The Pantry Takes Below-Cost Issue to Court

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The Pantry Takes Below-Cost Issue to Court

SANFORD, N.C. -- The Pantry Inc. is suing convenience stores throughout the Southeast, alleging that they are selling gas too cheap.

And, according to a report on Fayetteville (N.C.) Online, the big chain is using state laws intended to protect small gas stations.

The laws, found in North Carolina and other states, prohibit retailers from selling gasoline below wholesale prices in almost all circumstances.

Supporters of the laws say they protect consumers. A large company with deep pockets could start a price war that eliminates smaller competitors. Once those competitors are gone, the company would have a monopoly, and it could charge whatever it wants for gasoline.

But opponents say the laws protect inefficient companies that would normally go out of business. There's no hard evidence showing that the laws help consumers.

"With gas approaching $3 a gallon, who in the world is going to be arguing for a law that increases those prices further? We think it*s ludicrous," said Michael Cortez, vice president and general counsel of Sheetz Inc., one of the chains sued by The Pantry. Sheetz was dismissed from the suit in March.

According to the report, last year The Pantry sued Sheetz and Kroger in Wake County Superior Court. In April, The Pantry sued Petro Express in the Court of Common Pleas in Gaffney, S.C. The Pantry has filed two similar suits in Florida, according to The Florida Times-Union in Jacksonville, Fla.

The company, based in Sanford, N.C., did not return calls seeking comment.

"Consumers deserve the cheapest possible price on a commodity like gasoline," Cortez said. "I have talked in front of state legislatures in a number of states, telling them that I think this law is a bad law. It's a terrible law."

The Federal Trade Commission shares that opinion.

"The FTC's position has been that these laws are a bad idea," said James Cooper, assistant director of the office of policy planning at the commission. "They don't seem to serve any purpose other than to protect inefficient competitors."

Proponents of the laws say they actually lower gas prices.

The laws prevent large companies from eliminating smaller competitors through price wars, said David Bunch, president of the North Carolina Association of Convenience Stores. By discouraging monopolies, the laws preserve competition by keeping smaller retailers in business, Bunch said.

North Carolina has more convenience stores per capita than almost any other state, Bunch said. There's enough competition to keep economists and consumers happy.

Over time, the laws lower gas prices by a penny, according to a study published in the Journal of Urban Economics.

If anything, North Carolina's law is hard to enforce, Bunch said. It was initially written to prevent large oil companies from putting small retailers out of business. Since the law was passed, Wal-Mart, Home Depot and large grocery chains have started selling gasoline.

"It's the smaller mom-and-pops that are more susceptible," Bunch said.

The Pantry, however, is not a mom-and-pop convenience store battling a big company. It operates more than 1,400 stores in 11 states.

The laws that form the basis of its suits are immensely unpopular among economists, James Smith, a professor of finance at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, told Fayetteville Online.

Most economists oppose price controls, he said. If a business can sell a product at prices below wholesale, then no law should stop it. "Low cost wins. That's the rule in economics," Smith said. Efficient companies win more business, and customers save more money.

Even if a company wanted to eliminate its competition through a price war, the strategy would be risky, said the FTC's Cooper. Once the retailer wins the price war, it will need time to recuperate. After all, it just spent several days selling gas at a loss. It must maintain high gas prices long enough not only to recover its losses, but to justify the price war.

That's where the strategy falls apart.

Other companies will see the retailer making handsome profits, Cooper said. Those retailers will move into the market and open stores. The winner of the price war will lose its monopoly.

In fact, Cooper is unaware of any instance in which a retailer has tried to drive out its competitors by waging a gasoline price war.

Studies can't even agree on what effect the laws have on prices, Cooper said. While the study in the Journal of Urban Economics shows that the laws lower gas prices by a penny, other studies show that the laws increase prices, in some cases by 2 or 3 cents, Cooper said.

The challenge for all of the studies is that they are trying to measure a small component of the overall price of a gallon of gasoline, he said. A penny difference is incredibly small to measure, especially when gasoline is selling for nearly $3 a gallon.