timing of the OPIS prices 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 rack price. As a result, if the price at the rack subsequently increases, a vendor could
violate the bill by selling gasoline above its own costs, but below subsequent rack 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
branded rack 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.
iii. The quantity limit provision
Finally, by preventing vendors from limiting the quantity of motor fuel sold or offered for sale to
any customer, the proposed law would further discourage procompetitive price-cutting. This provision
would prevent a vendor from offering its customers a special price for a limited quantity. For many
products, such as groceries and fast food products, vendors offer consumers a low price and limit the
quantity of the product that consumers can buy. Vendors find it necessary to limit quantity, because it is
possible that competing vendors could buy the entire inventory and deprive consumers of the benefit of
the low price. These types of offers are procompetitive because they offer consumers low prices. This
provision preventing vendors from limiting quantities effectively would allow competitors to buy a rival’s
entire inventory, thereby making it more difficult for the rival to sell motor fuel to consumers at low
prices. It is not clear if competitors would do so; FTC staff could not find any empirical data on this
point, perhaps because of the rarity of such a provision for motor fuel. By preventing vendors from

35 Federal antitrust law generally permits unilateral refusals to deal. See United States v.
Colgate & Co., 250 U.S. 300 (1919).
13
limiting the quantity of motor fuel offered for sale, the provision could deter price-cutting while offering
no benefits to consumers.35

14
III. Conclusion
For these reasons, the FTC’s Bureau of Competition, Bureau of Economics, and Office of
Policy Planning believe that House Bill 1203 / Senate Bill 787 would more likely harm than promote
competition. The bill 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, the bill likely would deter procompetitive price-cutting and cause
some vendors to raise their prices, to the detriment of North Carolina’s consumers.
Respectfully submitted,
Joseph J. Simons, Director
Bureau of Competition
David T. Scheffman, Director
Bureau of Economics
Todd Zywicki, Director
Office of Policy Planning