In a competitive market, one supplier never makes the same level of profit that another marketer makes. The same is true when a marketer sells his products in more than one way. Profits from each method of operation will ordinarily differ. The whole concept of equal profits or minimum profit levels is anticompetitive and alien to a free economy.

Let me turn to the open supply and brand surcharge provisions. I think these provisions will erode and eventually end brand marketing. What is at stake is the right of a supplier to have his branded products adequately represented at the station.

I anticipate that under this bill a supplier's hallmark will become only a facade, or a come-on for the unwary motorist and most of the products sold at the location will come from other sources. When this happens, customer confusion will occur and there will no longer be any basis for making an investment in brand marketing-including credit-card costs and the huge investment refiners currently have in dealer stations.

The consumer will lose because there will be no assurance of quality products and services. Ironically, the conventional dealer will be hurt badly because he, more than anyone else, relies on a well-known brand to attract customers.

If anyone doubts that this is self-interest legislation consider the provisions concerning the so-called right of first refusal. The image created by this terminology is one of fair bargaining. But this is very misleading. What it adds up to is that, if a refiner decides to sell a service station no third-party offers need be received from anyone and if the refiner disposes of that unit he is required to sell the station to the dealer at an appraised price. Regulations concerning the appraisal are to be written by the Small Business Administration. Once the property has been sold to the dealer he can turn around and sell it to someone else at a much higher price for a totally different use. Gentlemen, this is a ripoff and there just isn't any other way of expressing it.

H.R. 1362 goes to the fundamentals of how gasoline marketing will be conducted in the future. In essence, it raises far more questions and conflicts than it will ever resolve. Before considering the legislation further I believe we need to address these concerns. This concludes my prepared remarks. And as I indicated in the interest of time I have briefed down my comments somewhat from my official statement which has been submitted to the subcommittee for the record. I have appreciated the opportunity to appear before you and certainly will do my best to respond to questions. [Mr. Mulit's prepared statement follows:]

PREPARED STATEMENT OF D. L. MULIT, VICE PRESIDENT, MARKETING, CHEVRON U.S.A., ON BEHALF OF THE AMERICAN PETROLEUM INSTITUTE

My name is Don Mulit, Vice President-Marketing for Chevron U.S.A. I am testifying today on behalf of the American Petroleum Institute and appear in opposition to H.R. 1362. Within the next few days, I will also submit a statement of Chevron's views.

Frankly, gentlemen, I am greatly troubled by this bill. At a time when everyone realizes we must be more productive and more efficient, this bill would lead us in the opposite direction. The bill would prevent major refiners from operating retail stations and curtail retail competition by independent refiners. Jobbers who perform a true wholesale function could be driven out of business, brand marketing would be put in serious jeopardy and dealers would obtain preemptive rights to service station sites when the property might be better suited for other uses.

What I see is that the competitive process will be discarded in favor of protecting a select group of businessmen. This is wrong in concept because the goal of our economy should be to encourage competition for the benefit of the consumer, not provide for the welfare of particular companies or particular individuals.

What is divorcement all about? When you strip away the rhetoric, what this bill would do is preclude major refiners from operating retail stations. There is no way of sugarcoating the fact that such a law would be anticompetitive and harmful to consumers. The Antitrust Division of the U.S. Department of Justice is charged with the responsibility of protecting the competitive process. Mr. Donald Flexner, writing on behalf of the Antitrust Division last year, commented as follows on divorcement and divestiture proposals:

"** Divorcement and divestiture laws and price controls all protect one group of firms (e.g., franchised dealers) •*. The result is the prohibition of competitive behavior induced by valid market incentives, a result which is detrimental to

consumers.

"For example, if today's motorists prefer lower gasoline prices at gas-and-go stations to higher prices at conventional outlets and if the former are most efficiently operated by refiners or jobbers, then forcing divorcement or divestiture would harm consumers (Letter dated June 20, 1980, pp. 15-16).

In January 1981, the Office of Competition published its final Report on "The State of Competition in Gasoline Marketing". Congress itself commissioned this Report because of the many questions raised during the course of the debate on the Petroleum Marketing Practices Act. The Report is comprehensive and contains many significant findings. In the Recommendations section, the Report reaches the conclusion that divorcement of company-operated stations is not in the public inter

est:

"Essentially, such legislation creates a barrier to entry, at least for some firms. ・・・ The presence of entry barriers is the most significant structural detriment to the competitive process. The establishment of such barriers, without an overriding social interest, is at best neutral regarding consumer welfare and most likely is anti-consumer in effect

The principal justification for H.R. 1362 is the argument that refiners have been charging predatory prices at company-operated stations to keep dealers from competing and thus force them out of business. This argument, although repeated many times, is unsound. Let me outline the reasons why this is so.

First, most of the refiners affected by this bill rely primarily on dealers for sales at the retail level. It would make no sense for these refiners to attempt to drive their dealers out of business.

Second, dealers often quote statistics that anywhere from 50,000 to 100,000 dealers have gone out of business during the period from 1972 to 1978. A comparison is then made to company-operated stations which have shown an increase of about 2800 outlets during the same period. Dealers point out further that most companyoperated stations pump greater volumes than dealer stations. Even when all these facts are digested, it simply defies common sense to suggest that 2800 stations could take over the work of 100,000 stations. It makes even less sense when one considers that the eighteen largest refiners-including the sixteen refiners targeted for divorcement under this bill-showed an increase of only 248 company-operated units during the period from 1972 to 1978.

Third, the Report prepared by the Office of Competition shows that there is no industry trend toward company-operated stations. Instead, different refiners have pursued different strategies. This is what one would expect in a competitive market. Fourth, most of the dealer closures that have occurred were caused by DOE regulations and changed marketing conditions, in particular the sale of gasoline through high-volume low-cost outlets.

Fifth, in recent years, the initiative in the marketplace has been with private brand marketers and cooperatives who have made tremendous gains in market share at the expense of conventional dealers and the refiners who supply those dealers. One of the primary weapons used has been price. Dealer revenues have been further reduced by competition from consumer-accepted specialty shops such as those providing fast-oil changes, muffler service and brakework.

Sixth, there are adequate laws to deal with any isolated case of predatory pricing that is shown to exist on the basis of hard facts which have stood the test of cross examination.

Despite the many problems with the predatory pricing argument, it has become an article of faith with dealer organizations. Dealer strategy in the state legislatures has been to convince a few senators and representatives on the predatory pricing issue. Once this has been done, the dealer organizations offer several different bills designed to restrict competition or to grant a special advantage to their members.

The dealer organizations have not been too successful at the state house. But, nonetheless, this same strategy is being pursued here. H.R. 1362 is really a whole group of different bills all rolled into one and each part of the bill is special interest legislation.

The 1981 version of this legislative package retains the restrictions on company stations operated by small or independent refiners. Growth at these stations would be held back to the sales made in 1978 plus a fixed percentage of the additional amount of gasoline manufactured by the refiner. Sales at company stations could also be based on purchases of gasoline from others.

Independent refiners typically have high volume efficient stations and offer gasoline at low prices on the street. I submit that the objective of the bill is not to help the economy but simply to protect the conventional dealer from competition. To me, this is wrong in principle. Certainly, the consumer does not benefit. I say this even though the conventional dealer served by refiners such as Chevron might reap a short-term benefit from the reduced competition brought about by the bill.

The so-called rack pricing provisions are different from the 1980 version of the bill. They would require every supplier-whether jobber or refiner-to sell gasoline at the same price, at every point of transfer, to independent wholesale purchasers. The term "independent wholesale purchaser" is defined to include both jobbers and retail dealers. This is important because what the bill means is that both jobbers and dealers are to buy at the very same base price.

The rack pricing provisions are in direct conflict with the common practice in almost every industry in the country. Wholesalers typically pay less than retailers. There is usually a good reason for this. In the gasoline industry, a jobber who performs a true wholesale function provides many valuable services. These include transportation, market coverage, billing, extending credit and handling customers complaints. In areas distant from major supply points-the rural communities of America-jobbers are often the only wholesalers who serve dealers, farmers and other small businessmen. What this bill apparently says is that a jobber who provides a true wholesale function is not needed in the marketplace.

The problem is not solved by the provisions of the bill which state that a refiner can charge a lower price to compensate him for a lower cost of "manufacture, sale or delivery." Notice that the bill is drafted in terms of cost savings to the refiner; the actual expenses incurred by the jobber are not considered and they may or may not be covered by cost savings realized by the refiner. Moreover, the bill says nothing at all about jobber profits. Evidently, the jobber is to provide his services free of charge. If my reading of the bill is correct, this means that a jobber performing a true wholesale function will be forced out of business because he cannot be expected to do his job for nothing and still survive.

The dual distribution provisions of the bill would restrict competition even further. These provisions say that any supplier-jobber or refiner-must make the "same profits", or at least as much profit, in selling gasoline from a companyoperated station that he makes in selling to dealers. In a competitive market, one supplier never makes the same level of profit that another marketer makes. The same is true when a marketer sells his products in more than one way: Profits from each method of operation will ordinarily differ. The whole concept of equal profits or minimum profit levels is anticompetitive and alien to a free economy.

The dual distribution provisions are no doubt intended as another link in the chain to protect dealers. First, major refiners would be precluded from competing in the retail market by the divorcement provisions. Then, the dual distribution provisions would restrict retail competition by independent refiners and jobbers. It seems to me that if a jobber or independent refiner is able to operate more efficiently at the retail level than a conventional dealer he should be able to pass this efficiency along to consumers in the form of lower street prices. This is what would happen in a normal competitive market.

Let me turn to the open supply and brand surcharge provisions. I think these provisions will erode and ultimately end brand marketing. In analyzing this issue, let me first put aside one aspect of the matter. For years, it has been the law that a dealer can buy competing products from other sources. There is no debate about that. What is at stake is the right of a supplier to have his branded products adequately represented at the station. I anticipate that under this bill a supplier's hallmark will become only a facade, or a come-on for the unwary motorist and most of the products sold at the location will come from other sources. When this happens, consumer confusion will occur and there will no longer be any basis for making an investment in brand marketing-including credit card costs and the huge investment refiners currently have in dealer locations.

The consumer will lose because there will be no assurance of quality products and services. Ironically, the conventional dealer will be hurt badly because he more than anyone else relies on a well-known brand to attract customers.

If anyone doubts that this is self-interest legislation, consider the provisions concerning the so-called "right of first refusal." The image created by this terminology is one of fair bargaining. But this is very misleading. What it all adds up to is that, if a refiner decides to sell a service station, no third party offers need be received from anyone and if the refiner disposes of the unit he is required to sell the station to the dealer at an appraised price. Regulations concerning the appraisal are to be written by the Small Business Administration. Once the property has been sold to the dealer, he can turn around and sell it to someone else at a much higher price for a totally different use. Gentlemen, this is a rip-off—there is no other word for it.

H.R. 1362 goes to the fundamentals of how gasoline marketing will be conducted in the future. Before considering this legislation further, I think we should ask ourselves some very basic questions:

1. Will the effect of eliminating one class of trade from the retail market be to raise or lower prices? Will the consumer benefit?

2. The antitrust laws are designed to protect the competitive process rather than individual competitors. Should new laws be enacted to overturn this approach and guarantee the survival of individual businesses?

3. Do jobbers who perform a true wholesale function provide a useful service in the economy, or should legislation be passed to eliminate some jobbers from the marketplace?

4. Is brandname marketing with its quality control and associated services, such as credit cards, desired by the consumer? Is this form of marketing beneficial to the conventional dealer? Should laws be enacted to encourage or discourage brand marketing?

5. If refiners decide to sell service station properties, should they be required to sell them at less than fair market value to dealers even though the property would command a much higher price when used by some other business?

6. Finally, is it good or bad policy to enact new laws and regulations before the economy has had a chance to sort out the innumerable problems caused by years of DOE controls?

The answers to these questions are in your hands. This concludes my prepared remarks. I have appreciated very much the opportunity to appear before you and will do my best to respond to questions. Thank you.

Mr. BEDELL. Thank you. Mr. Krider, do you want to add to the testimony?

Mr. KRIDER. Yes, sir.

Mr. BEDELL. You may proceed.

TESTIMONY OF CHARLES E. KRIDER, ASSOCIATE PROFESSOR OF BUSINESS ADMINISTRATION, UNIVERSITY OF KANSAS, LAWRENCE, KANS., REPRESENTING THE AMERICAN PETROLEUM INSTITUTE

Mr. KRIDER. My name is Charles E. Krider. I am an associate professor and associate dean with the School of Business, University of Kansas. I am an economist and have a Ph. D. degree from the University of Chicago. I have written a professional article on divestiture legislation and have twice testified before the State legislature in Kansas on similar legislation.

The main rationale for H.R. 1362 is to protect independent dealers from perceived unfair competition on the part of integrated refiners who operate their own service stations. In recent years many independent dealers have gone out of business and there is concern that the trend will continue if integrated refiners are able to replace independent dealers with company-operated stations.

The legislation is designed to promote competition by insuring independent dealers remain viable competitors in the marketplace.

Where the intent of H.R. 1362 is to promote competition in the retailing of gasoline the actual effects would be considerably different. The effects of the legislation would be:

One: To reduce competition in the retailing of gasoline.

Two: To raise gasoline prices for consumers.

Three: To redistribute income from oil companies and consumers in favor of independent dealers, and

Four: Cause a less efficient allocation of resources for society in general.

In addition, this legislation would further entangle the oil industry in new regulations at a time when the Federal Government is making a determined effort to reduce or even eliminate unnecessary regulations in the private sector. My overall conclusion is that this legislation is unwise and should not be enacted by Congress. The major premise underlying this legislation is that the difficulties encountered by independent dealers have been caused by unfair competition on the part of integrated refiners. I believe this view is incorrect. The independent dealers' economic difficulties have been caused by changes in the marketplace which reflect both changes in the control over oil supplies by OPEC and by rapidly escalating prices for gasoline. These events have led to two major changes.

First: The major integrated oil companies have a stronger incentive to increase the profitability of the marketing of gasoline. This they have attempted to do by closing unprofitable stations and consolidating their sales efforts.

Second: Over the past 8 to 10 years we have seen the rise of new ways of marketing gasoline which have emphasized price competition rather than the provision of additional services. Price conscious consumers have increasingly favored low price gasoline to the higher price gasoline offered by independent dealers. These changes, in my judgment, are the result of good-faith competition and changes in consumer preferences and do not in any way call for a legislative response by Congress. There is no evidence that major refiners have achieved market power in gasoline retailing, or that they have been using such powers to harm independent deal

ers.

In my view, the major effect of H.R. 1362 would be to protect existing independent dealers from changes in the marketplace which are adversely affecting their economic interest. The basic issue raised by the bill is the continuing one of economic efficiency versus equity for a particular set of producers.

The free market in the absence of Government intervention will produce a distribution system in gasoline which is the most efficient, given consumer preferences. This would be the case so long as there is no monopoly power enjoyed by any company in the retailing of gasoline, and so long as entry into retailing is not restricted. There is currently no evidence of monopoly and no barriers to entry in this industry and, thus, there is every reason to believe that competition will prevail.

On the other hand, there is also a strong likelihood that some independent dealers will suffer economic loss if the industry is restructured in response to the changed economics of the oil industry and change in consumer preferences. This is the equity consid

79-549 0-81--8