Commentary

Full Serve, No Choice

By Thomas A. Firey and Bart J. Wilson
New York Times on October 3, 2004.>
Sometime in the coming weeks, New York lawmakers will quietly send to Gov. George Pataki a business welfare bill that passed both houses of the Legislature earlier this year after having languished in Albany for more than two decades. If the governor signs the bill into law, it will bring a long-awaited victory to a small group of politically well-connected businessmen and give New York drivers even more reason to complain the next time they fuel up their cars.

Advertisement The legislation, sponsored by Assemblyman Peter Abbate, a Brooklyn Democrat, and Senator Kenneth LaValle, a Republican who represents Long Island’s East End, would protect gas station franchise owners from competition by prohibiting oil companies from opening their own gas stations within one to two miles of their franchisees. For instance, even if there is plenty of customer demand for a new Shell station with a full-service convenience mart, the bill would prohibit the refiner from building one if a franchised Shell station was nearby. The law would in effect award the franchise owners monopoly zones for their brand of gas, which is a valuable asset given drivers’ historically strong brand loyalty. That freedom from competition means more profits for the franchisee and higher prices and inferior service for customers.

Why would New York hand out such anti-consumer business welfare? Because the franchisees make up a powerful lobby and the last two decades have not been kind to the traditional gas stations they tend to operate. What consumers want from gas stations has changed, and that has transformed the industry. Instead of service bays and a stockroom of tires and batteries, drivers now want freshly made sandwiches, snacks and convenience-store items. Some even avoid service stations altogether and instead buy their gas at grocery stores and shoppers’ clubs.

The change is understandable. Drivers like the convenience of buying gas and other necessities at the same time. Meanwhile, they get their tires and batteries at large retailers like Sears and Wal-Mart that offer more selection and lower prices. Car repairs and servicing are increasingly being left to specialized mechanics or high-volume chains like Jiffy Lube and Midas.

That’s a boon for consumers, but a hardship for franchisees with traditional service stations. Many of them don’t have the expertise or capital to change their businesses into shiny convenience marts with deli counters and in-store bakeries.

Instead of evolving with the market and offering consumers what they want, some of the franchisees are trying to reverse the change. Their trade group has pursued the monopoly zone legislation with Ahab-like determination. In 2002, the association got a similar bill through the Legislature, only to have Governor Pataki veto it. Two years later, the association hopes for better results.

New York drivers should be concerned. Academic research indicates that anti-competition laws like the New York bill not only diminish consumers’ convenience, but also raise gasoline prices. The reason is simple. With franchisees, the refiner’s price includes a markup above the cost. The franchisee places another markup on top of that to make a profit. But when a refiner directly owns a station, there is only one markup above the wholesale cost to the consumers. It’s not hard to see why franchisees fear this cost competition from the refiners and are using legislation to protect themselves.

Other states have adopted restrictions on how oil companies market their gasoline. In 2000, a Federal Trade Commission economist, Michael Vita, writing in The Journal of Regulatory Economics, found that similar laws increase gas prices by more than two and a half cents per gallon. That number seems small, but it adds up to about $100 million in corporate welfare to the franchisees in those states.

Most drivers know the best way to get lower prices and better service at their local gas station is to have a competitor open down the road. New York lawmakers should be siding with consumers and allowing refiners to provide that competition, instead of protecting gas station owners who are unwilling or unable to give consumers what they want. The market has changed, and New York should not force consumers to accept a business model that time and the market have passed by.

Thomas Firey is managing editor of Regulation magazine, published by the Cato Institute.
Bart J. Wilson is an associate professor of economics at the Interdisciplinary Center for Economic Science at George Mason University.