Pricing Strategies and Litigation Risks: An Economic Analysis of the Downstream Petroleum Industry

Abstract

Economics lies at the center of many antitrust cases. Economic experts are often proffered up on both sides to give opinions on either the benefits or potential harm of the specific practices in dispute. As decisions can sometime turn on this battle of opinions between experts, it is important for litigators to have a working knowledge of the economics underlying such arguments. 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. Under both federal and state laws, I discuss how legislators and courts have tried to deal with these behaviors, and argue that, in some cases, the laws (or interpretation of those laws) can be counterproductive and 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 (unilaterally) pricing too high in states with so-called “Price Gouging” laws and a third risk arises from (unilaterally) pricing too low in states with Sales-Below-Cost laws. Finally, the 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.