Pricing Strategies And Litigation Risks: An Economic Analysis Of The Downstream Petroleum Industry

In this article, I discuss the economics behind a series of recent controversial pricing patterns and strategies that have spawned antitrust and related activity in the downstream petroleum industry. Brought under both federal and state laws, I discuss how legislators and courts have tried to deal with specific practices and argue that, in some cases, the laws (or the interpretation of those laws) can sometimes be counterproductive and actually harm competition. The practical consequence to downstream fuel sellers is that behavior which is perfectly pro-competitive and unilateral in nature still carries an unavoidable systematic risk of litigation. The first risk I discuss arises from parallel pricing. Well known in general and not illegal in itself, parallel behaviors still spawn substantial antitrust activity in the petroleum industry. I focus on two particular and unusual parallel pricing patterns specific to downstream petroleum that have caused recent international controversy. A second litigation risk sellers face arises from pricing too high in states with so-called “price-gouging” laws and a third risk arises from pricing too low in states with “Sales-Below-Cost” laws. Finally, a fourth litigation risk arises from the use of bundled discounts between fuel and non-fuel sales. Usually challenged under Sales-Below-Cost laws not well suited to address them, bundled discounting at the retail level has become an increasingly common pricing technique in the ongoing modernization of the downstream petroleum industry.