A Washington Post editorial last week reached the surprising conclusion that a series of vertical and horizontal acquisitions that led to a firm owning about 40% of the gas stations in the District of Columbia was procompetitive. The editorial apparently concluded that the vertical integration efficiencies were more important than the adverse horizontal effects. The editorial cited to an FTC report on the efficiencies of vertical integration. This is a very counterintuitive conclusion for an allegedly liberal newspaper. Even more counterintuitive, however, is the fact that the editorial also reports the results of a natural experiment that concluded that prices have risen as a result of the acquisitions. The gap between prices in DC and Maryland/Virginia rose from 10 cents to 17 cents. According to the numbers in the editorial, tax increases account for about half of the gap. Does this mean that WAPO has bought on to the Aggregate Welfare Standard over the Consumer Welfare Standard? Or, is this just one more example of skillful advocacy by the gas station owner combined with poor understanding of economics by the editorial board? I vote for the latter. Do others disagree?
WAPO Concludes that Vertical Efficiencies Trump Horizontal Market Power
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I like the real estate idea. But, the real estate is a fixed cost. So, that explanation would only work if Mamo’s pricing were being constrained by fear of entry. That seems unlikely for 2 reasons. First, price is a flow and entry is a stock. He could wait and cut price if and when he observes entry occurring. Second, my guess is that there are environmental barriers to entry to building new gas stations in DC.
On his station ownership in Md and Va, that could be a relevant factor in explaining the price levels. I’m assuming that it has less relevance for the price difference because he appears to have a higher market share in DC. But, that conceivably is not true.
Are you all accepting the claim that horizontal trumps vertical here, if these alternative explanations fail?
DC’s bucking the national trend of declining real estate prices only explains higher retail prices at gas stations if Mamo’s stations were newly established on the properties and he had to buy real estate at the higher prices (the operators are renting from Mamo). If the station has been sitting on the same real estate for a decade, Mamo has an asset that’s risen in value but he doesn’t face a direct higher cost from the increase in real estate prices. (I suppose there could be indirect costs, e.g. employees living in the District demand higher wages to cover their higher cost of living, but I doubt these gas stations have been raising wages for low-skilled jobs. Unemployment rates, even in DC, are too high for that.)
Isn’t the price/cost of real estate an opportunity cost? Higher prices compensate the owner for the alternative use to which the land could be put. Indeed, a number of DC gas stations have closed in recent years and the land sold to developers for other uses. Coming soon: an apartment complex instead of the Key Bridge Exxon station.
Since Mamo owns numerous stations in Maryland and Virginia as well, how does the “natural experiment” show anything?
The gap in real estate prices between DC and Virginia/Maryland has grown by more than the 1% growth in the difference in gas prices without any concentration in real estate ownership in the DC area. The 3.5-cent price increase you describe (aside from being under the 2-to-5% price increase that is the informal threshold for demonstrating market power) is necessary, but not sufficient to demonstrate adverse horizontal effects; increased rents and opportunity costs are more than sufficient to explain the difference.