A Study on the Impact of Minimum Markup Laws on Small Businesses and Gas Stations

posted by Jay Weber - 

Executive Summary 

Among the key arguments for minimum markup laws is that they protect “the little guy” from the danger of predatory pricing by large and powerful corporations. Protection of small business from larger rivals was the stated purpose for the minimum markup laws that have existed around the country since the 1930s, including the one in Wisconsin. But claims that minimum markup requirements will protect small business have rarely been tested. If they are true, then one would expect that states with minimum markup protection would have a larger small business sector than states that do not. One would also expect that states that single out gas stations for special “minimum markup” treatment – like Wisconsin – would have more stations than those who do not.

This study tests these claims. Using a rigorous econometric analysis of data from all 50 states, we conducted an extensive analysis of the effect of minimum markup laws on the number of small business retailers and the number of gas stations in a state.

Quite simply, we found that minimum markup laws do not achieve their stated purpose. Among the key findings:

Minimum markup laws have no effect on the number of small business retailers in a state. Once appropriate controls are included, the presence of a minimum markup law does not increase (or decrease) the number of small businesses in a state.

General minimum markup laws have no effect on the number of gas stations in a state. In an analysis that includes 20 years of national data, the presence of a minimum markup law does not increase (or decrease) the number of gas stations in a state.

Gasoline-specific minimum markup laws have no effect on the number of gas stations in a state. Even in states that have minimum markup laws that apply exclusively to gas stations, no effect of the laws was found on the number of gas stations in an analysis of 20 years of data.

 Introduction 

Wisconsin’s Unfair Sales Act is a policy in search of a problem.

The intent of the law is to prevent “unfair competition,” described in the statutory preamble as sales made below costs for the purpose of attracting customers. Like many other states, Wisconsin’s statute was passed during the Great Depression in reaction to the small business failures that resulted from falling prices (Price 2017). Many at the time believed that large, vertically-integrated retailers were engaging in “cutthroat pricing” and selling products below cost long enough to drive smaller competitors in the area out of business, after which they could raise prices above the competitive price and earn above-normal profits by “gouging” consumers. Another term for this hypothetical strategy is “predatory pricing.”

Although these laws have been in effect in some form since the 1930s, there is little existing evidence that they actually reduce small retailer attrition. The reason is that the evil the law is designed to prevent --predatory pricing--is a chimera. It is a bogeyman for which there is no credible evidence. It rarely, if ever, happens and rarely, if ever, could.

The retail market can indeed be extremely competitive. This is particularly so in the area of gasoline pricing. Wisconsin’s minimum markup law for gasoline retailers mandates a minimum margin of 9.18 % from the wholesale price at the terminal closest to the gas station. But gas stations in states without a minimum markup requirement don’t perceive narrow margins on gasoline as an existential threat. This is because modern gasoline stations make most of their money on their “ancillary” sales of convenience store items such as soda and snack foods (NACS 2017). That is a primary reason why supermarket chains like Wal-Mart, Kroger, and Woodman’s have been so keen to enter the gasoline market in recent years. They make a smaller profit from gasoline sales, but the people visiting the pump frequent their store and buy more goods from them (Nassauer 2016).

Wisconsin Institute for Law & Liberty

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