FTC Staff Comment to the Honorable Raymond J. Lesniak, Senator, New Jersey State Senate, Concerning New Jersey State Bill 484 to Allow Gasoline Retailers to Set Prices Below Cost to Meet Competition

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Economics
Bureau of Competition
September 24, 2010
Hon. Raymond J. Lesniak
New Jersey State Senate
985 Stuyvesant Avenue
Union, NJ 07083
Re: 	New Jersey Senate Bill 484
Dear Senator Lesniak:
The staffs of the Federal Trade Commission’s Office of Policy Planning, Bureau
of Economics, and Bureau of Competition are pleased to provide our comments on
Senate Bill 484. 1 The Bill would modify current law to allow gasoline retailers to set
their prices below cost to meet competition.
FTC staff encourages the New Jersey legislature to pass Senate Bill 484. If
adopted, the Bill would permit gasoline retailers to meet a rival’s price even if that price
falls below the retailer’s costs. In this manner, the Bill likely would encourage more
aggressive price competition, which would benefit New Jersey consumers through lower
gasoline prices.
Interest and Experience of the Federal Trade Commission
The FTC is charged 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. FTC staff has previously
assessed the competitive impact of regulations and business practices in the gasoline
industry. For example, in 2004 we provided guidance to the Alabama, Kansas, and
Michigan legislatures that recommended against proposed legislation to prohibit below-
1 This letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Economics, and Bureau of Competition. The letter does not necessarily represent the views of the Federal
Trade Commission or of any individual Commissioner. The Commission, however, has voted to authorize
us to submit these comments.
2 See Federal Trade Commission Act, 15 U.S.C. § 45.

Hon. Raymond J. Lesniak
September 24, 2010
Page 2 of 3
2
cost pricing of retail gasoline, because such a rule could prevent lower gasoline prices to
consumers. 3
Discussion
Current New Jersey law prohibits a “retail dealer” from selling “motor fuel at a
price which is below the net cost of such motor fuel to the retail dealer plus all selling
expenses.”4 In some circumstances, below-cost pricing by a dominant firm may raise
competitive concerns. For example, the Supreme Court has recognized that a monopoly's
below-cost pricing can be anticompetitive if it causes a reduction in competition such that
the firm can later raise prices high enough to recoup what it lost on the below-cost pricing
scheme, and still be profitable.5
In many other circumstances, however, below-cost pricing can benefit consumers.
In fact, the Supreme Court has made it clear that as a general matter low prices are “a
boon to consumers.”6 As the Supreme Court stated, “[t]hat below-cost pricing may
impose painful losses on its target is of no moment to the antitrust laws if competition is
not injured.”7
3 See Letter from FTC Staff to Demetrius Newton, Alabama House of Representatives (Jan. 29, 2004)
(analyzing an Alabama statute (similar to New Jersey’s P.L.1938, c.163 (C.56:6-2) prohibiting the retail
sale of gasoline below cost and a proposed bill to repeal that statute; staff explained that the statute was
unnecessary to protect consumers, restricted competition, and on balance likely harmed consumers),
available at http://www ftc.gov/be/v040005.shtm; Comments of the FTC Staff to Lee Donovan, Assistant
Majority Leader, Kansas Senate, concerning Kansas House of Representatives Bill No. 2330 (Mar. 12,
2004) (suggesting that the legislature reject a bill that would prohibit below-cost gasoline pricing),
available at http://www ftc.gov/be/v040009.pdf; Comments of the FTC Staff to Gene DeRossett, Michigan
House of Representatives, concerning the Michigan Petroleum Stabilization Act, H.B. 4757 (June 17,
2004) (same), available at http://www ftc.gov/os/2004/06/040618staffcomments michiganpetrol.pdf; see
also Letter from FTC Staff to District of Columbia Councilmember Mary M. Cheh (June 8, 2007)
(encouraging the Council of the District of Columbia to repeal a portion of a statute that prohibited retail
gasoline station ownership by jobbers, producers, refiners, and manufacturers of petroleum), available at
http://www ftc.gov/os/2007/06/V070011divorcement.pdf; Letter from FTC Staff to Rep. Christopher Stone,
Connecticut House of Representatives (May 2, 2007) (suggesting that the legislature reject a bill that would
prohibit certain forms of price competition among gasoline retailers), available at
http://www ftc.gov/be/V070008.pdf. In recent years, the Commission has also conducted numerous
investigations of mergers and conduct in the petroleum industry.
4 P.L.1938, c.163 (C.56:6-2).
5 See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993).
6 Brooke Group, 509 U.S. at 224 (also explaining that low prices “benefit consumers regardless of how
those prices are set”); 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).
7 Brooke Group, 509 U.S. at 224.

Hon. Raymond J. Lesniak
September 24, 2010
Page 3 of 3
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The proposed legislation changes New Jersey law to allow below-cost pricing to
meet competition, as long as such prices are not set “with intent to injure competition or
destroy or substantially lessen competition.”8 Federal competition principles and
enforcement experience indicate that price reductions are unlikely to harm consumers in
such circumstances. In fact, by giving retailers the ability to better compete through more
aggressive pricing, this change will likely help New Jersey consumers, who should
benefit from lower prices from gasoline retailers.
Accordingly the staff of the Federal Trade Commission encourages the New
Jersey Legislature to pass Senate Bill 484.
Respectfully submitted,
Susan S. DeSanti
Director, Office of Policy Planning
Joseph Farrell
Director, Bureau of Economics
Richard A. Feinstein
Director, Bureau of Competition
8 SB 484. The proposed legislation would modify the current law to read (with new language underlined):
(b) No retail dealer shall sell motor fuel at a price which is below the net cost of
such motor fuel to the retail dealer plus all selling expenses, except to meet
competition. Notwithstanding the provisions of this subsection, it shall be
unlawful and a violation of P.L.1938, c.163 (C.56:6-1 et al) for any retail dealer
with intent to injure competition or destroy or substantially lessen competition to
sell motor fuel at a price which is below the net cost to the retail dealer.
We note that under federal antitrust standards, liability is predicated on likely harm to the competitive
process rather than on intent alone. See, e.g., Brooke Group, 509 U.S. at 225 (for antitrust liability, below-
cost pricing “must be capable, as a threshold matter, of producing the intended effects on the firm's rivals”);
see also Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 232 (1st Cir. 1984) (Breyer, J.) (“But
‘intent to harm’ without more offers too vague a standard in a world where executives may think no further
than ‘Let’s get more business,’ and long-term effects on consumers depend in large measure on
competitors’ responses.”).