Martha's Vineyard Gas Stations Cleared of Price-Fixing and Gouging
The nine gas stations on Martha's Vineyard charge prices that are thirty-five cents a gallon more than prices charged on Cape Cod, even after adjusting for the higher cost of getting gas to Martha's Vineyard. Profits from the sale of gas on the island increased substantially in the wake of Hurricanes Katrina and Rita in 2005. Four of the nine stations were sued by a class of consumers for horizontal price-fixing and under state law for price-gouging. Summary judgment for the defendants was affirmed by the 1st Circuit. White v. R.M. Packer Co., 2011 WL 565655 (February 18, 2011).
There was no direct evidence of an agreement among the station owners. Thus, the case was decided under the Twombly, Monsanto and Matsushita standard of requiring evidence that is more consistent with a conclusion of concerted action than independent, or which tends to exclude the possibility of independent action.
The court was faced with a textbook example of an oligopoly where it was in each station owner's unilateral self-interest to price in parallel with its competitors. Among the factors considered by the court were:
• The product, gasoline, is homogenous and fungible.
• Sales are made frequently and in small quantities.
• There are only a few competitors, and they publicly post their prices, so price-cutting can be easily be monitored. Rivals can easily and rapidly adjust prices to counter any price-cutting.
• Sales are inelastic. Higher prices will not appreciably diminish sales by driving consumers to competitors in nearby markets, and low prices will not increase sales by drawing consumers from nearby markets, because Martha's Vineyard is an island and there are no easily-accessible nearby markets.
• Barriers to entry are high. New entrants need approval from the Martha's Vineyard Commission, and the Commission has denied all petitions for new stations since 1997.
Given these economic factors, the court concluded, station owners would be expected to set prices at supracompetitive levels in parallel with each other. Conscious parallelism, without agreement, is lawful.
The plaintiffs cited nine plus factors in an effort to permit an inference of agreement. The court rejected that effort. Most of the plus factors merely demonstrated that the market is conducive to conscious parallelism. They also showed a motive to conspire, but the motive was equally indicative of parallel supracompetitive prices without agreement.
Two plus factors gave the court pause, though they ultimately were insufficient. First, one defendant who functioned both as a gas retailer and wholesaler made an implicit threat of reducing shipments to a retailer that cut prices. The court was not persuaded. This could have been only vertical pressure from a wholesaler to its customer rather than evidence of a horizontal agreement. The plaintiffs also pointed to apparently false testimony by a station owner about his profits, arguing that an inference could be drawn from the pretextual testimony. The court ruled that the statement, even if pretextual, did not support an inference of conspiracy, but only the amount of profits.
Consequently, the court affirmed summary judgment on the price-fixing allegation.
The price-gouging allegation raised interesting and novel questions. Prices had shot up in the wake of the two 2005 hurricanes. But because costs also increased dramatically, there was no gouging. Later, costs quickly declined back to normal ranges. Prices, however, declined slowly. Because prices did not decline as fast as costs did, profit margins expanded substantially in a market where prices were dropping. Given the volatility of the market and the lack of clear guidance from state courts, the court declined to find price-gouging where prices were declining, even though profit margins were increasing.
