Collusion or Illusion: A Tri-State Analysis of Gas Prices Presented to the city of Eau Claire Fiscal Advisory Committee 12/12/2012 Presenters • Dr. Ryan Weichelt – assistant professor Dept. of Geography and Anthropology • Dr. Laura Middlesworth – assistant professor Dept. of Economics • Emily Anderson – Senior, Economics and Accounting Major from Osseo, WI • Ben Possi – Senior, Geography and Economics Major from Milwaukee, WI Agenda • • • • • • Introduction Study Area Gas Taxes Wholesale/Retail Prices Unfair Sales Act Eau Claire Market Comparison – Further Analysis • Summary Statements Study Area • 10 cities of somewhat similar population as well as located on major highways and/or interstates • Wisconsin: Eau Claire, Hudson, Stevens Point, and Wausau • Minnesota: Mankato, St. Cloud, and Albert Lea • Iowa: Ames, Mason City, and Iowa City Area of Interest and Study Cities Gas Network Features 0 Cities Breakout Tanks National Interestate State Highway Liquid Gas Pipeline 26.4 5 5.9 46.2 49.4 43 .4 32.4 51 .5 419 49.4 153.9 32' .4 313 62.2 Map Produced by Ryan Ilf?l?eiehelt IEI University of Wisconsin-Em ltillaire Department of Geography Sou roee: American Petroleum Institute Total Gas Tax Federal and State (cents per gallon) *45 of Detoher 2012 41.4 443-)? 493 43? 33 41.9 - M4 42.4 51-3 59.? 51.4- HI 69.5 45 5 4M 5'1? k" 32693514? ED 9 59.6 45.4 41are 43.4 - . - 35'? 43.3 56.2 354 39.3 49.2 35.2 312 39 3 Wisconain State Tax? 32.9 Minnesota StateTaa: 39.5 33-4 Iowa State Tax -22 33.4 53.4 Federal Gas Taa: 13.4 gallon Retail Prices, Wholesale Prices, and the Unfair Sales Act Average Retail Prices by City $4.100 $4.000 $3.900 Eau Claire Retail Price $3.800 Wausau $3.700 Stevens Point $3.600 Hudson $3.500 $3.400 $3.300 4/29 5/6 5/13 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8 7/15 7/22 7/29 8/5 8/12 8/19 8/26 9/2 9/9 9/16 Date Claim: Retail prices in Eau Claire are generally higher than other Wisconsin cities Average Wholesale Price $3.30 Average Wholesale Price $3.20 $3.10 $3.00 Wausau $2.90 Eau Claire $2.80 Stevens Point Hudson $2.70 $2.60 $2.50 4/29 5/6 5/13 5/20 5/27 6/3 6/10 6/17 6/24 7/1 7/8 7/15 7/22 7/29 8/5 8/12 8/19 8/26 9/2 9/9 9/16 Date • One explanation is that the “cost” of gasoline is more expensive in Eau Claire • According to the above graph, this is not an accurate statement • Wholesale prices are fairly similar among these WI cities Observations • We do observe generally higher retail prices in Eau Claire than in many cities throughout the state • We do not observe a significant difference in either the wholesale or retail price between these sample cities Average Weekly Retail Price $4.000 $3.950 $3.900 $3.850 Retail Price $3.800 $3.750 Eau Claire $3.700 Wausau $3.650 Stevens Point $3.600 Hudson $3.550 Mankato $3.500 St. Cloud $3.450 Albert Lea $3.400 Iowa City $3.350 $3.300 Mason City $3.250 Ames $3.200 $3.150 $3.100 4/29 5/13 5/27 6/10 6/24 7/8 7/22 8/5 8/19 9/2 9/16 Date However, we do observe higher retail prices in Wisconsin than in neighboring states Minimum Markup Law Also known as the Unfair Sales Act The Basic Idea: • Motor fuel retailers and wholesalers are required to sell gasoline at a “minimum markup” above cost • Cost refers to the wholesale price • Markup 6% above certain costs or 9.18% over the average wholesale price, whichever is greater (Marley & Stein, 2010) Enacted in Wisconsin in 1939 • Meant to cover overhead costs and protect smaller firms against predatory pricing – Predatory Pricing occurs when a firm sells its product below cost Minimum Markup Law (cont’d.) • Penalties – First Offense: $50 – 500 per day the law is violated – Second Offense: $200 – 2500 per day • Steep penalties give firms an incentive to set prices high enough to ensure that they do not fall below the “minimum markup” • Federal Trade Commission in 2003 stated, “the Act likely leads to significantly higher prices for consumers . . . and harms competition.” (http://www.ftc.gov/opa/2003/10/wigas.shtm) • Due to the Act, Wisconsin’s gasoline prices varied markedly less than in other states (Brannon 2000) Public Observation: Gas prices vary less between stations in Eau Claire than other cities City Average Variance Eau Claire $0.017 Wausau $0.057 Stevens Point $0.022 Hudson $0.044 Mason City $0.219 Ames $0.153 Iowa City $0.124 Mankato $0.054 St. Cloud $0.130 Albert Lea $0.059 • Average variance over 20-week period • Why is there significantly less variance in WI cities? • WI’s Minimum Markup Law may be the answer • Variance = Maximum Price Recorded in a given week – Minimum Price Recorded for the same week • Most variances in Wisconsin below 10 cents • Specifically, ALL of Eau Claire’s variances are below 4 cents Wisconsin Weekly Variances $0.350 $0.300 $0.250 $0.200 Eau Claire $0.150 Wausau $0.100 Stevens Point Hudson $0.050 $0.000 4/29 5/6 5/13 5/20 5/27 6/3 6/10 6/17 6/24 7/1 Date 7/8 7/15 7/22 7/29 8/5 8/12 8/19 8/26 9/2 9/9 9/16 Iowa Weekly Variances $0.350 $0.300 Iowa Price Variance $0.250 $0.200 • Iowa City $0.150 Ames $0.100 Mason City • $0.050 $0.000 4/29 5/13 5/27 6/10 6/24 7/8 7/22 8/5 8/19 9/2 Wide range of variances More volatility of variances 9/16 Date Minnesota Weekly Variances $0.350 $0.300 • • lower overall variances less volatility in the variances $0.250 Price Variance Minnesota $0.200 Mankato $0.150 St. Cloud Albert Lea $0.100 $0.050 $0.000 4/29 5/13 5/27 6/10 6/24 7/8 Date 7/22 8/5 8/19 9/2 9/16 $25e ezee $1.50 $1ee $1150 Weekly Wholesale Prices and Profit Margins for Helidayr and Kwik Trip fer Claire, WI quefze12?efefze12 Price alid av heleeale Halide? Margin ?I:wi l: Trip- Wheleeale ?I:wilcTrip-Mar1gin Profit Margin $3.51] 52.51] $2.111] 91.59 91.139 90.59 90.139 $1159 Weekly Wholesale Prices and Profit Margins fer H?lid?? end SuperAmeriee for St. Cleud, MN 4/29/2912 - 9/9/2912 Price Helid av ?5u per/hm erice helesele ?Helide1.r Margin ?5u per/5m eriEe ergin PrefItMergln Weekly Wholesale Prices and Price Margins fer Casey's and Hum El Go fer Ames, IA il??fl?? oro?ou $3.5o $3_oo $2-54] $2_oo Casey's. Wholesale Casey's: Margin Hum EL Go Wholesale ELGDMEFEIFI $1_oo $1151] Profit Margin 5?31 Claire Market Comparison Questions • How does the price dispersion of Eau Claire’s gas market differ from other similar-sized Midwestern cities? • What locational factors contribute to the reported pricing patterns in Eau Claire? • Does Wisconsin’s minimum markup law bring small businesses into the market, or does it simply inflate the cost of regular gas? Hypotheses • The purportedly consistent pattern of low price dispersions likely associated with high seller density and disparate market share. • Uniform prices likely associated with clustering of certain retail stations. • Consumers within the study cities of Wisconsin do no benefit from Unfair Sales Act. Unfair Sales Act Key Concepts • Every retailer must mark up the price of petrol by at least 6% a gallon over the wholesale price. • Designed to help smaller, unbranded retailers by preventing predatory pricing. Price Dispersion • The variation in prices across sellers of a particular good. • Often attributed to search costs and localized competition. Search Costs • One component of transaction costs. Theoretically, rational consumers will continue to search for a better price or product until the marginal cost of searching exceeds the marginal benefit of the search. • Example: Driving around to look for cheap gas. Seller Density • The number of retailers within a defined area. (1.5 mile radius) Magellan’s Chippewa Falls Location Image Source: “3909 N Prairie View Rd, Chippewa Falls.” 37° 25’ 19.1’’ N, 122° 05’ 06’’W. Google Earth. October 2, 2011. November 10, 2012. Methodology: Pricing Data Collection • Collection Period: October 11th – October 25th • Data Acquisition of Retail Prices: MotorTrends, AAA Fuel Finder (Sorted by City) • Data Acquisition of Wholesale Prices: Oil Pricing Information Service Methodology: Seller Density and Distance from Highway • Calculated Standard Deviation of Prices within the Dispersion Areas Herfindahl-Hirshman Index (HHI) • Measures the size of firms in relation to the industry. • Indicates the amount of competition and concentration within a market. • Used by the Department of Justice Index • If HHI under 0.01, then market is highly competitive and unconcentrated • If HHI under 0.15, then unconcentrated • If HHI between 0.15 and 0.25, then moderately concentrated • If over 0.25, then highly concentrated and potentially non competitive • As market concentration increases, the chances of collusion and monopolistic competition rises. Formula:  𝑆𝑆1 2 + 𝑆𝑆2 2 + 𝑆𝑆3 2 + . . . where S is equal to percent market share - I f. I 3.1., I I II I: 3 3.75 {If Claire Gas Market .- ,7 [1hx?g' .75 .. - i ?3 3:?19 If?w I I I4-.. ?ad's, 1.. Dr '3 ifwrulaum 3.75 3.71 II 1I 5-15., I I 333? 3; 3.7.4 311* I r. ..I I1 ?ll Ui- 1?33 Ell-3 --.-I II 3 In{Juan-HS!- .-. I?lt I .I 1: '3 I, II- ?Furl -- I .7- .133.73 ML I: I ?ma I?M-nu . . - - :7 ?InCot-cf 3t 3159315 - 1.. - I Ir. Cm 127p'llf [3.74 I I 1' TD ?31; I . I. If; Gas Market Composition: Elaine 5312 I EI ?ml? Cenex mm""1373 I'm Inc? I .5 . .h137-. .. . . ., ?or? II I- II .. . Hohdav 41% i a? . "rI Dee?i?d Rd nmr'ielo Rd Index: 0.240 . .34 ?nite-?at?(?733 lAil-n CI-I :?u'lXI .. . .I i-?l?l "55.x C-?cr Sauces: Eli DeLotme- USES HRCAH. BliJapan METI EriChina {Hong Kong} Bri :Thailondil TomTorn 291E Eau Claire Gas Market (Continued) Price Distribution: Eau Claire 16 14 12 Frequency 10 8 6 4 2 0 3.68 3.71 3.72 3.73 Price of Regular Gas Herfindahl-Hirschman Index: 0.240 Standard Deviation of Gas Prices: 1.6₵ Average Distance from Transport: 0.11 Miles Average Seller Density: 1.91 3.74 3.75 3.76 :irRapid: - . St Gas Market ?I'u ?Il . 5 I I ?"333. I . IL. Hill 1:5.63 u: . LJ Ir; 1411' an 5: ?l run. I "9 :11; ..-I I RI I u I n.4_ ?Fi' :5 I gig-.5 r? 1" 51 cloud :3Ix: hr 1. 2 I 1 5.6? 3.55 Ix 3.51DuimnnSI 5-52 .15'51?5 r; I ?J?s-llamas; 3E4 I 3 I 53.62 - 3 2r'dh'ls 3.63 '16 . $5.1- Gas Market St. Cluudg 3.L'ttle Buys 5 - I 4556.~ ?g 45? 22an I I - 4.Case 5 33m 5:9. 3. iiwnly - 44hr SIS '1 rramerma i 1356 41!- - ?-Ih L. W. LE- ?55 Mobil I n?exz0.133 Scams: F_ • Marley, Patrick and Jason Stein. “Wisconsin’s Minimum Gas Markup Law Reinstated.” JS Online, September 3, 2010. Retrieved 3 December 2012. http://www.jsonline.com/news/statepolitics/102159474.html • Schneider, Christian. “Wisconsin’s Minimum Markup Law: Mandated Pain at the Pump,” WPRI Report, July 24, 2008. Retrieved 8 March 2012. http://www.wpri.org/Reports/Volume21/Vol21No6/Vol21No6p1.html#_edn27 • • • Thanks to: UWEC’s Office of Research and Sponsored Programs City of Eau Claire and Interim City Manager Brian Amundson