Gasoline price analysis finds super premium price paid for regular gas at some Vineyard pumps
During 60 months between 2003 and 2008, Islanders paid a handsome premium, averaging 56 cents for regular gasoline, at four Island fuel retailers. That's compared with the cost of regular gas sold at stations on Cape Cod. Only 21 of the 56 cents, or 38 percent, can be accounted for by the high cost of doing business on the Vineyard, according to data assembled and analyzed by Frank M. Gollop, an economics professor at Boston College.
Tisbury Shell is among the Island gas stations cited in a lawsuit heard last week. Photo by Susan Safford
The plaintiffs in a civil suit filed first in Dukes County Superior Court in 2007, charging several Vineyard gasoline retailers with fixing fuel prices, hired Mr. Gollop as an expert witness on their behalf. He concluded, and reported in a March 2009 affidavit, that on average, 62 percent of the price difference between Vineyard gasoline prices and prices on the Cape is not accounted for or justified by higher business costs for the Vineyard retailers. The data analyzed by Mr. Gollop comes from state and federal sources that keep track of local and regional gasoline prices as well as cost of living data, and from documents submitted by defendants during discovery in preparation for trial.
Both the plaintiff's original August 2007 complaint and Frank M. Gollop's affidavit are available here.
Click here for a Comparison of Average Monthly Pump Prices on Cape Cod with Pump Prices at Defendants' Gas Stations
Click here for Volume of Gasoline Sold at Defendants' Gas Stations
The average unjustified premium, according to Mr. Gollop, was between 27 and 38 cents a gallon, or about 12 percent of the cost of a gallon of gasoline priced to the consumer at $2.77.
Consumer complaints about the high cost of gasoline on the Vineyard have been common and frequent for decades. Motorists complain that perhaps a margin of some sort is justified by the cost of transportation to the Island for gasoline and other fuels, but that the actual margin, comparing Island fuel prices to prices off-Island but nearby, is extraordinarily high. Mr. Gollop's data defines the margin over the period he studied on behalf of the plaintiffs in the 2007 lawsuit, now in federal court.
Legal action began in 2007
In early August 2007, a pair of experienced trial lawyers, one of whom is a seasonal Edgartown resident, filed a class-action lawsuit in Dukes County Superior Court against two gas wholesalers and three retailers. In their 27-page complaint, Michael Roitman and Stephen Schultz, lawyers with the Boston firm of Engel & Schultz, said that the defendants unfairly fixed the price of gasoline, gouged consumers who purchased gasoline, and engaged in unfair price gouging in 2005 after hurricanes Katrina and Rita.
The defendants in the case are R.M. Packer Company, Drake Petroleum Company, Depot Corner gas station, and Francis J. Paciello, owner of Edgartown Mobil and Depot Corner. The four gas stations whose data was analyzed by Mr. Gollop are Tisbury Extra Mart, owned by Drake Petroleum; Tisbury Shell, owned by the Packer Company; and Depot Corner Service Station and Edgartown Mobil, both owned by Mr. Paciello or by Mr. Paciello and his wife. Three gasoline retailers on Cape Cod were used by Mr. Gollop for comparison, one in Falmouth, one in Hyannis, and one in Provincetown.
There are nine gasoline dealers on the Vineyard. DeBettencourt Mobil and Jim's Fuel Station, both in Oak Bluffs; Airport Fuel Services in Edgartown; Up-Island Automotive in West Tisbury; and Menemsha Texaco in Chilmark are not defendants in the lawsuit.
The plaintiffs are William White of Oak Bluffs, a former business partner in Tisbury Fuel Services; R. Carleen Cordwell of Oak Bluffs; Ken Bailey of West Tisbury; Nadine Monaco of Oak Bluffs; Karen Lodge of Edgartown; Joan Kriegstein of Oak Bluffs; and Hilary S. Schultz of Edgartown, wife of Mr. Schultz
Mr. Schultz is not merely an offended visiting gasoline purchaser. He told The Times in August 2007 that he became familiar with the dynamics of the sale of gasoline here while advising Tisbury Fuel Service. In 2002, that company tried unsuccessfully to get a permit from the Martha's Vineyard Commission to build a new gas station on State Road in Vineyard Haven. Mr. Schultz said that what he learned from that case and a subsequent economic analysis led him to the conclusion that there were enough facts to move forward with a class action suit. Mr. Schultz said that had he looked at the information and found nothing "that would have been the end of it." An accompanying article describes the Tisbury Fuel Service proposal.
When the suit was filed, a survey of mainland and Vineyard gas stations revealed that the cost of a gallon of gasoline varied at times by more than 75 cents comparing Vineyard and mainland service stations. Regular gasoline here cost approximately $3.50 per gallon then. It was as low as $2.79 at nearby off-Island locations. According to AAA (www.aaa.com), the state average then for a gallon of regular gasoline in Massachusetts was $2.99 for the Barnstable-Yarmouth area, and $2.81 for Boston.
Now, in federal court
The lawsuit is now before the federal district court for Massachusetts. The defendants have moved for summary judgment in the case, and in a hearing before retired federal Judge Rya Zoebel, the plaintiffs opposed the motion. For the purposes of the argument over the motion for summary, the defendants have assumed that Mr. Gollop's data, but not his conclusions, are accurate, according to an attorney for one of the defendants. That's because, the defendants argue, even if one accepts all the plaintiff's testimony at face value, their case still fails to support the claims they've made, another attorney for the defendants explains.
There have been no court judgments on the merits of the plaintiff's claims of price fixing and gouging by the gasoline retailers, and Mr. Gollop's affidavit, setting out the data he used in his analysis of prices and his conclusions based on that data, does not extend to explicit confirmation of any of the charges, though he says his analysis finds the pricing activities of the defendants are in some cases consistent with cooperative pricing and amount to a "prima facie" case for price gouging. According to Mr. Schultz, the defendants hired their own expert to analyze gas sales data but have not filed a statement or affidavit from their expert with the court.
Supra-competitive pricing
Still, without deciding the case for the plaintiffs, Mr. Gollop writes, "I have examined the defendants' pricing data and concluded that gasoline at the defendants' stations was sold at supra-competitive prices. During the period August 1, 2003 to July 31, 2008, average daily prices for regular gasoline at the defendants' service stations exceeded regular gasoline prices at stations on the Cape by 56 cents per gallon. Furthermore, my analysis leads me to conclude that additional costs associated with transporting gasoline, wage premiums paid to employees, higher costs of living, and other costs noted by defendants cannot justify the higher prices charged by the defendants' stations compared to the prices charged at Cape Cod service stations."
The defendants counter Mr. Gollop's conclusions, arguing that comparing Vineyard prices to Cape Cod prices for regular gasoline is unpersuasive, because although the two markets are near one another, they are not the same market. That means that the Cape market does not play a competitive part in the pricing of gasoline on the Vineyard. "That is an unassailable economic and oceanographic fact," the defendants claim.
Mr. Gollop, an economics professor, suggests ways in which the data support, and at times do not support, the price fixing and gouging charges. He writes, "I have examined the defendants' daily price and cost data underlying the analysis described in the preceding section with the objective of determining whether the data, standing alone from any circumstantial evidence indicating cooperative behavior, are consistent with cooperative behavior and/or are inconsistent with non-cooperative behavior. The results of my investigation are mixed. There are instances that, apart from circumstantial evidence and the 'plus factors' described in the following section, are not inconsistent with either cooperative or non-cooperative behavior. However, there are instances in the data time series when cost trends and coincident defendant pricing patterns are inconsistent with independent, non-cooperative behavior."
The professor's resume
Frank M. Gollop is a professor of economics at Boston College. He received B.A. degrees in economics (1969) and philosophy (1970) from the University of Santa Clara and a Ph.D. in economics from Harvard University (1974). He teaches both graduate and undergraduate courses in industrial organization and antitrust economics. He also teaches undergraduate courses in microeconomic theory and environmental economics. He served as the director of graduate studies from September 1999 through December 2007. More than 35 of his research papers have appeared in academic journals and volumes; he has co-authored a book on U.S. productivity and has served as a senior economic consultant to the U.S. government in its redesign of the U.S. industrial classification structure. His list of publications, consulting work, and other occasions when he has testified as an expert witness consumes several pages in three appendices to his affidavit.
Higher than expected
Whether the defendant retailers fixed prices, cooperated in setting prices, or set out together to gouge consumers has not been adjudicated or even argued before the federal judge, but Mr. Gallop is unequivocal on one point - Vineyard prices were higher than competitive retailing practices would lead an analyst to expect.
"The unexplained excess in price differences is positive for every defendant station in every one of the 60 months examined," he writes. "The unexplained differences are persistent over time and across stations and are considerable in magnitude. The full 60-month per-gallon averages of unexplained price differences are 38, 31, 38, and 36 cents for Tisbury Shell, XtraMart Citgo, Edgartown Mobil, and Depot Corner Mobil, respectively. The average unexplained differences over all four stations run from a low of 27 cents per gallon in the last five months of 2003 to a high of 38 cents per gallon in the first half of 2007 and the first seven months of 2008. These unexplained price differences are considerable not only in absolute terms but also in relative terms. Average daily prices for regular gasoline at the defendants' gasoline stations over the 60-month period exceeded regular gasoline prices at stations on the Cape by 56 cents per gallon ... The corresponding cost difference across all stations averaged 21 cents. This represents only 38% of the observed price difference leaving 62% unexplained. Interpreting retail gasoline prices on Cape Cod as representative of prices set in competitive markets and finding that such a substantial portion (35 cents or 62%) of price differences at the four defendant stations on Martha's Vineyard cannot be explained by cost differences leads me to conclude that gasoline at the defendants' stations was sold at supra-competitive prices during at least the August 2003 through July 2008 period."
Defendant retailers' prices rose when they ought to have fallen
Mr. Gollop writes that retail gasoline prices between May and September 2004 defied expected competitive retail practices. "Basic economic theory predicts that, in the face of declining costs, non-cooperating competitors' prices would decline. This is especially the predicted outcome for rivals selling perfectly homogeneous products (i.e., indistinguishable, perfect substitutes). This is not the observed pattern during the May 1 -September 15, 2004 period. Per gallon costs to the defendants decline, but defendant prices rise and do so in parallel fashion.
"The pricing pattern in May 2004, standing alone, is not inconsistent with non-cooperative behavior. Between May 1 and May 25, Tisbury Shell's cost-of-goods sold (the sum of the wholesale rack price, taxes, and freight) increased by 30 cents per gallon.
"Over the same 25 days, the station's per gallon pump price for regular increased by 27 cents. During the same May period, XtraMart Citgo's cost-of-goods sold increased by 28 cents per gallon and its pump price for regular increased by 30 cents per gallon. Between May 1 and May 25, the cost-of-goods sold at the two Edgartown stations increased by 26 cents per gallon. Prices for regular increased by 29 cents per gallon at each station. Putting aside the supra-competitive margins earned by the defendants, these May trends in prices and costs are not inconsistent with non-cooperative behavior.
"The patterns change significantly, however, beginning late May 2004. Tisbury Shell's cost per gallon between May 25 and September 15 had a clear and continuous downward trend, falling by 24 cents per gallon over the full period. A similar pattern emerges for both Drake's XtraMart Citgo where per gallon costs declined by 22 cents, and for both Edgartown Mobil and Depot Corner Mobil where costs per gallon fell by 22 and 23 cents, respectively.
"The significant and rapid decline in costs experienced by stations selling homogeneous (in this case identical) products (regular grade gasoline) and thereby facing highly if not perfectly elastic inter-station demand is the economic basis for the expectation that price competition would break out. However, not only did prices not fall, they increased at each station and by near identical amounts. Per gallon prices at Tisbury Shell and XtraMart Citgo each increased by 10 cents per gallon. Prices at Edgartown Mobil and Depot Corner Mobil increased by 8 and 7 cents per gallon, respectively. The per gallon gross margins increased from 47 to 81 cents for Packer's Tisbury Shell, from 37 to 69 cents for Drake's XtraMart Citgo, from 42 to 73 cents for Edgartown Mobil, and from 38 to 68 cents for Depot Corner Mobil.
"This is not the outcome expected from a model of non-cooperative behavior. In a homogeneous product, highly elastic demand environment, it makes no business sense to increase price as your costs decline, especially when you have reason to believe your rival's costs have declined as well, unless you know your rivals will follow. Nonetheless, Tisbury Shell led six price increases during the May 25-September 15, 2004 period ... Similarly, it makes no business sense for a rival to follow a price increase. At a minimum, when a rival increased its pump price, its competitors would have been expected not to follow but to passively enjoy the fruit of additional sales volume. Following price increases in the demand and cost environment on Martha's Vineyard in this three-month period was not the expected non-cooperative business strategy."
Price gouging, post-Katrina
Mr. Gollop concludes that regular gasoline pricing by the four defendant retailers shortly after hurricane Katrina struck the Gulf Coast make out a "prima facie" case for price gouging. "During the emergency period following Hurricanes Katrina and Rita," he writes, "(a) there were significant disparities between prices charged at the defendants' stations and prices charged in the pre-emergency period, (b) there were significant disparities between prices charged at the defendants' stations and prices charged by other stations in the same trade area, and (c) cost differences cannot explain the observed price differences."
The defendants argue that Mr. Gollop's analysis depends on differences in the gross margin realized by the defendant stations, comparing pre-Katrina and post-Katrina prices, which the standard for price gouging requires an unjustified differential in the retail price, not the margin. They also argue that the difference between pre-emergency and emergency period pricing must be on the order of two to six times, whereas among the defendants the differential is never greater than 19 percent. And, the defense argues that to judge price gouging, one must compare the price immediately before the emergency period, that is in the day or two before the defined emergency period, and that Mr. Gallop uses a greater period of time pre-emergency as the basis for the comparison on which he bases his conclusion.
Mr. Gallop explains that, according to Federal Trade Commission (FTC) analysis, a gross margin increase of more than five cents a gallon could not be explained by increased costs. He argues that his analysis of price increases during the post-Katrina period at the four defendant Vineyard retailers shows "that gross margins at each station in each month September through November 2005 exceeded each respective station's August gross margin by more than the five-cent threshold established by the FTC. Using the language of the Massachusetts Price Gouging Law, it seems reasonable to conclude that the 'price disparity is not substantially attributable to increased prices charged by the petroleum-related business suppliers or increased costs due to an abnormal market disruption.'"
