Assessing the Impact of Gasoline Sales-Below-Cost Laws on Retail Price and Market Structure: Implications for Consumer Welfare

Abstract

The effectiveness of gasoline-specific sales-below-cost (SBC) laws designed to limit firms' predatory behavior is yet to be determined. To provide policy makers with conceptual and empirical insights into this issue, the authors propose and empirically test a simultaneous equations model grounded in the structure–conduct–performance framework that assesses the direct and indirect impacts that SBC laws have on market structure (number of sellers) and on the wholesale and retail prices of gasoline. Unlike other SBC studies, which are more cross-sectional in nature and focus on a limited number of areas, the authors use monthly gasoline wholesale and retail prices from 1983 to 2010 for all 50 states. This approach is advantageous because it includes the opportunity to assess the long-term impact of SBC laws and transitional effects as states enact or repeal SBC legislation. The results suggest that SBC laws reduce retail prices directly and indirectly by increasing the number of sellers, thus improving customer welfare.