Ronald N. Johnson

Search Costs, Lags and Prices at the Pump

Evidence is mounting that long lags and asymmetric price responses to changes in wholesale prices are characteristic of many retail markets. Although long lags are often attributed to search costs, little empirical evidence exists to support this claim. The analysis offered in this paper compares price responses in gasoline and diesel markets in 15 U.S. cities. Search costs vary across these two markets, and the evidence indicates a much faster response in the diesel market where search costs are lower. Asymmetric responses, where prices rise faster than they fall, are also evident in the data. While asymmetric responses have been attributed to oligopolistic behavior, the arguments presented in this paper point to search theory as an alternative explanation.

Antitrust and Sales-Below-Cost Laws: The Case of Retail Gasoline

Numerous states have sales-below-cost (SBC) laws, often directed at specific products such as gasoline. Potential violations of state SBC laws occur when prices are less than the sellers cost of doing business, or some proxy thereof. The most commonly stated purpose of these laws is to protect small independent firms from predation by larger firms. This study offers empirical evidence on the impact of SBC laws on the retail gasoline market. The result indicate that SBC laws directed specifically at the retail gasoline market have resulted in higher retail margins.

Information distortion and competitive remedies in government transfer programs: The case of ethanol

Abstract. This paper reconsiders the analogy between competitive markets and the political process that is central to much of the literature on the efficiency of government transfers. The key problem is that property rights in politics are much less well defined than they are in competitive markets. As the paper outlines, obtaining accurate information about the benefits and costs of transfers is likely to be much more difficult than envisioned in the literature. Investigators, as well as general voters, often must rely on the government and competing parties for provision of information about underlying program parameters and functional relationships. We argue that politicians and the affected interest groups have incentives to limit and distort the information that is released to voters and that political competition is unlikely to be an effective counter. In developing the argument, a theoretical framework is provided and applied in a case study of the ethanol transfer. The documented efforts to disguise the actual costs and benefits of the program are important for gaining a broader understanding of the functioning and costs of government transfers in the economy.

The Impact of Self-Service Bans in the Retail Gasoline Market

In 1968, 23 states barred the self-service sale of gasoline. By 1992, close to 80 of all gasoline sales nationwide were marketed through self-service, and only New Jersey and Oregon continued to ban self-service sales. This paper examines the rise of self-service gasoline and its impact on price and the structure of the retail gasoline sector. Using predicted values for self-service sales for New Jersey and Oregon, the findings indicate that the bans in those two states have affected the retail market structure by slowing the penetration of convenience store tie-ins, and have resulted in retail margins that are approximately 0.03 to 0.05 per gallon higher. However, the bans have provided little protection to smaller outlets, which was a stated objective of their proponents.

Contractual stipulations, resource use, and interest groups: Implications from federal grazing contracts☆

Abstract The process of determining grazing fee levels for use of public lands has been highly controversial. Moreover, it has often been asserted that increases in grazing fees on federal lands will have no effect on stocking. Yet, environmental groups have advocated higher fees. In this paper we show that stocking does respond to changes in the grazing fee and the debate between environmental groups and livestock owners is not simply a question of distributional equity. Fees affect resource allocation and have become a focal point for both interest groups. The importance of the contractual stipulations between ranchers and the federal government to that outcome is demonstrated.

Commercial wild species rearing: Competing groups and regulation

Abstract Unlike species in the wild, animals reared in captivity are regarded as property. The development of captive rearing enterprises that compete with the wild harvest can establish a pressure group with a vested interest in regulating harvesting from the wild. Despite the potential for aggregate gains, regulations have often worked against the development of captive rearing enterprises. This paper examines why regulations may not favor the captive rearing sector and why that sector has little incentive to impose regulations that could reduce the inefficiencies associated with harvesting from the wild.

Vertical mergers and selective price cutting

A number of reasons have been offered for why businesses vertically merge. These include the facilitation of collusion and selective price cutting to circumvent rigid oligopolistic prices in upstream markets. This article presents a test of the second motive using data from the cement-concrete industries. Mergers in those industries are investigated because they were a controversial series of vertical mergers. The selective price cutting hypothesis is tested using ARIMA models with intervention components. Our results do not support that hypothesis.

Economic Trade-Offs and the North Carolina Shrimp Fishery: Comment

In a recent Journal article, Waters, Easley, and Danielson (WED) offered calculations purporting to show the economic trade-offs of fishery regulation designed to reduce the discard of juvenile pink shrimp caught incidentally by fishermen harvesting brown shrimp. Reducing the cull of juvenile pink shrimp by seasonal closure or prohibiting night shrimping implies that the mature pink shrimp catch will be augmented later in the season. WED argue that such regulations would reduce the brown shrimp harvest. Consequently, an economic tradeoff arises. Although WED conclude that the incidental catch and discard problem are not severe enough at this time to warrant new regulations to protect juvenile pink shrimp, they have ignored both the common property aspects of the fishery and the response of fishing effort to the potential increase in yields. Following the model of Gordon and Scott (1955), assume that the total cost of fishing is a linear function of fishing effort. Further assume, as do WED (p. 126), that the demand for shrimp harvested in North Carolina waters is perfectly elastic. For shrimp, the revenue/yield curve can be assumed concave in the relevant range, with a positive first derivative. Under common property access, the Gordon and Scott model predicts that entry will take place until all rents are dissipated; that is, average revenue per unit of fishing effort will equal average cost. If the yield of pink shrimp were increased by allowing more juveniles to reach maturity, the revenue/yield function would shift upward and effort would increase. Once again, total revenue would equal total costs. The economic benefits from enhancement of the pink shrimp fishery via regulation are, in this case, equal to zero. However, in the WED formulation the calculated gross benefits to the pink shrimp fishery are positive. The reason for this is that they treated effort as exogenous. WEDs equation (9) (p. 126) assumes no adjustment of fishing effort as yield increases. They essentially ignored the common property aspects of the fishery by not incorporating an effort response function into their model. In the real world, returns to fishery enhancement may not be zero even in an open access fishery. First, if demand is not perfectly elastic, there will be gains in consumer surplus from a larger net catch. Second, fishermen are not identical, and their supply to the industry is not infinitely elastic. Accordingly, rents may not be totally dissipated in an open-access fishery except for the marginal entrant. Third, there are likely to be lags in response to an enhancement project. Thus, benefits of enhancement may be positive over the short run even when the long-run effort supply function is perfectly elastic. Much recent discussion of fishery regulation concerns the response of effort to changes in property rights and regulations (Scott 1979 and Wilen). Limited entry, gear restrictions, and seasonal closures, for example, affect the amount of effort supplied since each fisherman will adjust at the relevant margins. To ignore supply response by individual fishermen in an open-access fishery, or even a regulated one, implies either that the harvesting costs do not matter and/or that effort is somehow exogenously determined. Estimates of economic trade-offs that ignore fishing effort changes due to regulation are primarily biological measures. They are likely to overstate the economic benefits.