The FTC is committed to policing gasoline and diesel markets to protect the American public against illegal acts. Given high prices at the pump these days, the Bureau of Competition is redoubling its commitment to police unfair methods of competition in wholesale and retail gasoline and diesel sales.
Chair Khan recently sent a letter outlining the ways in which the FTC is stepping up its investigative efforts in gasoline markets. First, the agency will examine potential price coordination and other collusive practices in the retail fuel industry by moving against mergers that create the opportunity for harmful pricing behavior. Under existing law, the FTC has typically sought to resolve anticompetitive deals by requiring merging companies to divest fuel stations in overlapping local markets. Chair Khan is concerned that this policy may have increased consolidation more broadly, at the metro, regional, or national level, creating conditions ripe for price coordination and other collusive practices. In particular, in the course of these retail gasoline and diesel chain merger reviews, staff has observed market-wide price signaling behavior among larger chain participants, both the targets of our investigations and other competitors. This behavior warrants a new approach and a wider lens during our merger review. We want to make the retail fuel industry aware of the potential that systemic price signaling behavior may violate the antitrust laws or extend the potential anticompetitive effects of a merger beyond local market overlaps.
Posted gasoline prices – particularly when controlled by large national chains with multiple stations in a particular area – offer opportunities for retail gasoline chains to signal price changes to their competitors. Retail fuel chains may use specialized software across their networks to set their own retail prices and monitor competitors. When retail gasoline profits are lower than what the chain deems acceptable at its stores – for example when wholesale fuel costs are rising faster than retail prices – the chain may attempt to “restore” the market by raising price. The signal starts with a significant price increase at every single one of a chain’s stations across a city area, without regard for whether those locations are all facing lower margins. The chain will monitor its competitors’ prices and its own sales to see if others will follow. If they do, prices across the city will rise. If competitors hold their prices, the instigator will lower its prices until another opportunity arises. Staff has observed common restoration behavior among major chains, leading to a concern that consolidation may have led to a world more conducive to signaling behavior – making restorations more likely to increase prices, and maintain higher levels for longer.
The success or failure of such behavior is of keen interest to the FTC. If market-wide restoration behavior by larger regional and national retail chains is successful, it may mean that these players, by virtue of their size or market share, are able to increase prices faster or higher than competition would otherwise allow. The Commission will scrutinize any merger or consolidation involving that chain for its effect on price signaling behavior wherever the buyer overlaps in any metro area with the seller, even if no local retail fuel station overlaps present concern. In addition, the Commission wants to hear from the American people and independent retail gas stations if they observe this market-wide price signaling phenomenon in their area. People interested in complaining about this behavior should email us at firstname.lastname@example.org and put “gas prices” in the subject line.
Second, the Bureau of Competition plans to seek tougher relief to remedy illegal retail fuel station mergers. In its last nine merger cases involving retail fuel outlets, the Commission has ordered the divestiture of approximately 450 individual retail stations around the country to resolve concerns with illegal merger activity – seemingly tough relief. Yet we continue to see more and more illegal retail fuel station merger proposals. This suggests that the agency’s approach has not deterred firms from proposing anticompetitive transactions in the first place. One likely explanation for this state of affairs, at least in part, is the Commission’s recently rescinded 1995 policy on prior approval. Now that the policy is no longer in effect, the Bureau of Competition intends to require merging parties to obtain prior approval from the Commission for any future proposed merger in the overlapping product and geographic markets.
However, there is room for even tougher relief in this regard. If there are circumstances that justify an even broader prior approval requirement that goes beyond the overlapping product and geographic markets – such as proposing a merger in geographic and product markets that are already highly concentrated – the Bureau of Competition will consider requiring it. Oil and gas mergers are prime candidates to require this tougher extra relief.
Third, from now on, staff in the Bureau of Competition analyzing oil and gas mergers will work hand in hand with FTC specialists in Franchise Rule enforcement to examine whether any practices by the merging parties violate the Franchise Rule or other provisions of the FTC Act that protect small businesses from unlawful conduct. Franchised gas stations often have no control over the retail price at their pumps, and we are concerned that pricing behavior from the franchisor may result in harm to franchisees. The Franchise Rule gives the Commission the ability to assess fines of $43,792 per violation per day. If we find any violations, we will aggressively pursue action against oil and gas companies.
The FTC is committed to vigorous enforcement of the antitrust laws. We believe that these actions will aid in protecting the American public at the gas pump.