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P. O. Box 7882 Madison, WI 53707-7882
Thursday, January 10, 2008 All Legislators Representatives Kramer and Vukmir and Senator Carpenter RE: Co-Sponsorship of The Competitive Marketplace Act
DATE: TO: FROM:
SUMMARY We are introducing The Competitive Marketplace Act which will repeal Wisconsin’s Unfair Sales Act (also known as “the minimum markup law”) and replace it with provisions designed to protect consumers and the marketplace against true anticompetitive pricing practices. The bill will be circulated this week. Past legislative attempts focused on eliminating the markup on gasoline. These efforts failed due to intense lobbying pressure and concerns raised about the potential for predatory pricing that could harm small businesses in the state of Wisconsin. Our legislation differs from previous efforts in that we intend to repeal the entire 1939 Unfair Sales Act (Wis Stat §100.30) and replace it with contemporary standards adopted by both the U.S. Supreme Court and the Wisconsin Supreme Court. These standards clearly distinguish procompetitive practices and anticompetitive (predatory) practices. The Competitive Marketplace Act will protect Wisconsin’s consumers, retailers, and wholesalers against predatory practices while promoting competition and a competitive marketplace. Passed in 1939, the Unfair Sales Act discourages competitive pricing. Sellers are in violation of the law for selling below a statutory minimum price for the purpose of “diverting trade” from a competitor. Such practices are considered an “unfair method of commerce.” The law condemns procompetitve pricing practices even when they have no possibility of harming competitors, competition or consumers. In Wisconsin, a seller can violate the Unfair Sales Act even when they are selling a product above their cost because the statutory definition has little or no rational basis. For certain products, most notably gasoline, the seller is required to add a gross profit margin (markup) of as much as 9.18%. For products, like alcohol, the consumer must pay a 9% retail/wholesale markup above cost on every product regardless of its price or profit margin to the retailer. Few people are aware that a seller in Wisconsin is prohibited from selling products below the cost their competitor pays, even if the price is more than the sellers own cost. Merchants are also prohibited from using below-cost pricing in special promotions or customer loyalty programs. Supporters of the current law claim that it protects the small “mom-and-pop” stores against larger companies that can sell below-cost for a period of time, drive them out of business and then increase their prices. The Competitive Marketplace Act addresses this concern by prohibiting predatory pricing and imposing steep penalties for violators.
THE COMPETITIVE MARKETPLACE ACT The Competitive Marketplace Act (CMA) will replace the existing Unfair Sales Act. The CMA addresses the concerns of Wisconsin’s business owners and consumers by allowing retailers to compete freely for their customers’ patronage. Unlike the current law which places the well-being of businesses ahead of consumers, the CMA places the interests of consumers and businesses on a level-playing field, a term often invoked by those who would prefer retaining the current one-sided advantage they now hold. In drafting this legislation, we carefully considered the potential impact that repealing the current law would have, and what steps could be taken to ensure that Wisconsin has a competitive and vibrant marketplace. Our legislative predecessors held a view that protecting individual competitors, regardless of their efficiency. was more important than fostering competition in the marketplace. As this 1940 U.S. Supreme Court opinion expresses, federal law “has not permitted the age-old cry of ruinous competition and competitive evils to be a defense to price-fixing conspiracies.” Yet, in Wisconsin, it has been the law of the land for nearly 70 years. In developing this legislation, we chose to avoid the path of our predecessors. We did not consult with business leaders, industry groups, or trade organizations. We turned instead to the courts. The Competitive Marketplace Act draws its language and construction from three separate sources - the Federal Trade Commission Act, the Wisconsin Supreme Court and current statutes. The Wisconsin Supreme Court adopted a federal standard for determining anticompetitive pricing in 2003 and we have incorporated the language into the new Act. As the court notes, from a long line of federal predatory pricing cases: "predatory pricing schemes are rarely tried, and even more rarely successful, and the costs of an erroneous finding of liability are high. The mechanism by which a firm engages in predatory pricing - lowering prices - is the same mechanism by which a firm stimulates competition; because cutting prices in order to increase business often is the very essence of competition; mistaken inferences are especially costly, because they chill the very conduct the antitrust laws are designed to protect. It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high.” (at ¶27, citations omitted). The Court, added, “Adoption of a predatory pricing standard authorizing successful claims when no harmful activity has occurred would be detrimental to market competition and consumer welfare in Wisconsin.” (at
Thus, the Court adopted the Brooke Group standard. In order to be anticompetitive (predatory), the seller’s price must be set below an appropriate measure of the seller’s cost and the seller must have a dangerous probability of recouping the seller’s investment in below−cost pricing by later raising prices above competitive levels. Under the Competitive Marketplace Act, using language from the Federal Trade Commission Act, we also provide the Department of Agriculture Trade and Consumer Protection a process for evaluating and preventing below-cost pricing conduct that is likely to cause direct, substantial, and reasonably foreseeable injury to consumers. DATCP is also given the authority to create rules that are consistent with FTC findings regarding predatory pricing practices. These provisions will allow DATCP to evaluate and prevent anticompetitive pricing practices that may be occurring in this state as well as practices that the FTC discovers in other states The Department of Justice may, independently or together with DATCP, investigate and stop belowcost pricing practices that are likely to injure competition and consumers. If the Department of Justice or a District Attorney believes a seller is employing anticompetitive pricing practices, they may bring an action under Wisconsin’s mini-Sherman Antitrust law (Wis Stat § 133.03). The new Act increases the maximum fine for violating the antitrust laws from $100,000 to $1,000,000. Under 133.03, a violator may be charged with a Class H felony and injured parties have the right to seek treble damages and court costs.
DETAILS OF THE ACT
Under the bill, anticompetitive (predatory) pricing and pricing that injures competition are prohibited. Anticompetitive pricing is a violation of Wisconsin’s antitrust law. Pricing that injures or could injure competition is enforced by The Department of Agriculture, Trade and Consumer Protection and the Department of Justice.
Anticompetitive Pricing Anticompetitive pricing occurs when a seller’s price is less than an appropriate measure of the sellers cost and the seller has a dangerous probability of recouping their losses in below-cost pricing by later increasing their price above a competitive level. The Department of Justice or a District Attorney may commence an action against a seller who engages in anticompetitive pricing. A violator may be found guilty of a class H felony and may be fined up to $1,000,000. Parties who believe they have been injured may pursue a civil action against a seller for treble (triple) damages and court costs. Such cases may include a class action.
Pricing that Injures Competition Pricing that injures competition occurs when a seller’s price is less than an appropriate measure of the sellers cost and poses a direct, substantial and reasonably foreseeable injury to consumers and not outweighed by countervailing benefits to competition. The Department of Agriculture, Trade and Consumer Protection, may conduct a hearing to determine if a seller’s pricing injures competition or consumers. If the department finds that the seller’s price injures competition, the department shall prepare written findings and may issue an order requiring the seller to cease the violation and assess a penalty of up to $2,500. Such an order is subject to judicial review. The Department of Justice may independently pursue an action to restrain the practice under a temporary or permanent injunction and assess a penalty of up to $2,500. Such an order is subject to judicial review. As an alternative, DATCP or the Department of Justice may accept a seller’s written agreement to stop pricing that is alleged to be in violation. DATCP may promulgate rules for administering or interpreting the Competitive Marketplace Act. These rules must be consistent with federal laws and controlling legal precedent relating to predatory pricing.
RECENT DEVELOPMENTS The FTC evaluated Wisconsin’s Unfair Sales Act in 2003 and concluded “the Act restricts competition and likely leads to higher prices for consumers.” The FTC’s analysis also found that “the Act defines “cost” in a way that lacks a firm economic foundation.” (2003 FTC Memo, at page 4) In August 2005, Governor Doyle called for “a bipartisan proposal to repeal the … Minimum Markup Law,” saying: “The law is a relic of the 1930s, requiring retailers to inflate their prices by a minimum amount. It is one of the reasons gas prices in Wisconsin are artificially higher than in our neighboring states, and it should be abolished. If the Legislature would act on this commonsense proposal, gas prices would drop about nine cents virtually overnight.”
(Press Release - August 30, 2005)
A year later, Governor Doyle ordered The Department of Agriculture Trade and Consumer Protection to suspend enforcement of the law on Ethanol. (Press Release - August 8, 2006) In October of 2007, Federal Magistrate William E. Callahan, Jr., dismissed a case against a gasoline retailer; ruling that the Unfair Sales Act violates federal antitrust laws. Callahan found that the Unfair Sales Act has “displaced competition among [gasoline] retailers,” and “allows wholesalers to set retail prices and retail markups without regard to the actual wholesale costs.” In addition, he found that the law is not actively supervised to “determine whether the current minimum markup percentage is still an accurate reflection of the ‘cost of doing business’.” Quoting from a U.S. Supreme Court decision, Callahan asserted, “the national policy in favor of competition cannot be thwarted by casting such a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement.” (Lotus Business Group, LLC, v. Flying J, Inc)
“Wisconsin should kill, finally, its outdated and needless minimum markup law.”
The Milwaukee Journal Sentinel
“Lawmakers should repeal this anti-competitive, anti-consumer regulation”
Wisconsin State Journal
“Wisconsin legislators have the gall to call its government-sponsored seller collusion the ‘Unfair Sales Act.’”
GMU Economics Professor – Walter Williams
HISTORY OF THE UNFAIR SALES ACT During the 1920’s and 30’s there was a strong backlash against national chain-stores as consumers were forced to choose between their loyalties to local merchants and a need to stretch their dollars during the financial hardships of the time. The problems were vast. America’s industrial and agricultural output had increased dramatically because of technological advances. At the same time, our international exports declined dramatically as our trading partners rejected our imposition of stiff tariffs on imports. As markets for goods declined, so did prices and with the drop in prices came a drop in employment and wages. As the 1920’s drew to a close, President Herbert Hoover and Congress sought to address the problem of low wages and prices. They sought to provide an economic “equilibrium” by controlling competition. It was determined that unfettered competition had to be contained in order to reverse unemployment. Hoover used the U.S. Commerce Department to institute “codes” of fair-competition organized and developed by trade associations. This, it was believed, would sustain higher wages which in turn would support more consumption and lead to expanded employment. It did not work and by 1929 the financial markets collapsed and unemployment rose even higher. Franklin Roosevelt was ushered into office and in 1933 he introduced The National Industrial Recovery Act, the first part of the New Deal. As part of the Act, Roosevelt expanded on Hoover’s codes of fair-competition for individual industries. Congress established the National Recovery Administration (NRA) and provided the president with the authority to regulate and license commerce of all types. The goal, as Roosevelt stated, was to prevent “unfair competition and disastrous overproduction.” The NRA set prices and wages and regulated hundreds of industries. The codes were developed by industry associations and trade groups and the NRA would codify them after they were reviewed. In fact, nearly 500 groups had prepared their codes before the act had even been passed by Congress. The era of competition had been replaced by cooperation, or as many of the opponents referred to it, competition had been replaced by collusion. Roosevelt, as Hoover before him, believed that using the power of government to inflate and maintain higher prices on goods and services under the banner of the NRA’s Blue Eagle would support higher wages and increased employment. A price-cutter was a violator of the new cooperation. Individuals who broke the codes were fined and jailed. A New Jersey tailor was sent to jail for violating the “Tailor’s Code” by pressing a suit for 35 cents rather than the required 40 cents. In 1933, the Wisconsin Legislature passed the Wisconsin Recovery Act (WRA). Very similar to the NRA, the legislature vested the governor with the authority, after consulting with industry representatives, to impose codes of fair competition. Violations would carry criminal penalties and fines. In a 1935 challenge, The Wisconsin Supreme Court found the WRA unconstitutional because it was a “complete abdication of legislative authority.” Months later, the U.S. Supreme Court struck down the NRA for almost identical reasons. The battle against price-cutters continued and fears of unfair competition and monopolies from large national and regional industries fomented political battles. Companies like A&P, J.C. Penney and Woolworth’s were part of the “chain-store menace.” While rural merchants were battling mail-order companies like Sears & Roebuck and Montgomery Ward. The United States Senate directed the Federal Trade Commission (FTC) to investigate whether the chain-store movement had tended to create monopolies. After a six-year investigation, the FTC did not find any systematic abuses but did recommend changes to the federal anti-trust laws.
The result was the 1936 Robinson-Patman Act which made it “unlawful for any person engaged in commerce…to discriminate in price between different purchasers of commodities of like grade and quality...where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly or to injure, destroy, or prevent competition” (15 USC §§ 13-13(b)). Wisconsin has a “mini” Robinson-Patman Act (Wis Stat § 133.04). In 1937 Congress passed the Miller-Tydings Act allowing manufacturers to set minimum resale prices, a practice restricted under the Sherman Antitrust Act. This encouraged states to pass their own “fair trade” laws to counter chain-store price-cutting. Prior to the adoption of Miller-Tydings, the courts had generally rejected state attempts to permit resale price maintenance. The Miller-Tydings Act was repealed in 1975. The Robinson-Patman Act, sometimes referred to as the “Anti-Chain-Store Act” and the MillerTydings Act, were both put in place to protect small businesses against the buying-power of the chain stores by discouraging “unjustifiable” volume discounts. States had been passing various forms of “Fair Trade” laws since the early 1920’s. Some were focused on permitting manufacturers to maintain minimum pricing, others included prohibitions on the use of loss leaders. Other states passed laws that focused on “Unfair Practices,” in particular, sales below cost. Most states passed general antitrust laws focused on predatory or monopolistic practices that could harm or injure competition. The push for states to pass such laws was particularly strong from trade organizations following the U.S. Supreme Court decision against the NRA. Having lost the ability to limit competitive pressure using federal law, the trade groups moved their efforts into the state legislatures. In 1936, the U.S. Supreme Court upheld Fair Trade laws in California and Illinois providing momentum to the movement. In 1939 Wisconsin adopted the Unfair Sales Act. The law was based on model legislation drafted by the National Food and Grocery Conference Committee and the National Retail Dry Goods Association and patterned after the NRA code system. The original Unfair Sales Act required a 3% wholesale markup and 6% retail markup on all products and included fines and jail time for offenders. Similar to NRA codes, the law also limits larger volume sellers from selling below a cost that can be justified by the “prevailing market conditions” even if they are selling above cost. Columnist Matt Pommer, believes that a 1938 case in Madison where 16 oil companies and 30 executives were convicted of violating the Sherman Antitrust Act prompted the passage of The Unfair Sales Act. Their crime was conspiring to artificially maintain minimum tank car prices for gasoline. As their defense, they argued that they were adhering to the NRA codes of competition. If adoption of The Unfair Sales Act was motivated by this court case, it was on the side of protecting conduct that the U.S. Supreme Court concluded violated antitrust laws. Most states continue to have some form of protection against predatory below-cost sales, but they typically refrain from providing a definition of cost and are focused on protecting competition (a competitive marketplace) rather than individual competitors as Wisconsin’s law does. Several states that had more restrictive below-cost sales laws either have repealed them or have had them ruled unconstitutional in state courts.
THE IMPACT OF THE CURRENT LAW The Unfair Sales Act has as its stated policy purpose, a broad condemnation of below cost sales by wholesalers and retailers: “The practice of selling certain items of merchandise below cost in order to attract patronage is generally a form of deceptive advertising and an unfair method of competition in commerce Such practice causes commercial dislocations, misleads the consumer, works back against the farmer, directly burdens and obstructs commerce, and diverts business from dealers who maintain a fair price policy. Bankruptcies among merchants who fail because of the competition of those who use such methods result in unemployment, disruption of leases, and nonpayment of taxes and loans, and contribute to an inevitable train of undesirable consequences, including economic depression..” (Wis Stat
The Act goes on to define “cost” in a variety of ways depending on the product: • For the sale of motor fuel, cost is defined as the actual invoice cost, plus transportation, excise taxes, plus “other costs which may not be included in the invoice cost”, or the average posted terminal price, or the replacement cost – whichever is higher, plus. o a minimum markup of 3% for wholesalers, 6% for retailers and, 9.18% for retailers who obtain their supply from a refiner. This markup is intended to “to cover a proportionate part of the cost of doing business.” For the sale of tobacco and alcoholic beverages, cost is defined as the actual invoice cost, plus transportation, excise taxes, plus “other costs which may not be included in the invoice cost”, or the replacement cost – whichever is lower, plus, o a minimum markup of 3% for wholesalers, 6% for retailers. This markup is intended to “to cover a proportionate part of the cost of doing business.” For all other products, cost is defined as the actual invoice cost, plus transportation, excise taxes, plus “other costs which may not be included in the invoice cost”, or the replacement cost – whichever is lower, unless; o a seller’s cost is less than the cost of their competitors, then the seller must use the “prevailing market conditions” to determine their price. (Wis Stat §100.30(2)(b)).
Under The Unfair Sales Act, a violation of the law occurs when a product is sold below the statutorily defined cost with the “intent or effect” of “diverting trade from a competitor.” Such a sale is considered evidence of injury to a competitor (Wis Stat §100.30(3)). A violator can be fined up to $5,000 per violation and may be sued by the competitor in a private cause of action for treble (triple) the monetary loss or $2,000 per day – whichever is higher. In Wisconsin, a competitor is entitled to collect damages without demonstrating any actual harm to their firm or to the competitive marketplace. The Unfair Sales Act condemns below cost sales while defining cost in ways that have no relationship to a sellers actual cost. In Wisconsin, a firm can be in violation for selling below the statutory cost even when they are selling the product above their own cost. Likewise, the Unfair Sales Act makes no distinction between a procompetitive rivalry and anticompetitive (predatory) pricing. A firm may be in violation for choosing to sell a product at or below cost for a legitimate business purpose, even if they pose no threat to a competitor or competition. Gasoline retailers, in particular, work under the constant threat of having to defend their business in court if they set their prices differently than their competitors. In one example, a station owner spent more than a year keeping a ledger of his competitors pump prices. He then went to court and won a judgment of $586,000. No evidence of competitive injury is required under the law and none was established in this case (Gross v. Woodman's Food Market, Inc). The Act allows a retailer to lower their price to meet the price of a competitor. It was unclear if the law intended that a store owner in Wisconsin could lower their price to match a competitor across the state line. In 2003, when the question arose, some legislators attempted to prohibit meeting the price of an out of state competitor (2003 - AB415). The courts settled the matter in 2006 deciding that meeting the price of a competitor included a direct competitor across the state line (Wisconsin. Go America LLC v. Kwik Trip, Inc).
In June of 2007, Raj Bhandari filed a suit against the Department of Agriculture Trade and Consumer Protection (DATCP) asking the court to find the Unfair Sales Act in violation of the Wisconsin Constitution. Mr. Bhandari had purchased and rehabilitated a gas station and was working to grow his business by providing discounts on gasoline to seniors and to donors of a local youth hockey league. After DATCP received a complaint from another area station owner, the department sent a letter informing him that such practices may be in violation of the Act. Mr. Bhandari discontinued the programs, but he is seeking relief in the courts. The Institute for Justice has joined him in his efforts. In September of 2007, 42 stations in the Green Bay area filed a suit claiming that a station selling E85 was violating the Unfair Sales Act. The suit accused the station of selling the ethanol-based product for less than the gasoline-based fuel over a 143-day period. Each station is asking for $286,000 in damages, or $2,000 per day of violation for a total of $12 million. In this case, the question of cost is at issue. E-85 costs less than gas, yet the plaintiffs are alleging a violation because the price was not marked up to meet the prices of gasoline or gasoline-blends sold at retail. In October of 2007, Federal Magistrate William E. Callahan, Jr., dismissed a case against a gasoline retailer; ruling that the Unfair Sales Act violates federal antitrust laws. Because the state did not participate in the case, the state may continue to enforce the law; however, the decision makes the law vulnerable to further challenges, particularly in federal courts. In his opinion, Callahan presented significant obstacles and challenges for future plaintiffs (Lotus Business Group, LLC, v. Flying J, Inc). Over the years, The Unfair Sales Act has also been used to discourage discounting of a variety of other products. A tobacco wholesaler was prohibited from passing on trade discounts to its customers. In a higher-profile case in 2000, Wal-Mart was accused by a dozen of its competitors of selling items below cost. Wal-Mart responded to the allegations by identifying statutory below-cost sales violations in its competitor’s stores. Wal-Mart filed over 300 complaints against almost every major chain-store in Wisconsin. The case was settled but not until Wal-Mart agreed to change the way it calculates product costs in Wisconsin. DATCP did not pursue the complaints filed by Wal-Mart, but the case brings up several important problems with The Unfair Sales Act. None of the chain-stores were alleged to be engaged in anticompetitive (predatory) pricing, yet they were in violation of the Act. As a result, stores that may be selling above their marginal costs but less than the statutory costs are required to increase the cost to consumers. Similar to the NRA codes, The Unfair Sales Act works as government-sanctioned encouragement towards price collusion. The motivation for enforcement comes from a business owner’s interest in maintaining higher profit margins against a competitor’s attempts to lower prices. The state has (as Magistrate Callahan pointed out), in effect established a private price-fixing scheme. Following the letter of the law in Wisconsin has discouraged retailers like Target and Wal-Mart from adding some prescription drugs to their $4 discount drug programs. Wal-Mart was also prevented from offering Wisconsinites the same “Black Friday” door-buster deals that are offered to shoppers in neighboring states. Again, this prohibition occurs without any indication of harm to competition. While the law may intend to prevent larger firms from harming smaller firms, the impact or threat of litigation and penalties discourages even small business owners from price-cutting. A new store owner, like Raj Bhandari, who was trying to establish his business in the market, was warned that he may be breaking the law. Likewise, a main street merchant wanting to advertise popular products at holiday “door-buster” prices to bring in new customers who may otherwise go to the large chain-stores, is also at risk of violating the current law. Despite the Unfair Sales Act’s stated objective, attracting patronage with lower prices is neither unfair, nor deceptive. It is the essence of competition. That the law makes no distinction between procompetitive pricing and anticompetitive (predatory) conduct should only serve to hasten its repeal.
DOES THE CURRENT LAW SERVE THE INTEREST OF THE PUBLIC? Over the years, several attempts to repeal The Unfair Sales Act have been unsuccessful. These attempts focused on eliminating the provision specifically on gasoline. The last successful and significant change to the law occurred in 1985 with Act 313. The Act removed the markup requirements on all products other than tobacco, alcohol, and motor-fuel. The prohibition on selling below an arbitrary statutory price or the prevailing market price remains for all other products. Interestingly, by either accident or intent, the 1985 Act created a loophole in the markup law that allowed a fuel producer-owned store to avoid the wholesale markup, thus allowing them to charge lower prices than independently owned stores. The loophole was closed in 1998 under Act 55 which imposed a 9.18% markup for producer-owned stations and increased the penalties for violators. For 13 years, the law actually created a price disparity that advantaged the large station owners over the independent stores. The trade groups that once advocated for the NRA codes of competitive conduct have longabandoned markup legislation for many good reasons. Retailers and wholesalers that carry a wide variety of products could not sustain such high markups on all of the products they sell. In the hardware industry, nails, fasteners, and other products sold as commodities, sell for far lower margins. The same occurs in the grocery business on many items. Sellers carry the products their customers want, even those they break-even or lose money on because they sell enough other products to allow a profit. Most states that adopted general minimum-markup laws in the 1930’s have long-since repealed them. Several states have used the markup laws to protect state industries or to reduce consumption. Markups on intoxicating beverages served the same purpose as sin-taxes and date back to the prohibition era. California and Ohio enacted markup requirements on wine to protect domestic producers. The Federal Courts have struck these markup laws down, but in Ohio, the legislature is working with the state’s trade groups to reinstate a markup of at least 33.3% on wine. Only two states have a minimum markup on gasoline. Wisconsin’s is by far the highest at 9-9.18%, while Minnesota’s markup is 8 cents per gallon or 6%, whichever is lowest. Minnesota’s minimum markup requirement was put in place recently. The Wisconsin and Minnesota Petroleum Marketers Associations (PMA) joined forces to get the law passed. Working in Iowa, the PMA has also persuaded a pair of legislators to introduce gas-price legislation; however, the Iowa bill does not include a minimum markup but prohibits below-cost sales that harm competition. The recent opinion by Magistrate Callahan underscores the problems with Wisconsin’s markup law. It lacks any rational basis. Callahan astutely points out, “Given that a markup of 9 cents per gallon was deemed an accurate estimate of the “costs of doing business” in 1998, it seems curious that a markup of 25 to 30 cents per gallon, which is approximately 200% greater than the markup in 1998, is an accurate estimate of the “costs of doing business” in 2007.” If gasoline should go from $3.00 to $4.00 per gallon in 2008, does the operating margin required by a station owner and wholesaler also increase by 9 cents? Similarly, if the price were to decline to $2.50 can the wholesaler and retailer afford to forgo 4.5 cents of this margin? Similar arguments could be made for the markup provisions applied to tobacco and alcohol. A wholesaler or retailer should not be determining their product’s gross profit margin based on an arbitrary markup set by the state. Does a retailer or wholesaler need the same percentage of markup on every case of wine or box of cigars? Should the seller be able to charge a lower markup on a $300 case of wine than they charge for a $50 case of wine? As it stands today, the law that intended to provide small grocery and dry-goods store owners a minimum gross-profit margin and protect them from large national retail chains now serves only the narrow interests of its most active proponents. The question for the legislature is - does the law serve a public purpose? If so, what is that purpose and does the purpose serve the interest of the consumer?
THE FEDERAL TRADE COMMISSION: OPINIONS REGARDING THE UNFAIR SALES ACT
The Federal Trade Commission responded to several questions regarding the Unfair Sales Act submitted by a Wisconsin Legislator (FTC Letter-October 2003). The following is a summary of their opinion.
Q: Does the law harm consumers by significantly raising prices to consumers? Most likely yes. Minimum markup laws likely deter pro-competitive price cutting and can ultimately lead to higher prices for consumers. They can prevent efficient vendors from passing on savings to consumers, and they can discourage entry from new competitors that may be more efficient. Moreover, when compared to other states with similar laws, the Act exacerbates these problems by employing one of the steepest minimum markups on retail fuel sales in the country. Q: Does the current Wisconsin law duplicate existing protections against "predatory pricing" found in the federal antitrust law? The federal antitrust laws deal specifically with below-cost pricing that has a reasonable prospect or dangerous probability of leading to monopoly. The FTC, the Department of Justice's Antitrust Division, state attorneys general, and private parties can sue under these laws in response to anticompetitive below-cost pricing. The Act, however, does more than duplicate these protections; it exceeds them in ways that do not benefit consumers. Federal law prohibits pricing that could harm competition and consumers, not just competitors, whereas the Act prohibits pricing that could harm competitors even if there is no harm to consumers. Q: Does the current Wisconsin law discourage or encourage competitive pricing? Current Wisconsin law discourages competitive pricing. The Act forbids below-statutory cost price cutting that has the intent or effect of diverting trade from a competitor. Thus, unlike federal antitrust law, the Act focuses on harm to competitors rather than harm to competition. In fact, the Act subjects vendors to civil liability - including treble damages and a $5,000 fine per violation - for cutting prices even if there is no likelihood of harm to competition, such as if they price below statutory cost on a single occasion, and even if the vendors have no intent to engage in anticompetitive conduct. Furthermore, the Act defines "cost" in a way that lacks a firm economic foundation and likely leads to higher prices. As a result, many vendors likely avoid pro-competitive price-cutting altogether. Q: Are there any scholarly studies or court decisions in recent years that address the effect of "below-cost" pricing in relation to the creation of monopolies? Yes. Because low prices benefit consumers, consumers are harmed by "below-cost" pricing only if, because of low prices, a dominant competitor is able later to raise prices to supracompetitive levels. Economic studies, legal studies, and court decisions indicate that below-cost pricing that leads to monopoly occurs infrequently. Below-cost sales of motor fuel that lead to monopoly are especially unlikely. For these reasons, we believe that Wisconsin's Unfair Sales Act likely harms consumers and restricts competition. We believe that, if followed by retailers, the Act restricts competition and likely leads to higher prices for consumers. Unlike federal antitrust law, the Act aims to protect individual competitors, not competition, thereby discouraging pro-competitive price-cutting. Moreover, the Act defines "cost" in a way that lacks a firm economic foundation and likely leads to significantly higher prices.
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ADDRESSING THE CONCERNS OF SUPPORTERS OF THE UNFAIR SALES ACT
“It Is Important Small Business Be Assured The Opportunity To Succeed And Prosper In a Marketplace That Includes Vigorous And Fair Competition Between Small And Big Business” The Competitive Marketplace Act which will replace The Unfair Sales Act, addresses predatory pricing. Anticompetitive pricing is prohibited and DATCP along with the Department of Justice can continue to protect Wisconsin’s consumers and businesses against these practices. Preserving competition is the primary objective of the Competitive Marketplace Act.
“The Unfair Sales Act Protects Small Businesses Against Large Chains And Multi-National Companies Who Will Drop Their Prices, Drive Out Competition And Raise Prices” The supporters always use this scenario as a defense for keeping The Unfair Sales Act; however, this is a predatory practice that is a classic antitrust violation under Wisconsin’s Mini-Sherman Act or the Federal Sherman Act. The Unfair Sales Act was never designed to address this type of practice. The new Competitive Marketplace Act does so by creating a bridge between the Unfair Practices in Chapter 100 of the statutes to The Antitrust Violations found in Chapter 133. The Competitive Marketplace Act also increases the current maximum fine for violators from $100,000 to $1,000,000 and maintains the potential for a felony conviction. Also, private actions for treble damages continue to exist under the new Act. A crime that harms consumers and competition is serious and deserves stiff penalties. Unlike The Unfair Sales Act, which provides for small fines and damage awards for unharmed third parties, actual anticompetitive pricing is a public interest and requires a determined state action.
“Without The Current Law, Many Small Retailers Would Be Unable To Compete Leaving Customers With No Choice And No Competition” Almost every state has some form of protection against predatory practices, including predatory belowcost sales that harm competition. That protection will continue to exist in Wisconsin. Over the past 70 years, only a small number of states had markup requirements on general products and every state, including Wisconsin repealed those provisions. Today states that use markups apply them to protect specific state industries (wine) or to discourage the use of products (alcohol and tobacco). While the claim is easy to make, there is no evidence to suggest that the existence of the current law, particularly a requirement for a price markup, has served to protect small businesses or consumers any better than states without the markup requirement. National chain stores and the precursor to the internet – catalog retailers – have been around for a century and small businesses have learned to adapt their businesses to compete. Consumers will always pursue value and that does not always mean lowest prices. Manufacturers interested in providing quality products through a quality non-discount retail channel were recently afforded more latitude to adopt resale pricing agreements – just as the original Fair-trade laws supported (Leegin Creative Leather Products v. Kays Shoes). At the same time, consumers should not be forced to take their business to a neighboring state or even the internet to find bargains. This doesn’t help Wisconsin’s businesses either. Small retailers will continue to be protected against predatory pricing. Below-cost sales that pose a threat to competition will be prohibited under the Competitive Marketplace Act.
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“The Current Law Protects Our Rural Communities And Small Towns” Under the Competitive Marketplace Act, DATCP can respond to complaints of predatory conduct. DATCP and the Department of Justice can also monitor instances of anticompetitive pricing through federal agencies and court decisions and adopt rules that will enable Wisconsin to prevent practices that may be occurring in other states from occurring in Wisconsin. Generally, the evidence indicates that the markup laws keep prices higher and discourage price-based competition and the burden to consumers falls equally on rural and urban populations. For agricultural areas, the current law poses a particular economic challenge. Ethanol is a heavily subsidized product that currently costs less than regular gasoline. Sellers in Wisconsin face litigation if they attempt to pass on the cost savings to consumers. Despite the Governor’s order that DATCP suspend enforcement, nothing prevents competitors from initiating a private action.
“Relying On Federal Law Will Not Help Small Businesses Because They Cannot Afford Expensive Litigation” The Competitive Marketplace Act does not require businesses to initiate litigation to prevent below-cost sales. A merchant may file a complaint with DATCP. The department or the Department of Justice may initiate an action to halt the activity if the practice is a threat to competition. The Department of Justice or a District Attorney may also initiate an antitrust action against a violator.
“Tobacco, Alcohol And Gasoline Are Common Loss Leaders - The Current Markup Law Is Needed To Protect These Sellers” Until 1985, every product in this state carried a minimum markup. There are thousands of products now exempt from the markup requirement that could easily be included as “common loss leaders,” from toothpaste to bread to baby formula. All of these products continue to be available throughout the state in competitive markets. The prolonged existence of a markup for these products stands primarily as a testament to the influence certain trade organizations hold rather than to any sound public policy considerations. Tobacco discounters and Cigar Shops as well as liquor stores will continue to do well under the Competitive Marketplace Act. These specialty retailers frequently divert trade from chain grocery stores because of their pricing, service, and selection. Gasoline retailers have also adapted to changing market conditions. When the law was first enacted, auto dealers were often great distances away making service stations a common choice for motorists in need of small repairs and maintenance. As the number of dealers increased and cars and their parts became more proprietary, gas retailers changed their stations to convenience store formats. Today, a gallon of milk, cup of coffee, lunch, cigarettes, and cold beverages are the mainstay of the gas retailer. All of this happened in states with and without markup laws. The added products help the retailer add incremental revenue to their operations and value for their customers. Under the Competitive Marketplace Act, the use of loss leaders that results in harm to competition and consumers is enforceable by DATCP or the Department of Justice. If the practice is anticompetitive (predatory), it is prohibited under the new Act.
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ADDRESSING THE CLAIMS OF THE PETROLEUM MARKETERS
“Current Law Enhances Competition Because It Keeps More Stations In Business” The PMA produced a study (Skidmore) that they contend, demonstrates that states with Below Cost Sales (BCS) laws have more stations thus increasing the competitive market structure. The study also found that prices in states with BCS laws are less than 1 cent (0.50 cents to 0.86) lower per gallon. The study contradicts virtually all of the other scholarly research on the topic. The FTC notes (see section on Empirical Evidence) that the Skidmore study does not control for the level of enforcement. States that have some form of BCS laws with little or no enforcement are not likely to have any influence on how prices are set. This issue is addressed in a study done by James I. Brannon, that found prices went up 2 to 3 cents per gallon after the penalties for violating Wisconsin’s law were increased in 1998. Other studies mentioned by the FTC have indicated states with BCS laws have higher prices ranging from 0.9 cents to 2.67 cents per gallon. In 2004, two economists from Marquette University, on behalf of a coalition urging repeal of the law, examined the cost of gasoline in Wisconsin and found that the law adds 1.3 to 1.8 cents more per gallon. Most important, the study concluded that the law costs Wisconsin motorists an additional $40 million per year (in 2003-2004) and only 2.8% of that is earned by small retailers. Skidmore’s study does not provide an analysis that demonstrates the specific impact of Wisconsin’s markup law on gas prices. The other dozen states merely prohibit below-cost sales, none of them require a price markup as high as Wisconsin’s, thus the price data Skidmore provides lacks any meaning for Wisconsin’s consumers. Interestingly, the Skidmore study concluded “results indicate that [below-cost sales] laws serve to preserve the total number of establishments over time. They also suggest that [below-cost sales] laws protect medium sized and larger businesses, but that smaller establishments are unaffected.” This result would tend to undermine the argument that the law helps “mom-and-pop” stores. In fact, the Brannon study indicates that Wisconsin had 5,182 gas stations in 1972. By 1998 that number had fallen to 3,946. Clearly, the law has not had a significant impact on the number of retailers or any positive correlation to lower prices. In particular, even Skidmore’s data raises a significant question about who benefits from the added markup. If the number of small mom-and-pop establishments are unaffected by the law, then it could be argued that the higher markup works to attract larger gas retailers into the state to the exclusion of smaller mom-and-pop retailers. Another question raised by the results of the Skidmore study is one of economic efficiency. The demand for gas is generally inelastic and the volume consumed is unaffected by the number of stations, therefore a larger number of stations means that each station sells proportionately less fuel and produces less revenue for the owner. Whether this economic reality is good or bad is an open question, but the market should be free work out the equilibrium on its own without involving the hand of government in a price markup scheme.
“In A May 2006 Snapshot, Gas Prices Averaged $2.92 In States Without BCS Laws While Prices Averaged $2.85 In States That Had BCS Laws” Almost every state has some form of below-cost sales law. Only a dozen have laws that apply specifically to gasoline sales and only two states have a minimum markup requirement. The more relevant statistic would tell us how much Wisconsin consumers are paying on average as opposed to the rest of the country.
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“California, A State Without Fair-marketing Legislation, Has The Fewest Convenience Stores Per Capita In The Country And The Highest Gasoline Prices” California has several fair-trade laws including a general prohibition on below-cost sales on products including gasoline. California was also the first state to require a minimum-markup, which they long ago repealed. According to a 2004 Study by the State’s Attorney General, California suffers from a variety of problems including a long-term shortage of refining capacity, aging facilities, and a supply shortage of 10% while demand is increasing dramatically. The state has gone from being a net exporter of refined fuel to being a net importer. California also has some of the strongest environmental laws including a reformulated fuel mandate. The state banned MTBE blended fuels and now requires Ethanol, a product that is in short supply in the state of California. The attorney general also stated that the margins (cost plus profit) of California’s refiners far surpass the national average. None of these issues appears to be related to lacking a state minimum markup law.
“Current Law Does Not Guarantee a Profit But The Markup Is Designed To Prevent Predatory Pricing” The law, in fact, does not guarantee a profit. It does however discourage efficient sellers from passing on their lower costs to consumers while providing little incentive for less efficient sellers to improve their operations. The law also encourages private enforcement that requires no demonstration of actual harm, other than having a price that may be lower than the statutory requirements even if it is above the sellers cost. The Unfair Sales Act was most certainly not designed to prevent predatory pricing. It was designed, as the law states - to prohibit the “sale of any item of merchandise…at less than cost as defined in this section with the intent or effect of inducing the purchase of other merchandise or of unfairly diverting trade from a competitor… Evidence of any sale…at less than cost as defined … shall be prima facie evidence of intent or effect to induce the purchase of other merchandise, or to unfairly divert trade from a competitor, or to otherwise injure a competitor.” Predatory pricing is an antitrust violation. The Unfair Sales Act has little in common with antitrust laws. Since the federal adoption of the Sherman Act in 1890, it has been well understood that the antitrust laws prohibit practices and arrangements that harm competition and increase the cost to consumers. The Unfair Sales Act accomplishes the opposite; it has as a direct purpose, maintaining higher consumer prices without any regard to how it affects competition in general. The Unfair Sales Act exists to determine what is fair or unfair for a competitor. It was inspired during an era when it was widely thought of as virtuous for small business owners to collude under trade associations in order to work against larger competitors or even small competitors who broke ranks with the pricing established by the group. Today, without the sanction of state government such arrangements could qualify as a conspiracy to monopolize and be in violation of the antitrust laws.
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“The ‘meeting competition’ provision allows all retailers the option of offering and meeting a competitive price” Repealing The Unfair Sales Act will accomplish this too. As an added benefit, retailers will no longer have to file paperwork with DATCP or check prices at the nearest terminal. More important, retailers will not have to worry about being sued by the station across the street for merely offering their product at prices above their cost, but less than others have set. Without The Unfair Sales Act, sellers are free to price their products competitively without permission and without the threat of litigation.
“Commentary Provided By The FTC ‘is both misleading and factually incorrect.’” The Wisconsin Petroleum Marketers Association has in the past issued talking points that raise concerns about the importance, appropriateness, validity, and accuracy of some of the commentary provided by the FTC. To be fair to PMA, their talking points refer to a 2002 proposal in Virginia, however similar commentary was provided to the Wisconsin Legislature in 2003 regarding The Unfair Sales Act. The FTC’s divisions of Office of Policy Planning, Bureau of Competition, and Bureau of Economics evaluated The Unfair Sales Act and contributed to the letter’s content. While the PMA considers these “sub-agencies,” they are the appropriate agencies within the FTC to respond to a state legislator’s request for an opinion – a process that is not “irregular.” Further, the Commission on a 5-0 vote approved the release of that opinion. Because of the 2002 letter, the PMA and other associations requested a meeting “to determine the Bush Administration’s position on the issue.” It is important to note that the commissioners do not necessarily speak for the administration. Each member serves a seven-year term and only three members can be from the same party. Also worth noting is that the President had only been in office two-years when the letter was issued. The positions taken by the commission have less to do with political questions than they do with policy questions. Finally, PMA did not elaborate on which parts of the letter they believed were factually incorrect or misleading.
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