"Price Gouging," the Antitrust Laws, and Vertical Integration in the Petroleum Industry: How They Are Related

“Price Gouging,” the Antitrust Laws, and
Vertical Integration in the Petroleum Industry:
How They Are Related
Janice E. Rubin
Legislative Attorney
American Law Division
Summary
The antitrust laws and statutes to prohibit “price gouging” each aim to serve the
same end — realization of lower or reasonable prices for consumers, but they do so from
different perspectives. Antitrust law operates on the premise that vigorous and
unfettered marketplace competition will yield the most advantageous result for
consumers. Statutes concerning “price gouging,” by contrast, are direct consumer-
protection measures, generally making no reference to competition. Statutes to limit the
extent of vertical integration in the petroleum industry (common ownership of different
stages of production, marketing, or retailing) have been proposed at the federal level,
and exist at the state level, but contrary to the expectations of proponents, the price of
gasoline in those states that prohibit refiners from operating retail gasoline stations is
generally higher than in states without similar prohibitions. Although the potential for
anticompetitive actions by vertically integrated entities has been noted by, among others,
the Federal Trade Commission (FTC), it also states in a 2005 report, that “the vast
majority of the FTC’s investigations [into the petroleum industry] have revealed market
factors to be the primary drivers of both price increases and price spikes.” The Energy
Policy Act of 2005 required an FTC investigation “to determine if the price of gasoline
is being artificially manipulated by reducing refinery capacity or by any other form of
market manipulation or price-gouging practices”; the 110^th Congress enacted the Energy
Independence and Security Act of 2007 with a provision authorizing the FTC to
promulgate a rule concerning market manipulation. Also in the 110^th Congress, the
House has passed H.R. 1252, which would define “price gouging” as “excessively
unconscionable” or “unreasonably” increased prices during Presidentially declared
“energy emergencies,” incorporates the FTC Act, directs FTC enforcement, and
provides for civil and criminal penalties (several, similar measures are pending in the
Senate Commerce Committee); and H.R. 6074 to make “oil-producing and exporting
cartels illegal” under U.S. antitrust laws. This report, which may be updated to further
reflect congressional action, attempts to provide the antitrust context for the prohibited
practices, notes prior congressional action concerning vertical divestiture in the
petroleum industry, and provides information on the state “divorcement” statutes.

The primary purpose of the antitrust laws is to foster free and unfettered competition
on the assumption that such competition will produce the best result for consumers — the
lowest and most reasonable prices. To that end, section 1 of the Sherman Act (15 U.S.C.
§ 1) prohibits contracts or conspiracies in restraint of trade.¹ That is, section 1 forbids two
or more persons or entities from, e.g., agreeing to limit output or set prices. Section 2 of
the Sherman Act (15 U.S.C. § 2) prohibits monopolization or attempted monopolization,
either of which can be violated by individual persons or entities, although the provision
also prohibits agreements to monopolize; section 2 is frequently used in conjunction with
a charge pursuant to the so-called anti-merger provision of the Clayton Act (section 7 of
the Clayton Act, 15 U.S.C. § 18). That having been said, it is important to emphasize that
the prohibition against monopolization is not violated by the mere possession of
monopoly power or some predetermined share of the market. U.S. antitrust law does not
include a “no-fault” monopoly statute, and there is no “bright line” that, once crossed,
exposes an otherwise lawful monopolist to antitrust sanctions.²
In addition, the courts have acknowledged the right of an individual businessman to
do business, or not to do business, with whomever he likes, and on whatever conditions
he deems acceptable:
In the absence of any purpose to create or maintain a monopoly, the [Sherman] act
does not restrict the long recognized right of trader or manufacturer engaged in an
entirely private business, freely to exercise his own independent discretion as to
parties with whom he will deal; and, of course, he may announce in advance the³
circumstances under which he will refuse to sell.
Finally, the role of vertical integration — common ownership of different stages of
production, marketing, or retailing — is ambiguous; vertical integration, without more,
does not, at least at the federal level, automatically lead to a conclusion of antitrust law
violation, although, to be sure, there may be some anticompetitive effects. Just as there
may be lawful monopoly power that, if misused by the monopolist to extend or maintain
his monopoly, becomes unlawful as a violation of the antitrust law prohibition against
monopolization in restraint of trade, there is no general prohibition in U.S. law on the⁴
ownership of all stages of production by a single firm, but lawful vertical integration may

¹ Section 3 of the Sherman Act (15 U.S.C. § 3) is virtually identical to section 1 except that it
specifically makes the prohibitions contained in section 1 applicable to the District of Columbia.
² In U.S. v. Grinnell, 384 U.S. 563 (1966), the Court noted that “[t]he offense of monopoly under
s[ection] 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the
relevant market and (2) the willful acquisition or maintenance of that power as distinguished
from growth or development as a consequence of a superior product, business acumen, or historic
accident.” At 570-71 (emphasis added). See also, CRS Report RS20241, Monopoly and
Monopolization — Fundamental But Separate Concepts in U.S. Antitrust Law; and CRS Report
RL33708, The Distinction Between Monopoly and Monopolization in Antitrust Law, both by
Janice E. Rubin.
³ United States v. Colgate & Co., 250 U.S. 300, 307 (1919) (emphasis added).
⁴ “... combinations, such as mergers, joint ventures, and various vertical agreements, hold the
promise of increasing a firm’s efficiency and enabling it to compete more effectively.
Accordingly, such combinations are judged under a rule of reason, an inquiry into market power
(continued...)

give rise to anticompetitive practices that would be challengeable as violations of antitrust
prohibitions.⁵ In the petroleum industry, for example, any single entity may engage in any
or all of the stages: exploration or production of crude oil, transportation of crude oil to
refineries, operation of crude oil refiner[ies], transportation or storage of refined product,
distribution and marketing at the local wholesale or retail level, or retail sales. Vertical
integration does not, without more, therefore, violate the prohibition against
monopolization. Nor does a price increase attributable to vertical integration constitute
a violation of the antitrust laws, unless it is shown that the increase is the result of
collusion between the vertically integrated firm and another firm or portion thereof.⁶
There were unsuccessful attempts in the mid-1970’s, precipitated by the oil embargo
of 1973, and the operation of OPEC, to mandate divestiture in the petroleum industry.
S. 2387 (94^th Congress), for example, asserted that in order to facilitate “the creation and
maintenance of competition in the petroleum industry,” S. 2387 would “require the most
expeditious and equitable separation and divestment of assets and interests of vertically
integrated major petroleum companies.”⁷ The legislation would have prohibited major
producers from owning or controlling any interest in any refinery asset, major refiners or
major marketers from being involved in production or transportation, and petroleum
transporters from being involved in any other segment of the industry.⁸ Refiners would
have been able to continue to own retail marketing facilities, but to operate only those

⁴ (...continued)
and market structure designed to assess the combination’s actual effect.” Copperweld Corp. v.
Independence Tube Corp., 467 U.S. 752, 768 (1984) (emphasis added).
⁵ The FTC report, Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition
(2005), lists, among other potential anticompetitive effects of vertical integration in the petroleum
industry, the ability of an integrated entity to minimize the effectiveness of a competitor by, e.g.,
structuring its dealings so as to raise the competitor’s input costs, or by making it more difficult
for a competitor to enter its markets. At 121-124. (The full report is available at
[http://www.ftc.go v/ reports/gasprices05/050705gaspricesrpt.pdf]).
⁶ “An increase in prices alone does not necessarily constitute ‘price gouging.’” CRS Report
RS22236, Gasoline Price Increases: Federal and State Authority to Limit “Price Gouging,” by
Adam Vann. Further, the Supreme Court has ruled that the divisions of a single firm are not
legally capable of the kind of conspiracy prohibited by the antitrust laws:
Nothing in the literal meaning of those terms [“unilateral,” “concerted”] excludes
coordinated conduct among officers or employees of the same company. But it is
perfectly plain that an internal “agreement” to implement a single, unitary firm’s
policies does not raise the antitrust dangers that § 1 was designed to police. The
officers of a single firm are not separate economic actors pursuing separate economic
interests, so agreements among them do not suddenly bring together economic power
that was previously pursuing divergent goals. Coordination within a firm is as likely
to result from an effort to compete as from an effort to stifle competition. In the
marketplace, such coordination may be necessary if a business enterprise is to
compete effectively. Copperweld, supra, note 4, at 769.
⁷ S. 2387 (94^th Cong.), Sec. 2(b).
⁸ “Major producers,” “major refiners,” and “major marketers” were defined in section 101.

which they operated prior to January 1, 1976.⁹ The accuracy of the bill’s premise was
viewed differently by its supporters and opponents. It was argued both that S. 2387 would
increase competition at each level of the industry, increase refining capacity by reducing
barriers to entry into that sector, and “place restraints on the pricing power of the OPEC
cartel”;¹⁰ and that vertical integration was not the cause of “the spiraling cost of petroleum
products to the American consumers,”¹¹ would lead to reduced efficiencies in the
petroleum industry, would have no effect on the pricing policies of OPEC, and would lead
to “higher-priced petroleum products.”¹² The bill was reported favorably by the Senate
Antitrust Subcommittee and the full Judiciary Committee, but not voted on by the Senate.
Divorcement statutes, however, do exist at the state level. There are several states
that currently prohibit oil refiners from operating retail service stations; they mandate
operation of such stations only by independent operators, i.e., persons neither employed
by nor under contract to the refiner.¹³ According to the FTC report cited at note 5, the
rationale for the state statutes was the concern
that an integrated refiner/retailer might set wholesale prices to independent jobbers and
gasoline stations at a rate higher than its own internal transfer price, thus enabling the
refiner/retailer to sell gasoline to consumers at prices lower than those charged by its
competitors. Some argue[d] that this might persuade consumers to abandon
independent gas stations and, in the long run, reduce overall retail competition, as¹⁴
independent gas stations [were driven] out of business.
Statutes in “divorcement” states are more correctly characterized as consumer-
protection measures than antitrust statutes, as they (1) may be placed in a state’s unfair¹⁵
trade practices provisions or similar location, (2) do not recognize any justification for

⁹ Section 103.
¹⁰ Petroleum Industry Competition Act of 1976, S.Rept. 94-1005, Part 1 at 67-70.
¹¹ Id. at 179 (additional view of Senator Robert C. Byrd).
¹² S.Rept. 94-1005, Part 2 at 195-206; speech by Assistant Secretary of the Treasury for
International Affairs Gerald Parsky to the National Economists Club, reported in 757 A^NTI^T^RUST
&T^RADER^EGULATI^ONR^EP^ORT A-23 (3-30-1976).
¹³ States which, according to our research, mandate varying sorts of “divorcement” between
petroleum refining and retail gasoline sales, include Connecticut (Conn. Gen. Stat. §§ 14-344a,
344b); Delaware (6 Del. C. § 2905); District of Columbia (D.C. Code § 36-302.02); Hawaii
(H.R.S. § 486H-10.4); Maryland (Md. (Business Regulation) Code Ann. § 10-311); Nevada
(N.R.S. § 597.440); Virginia (Va. Code Ann. § 59.1-21.16:2); and Puerto Rico (23 L.P.R.A. §
1102). In addition, “[s]ince 1974, divorcement bills have come before forty-one state
legislatures” (Michael C. Vita, Deputy Assistant Director, Bureau of Economics, FTC,
Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of Gasoline
Divorcement Policies (July 21, 1999), at 1).
¹⁴ At 121.
¹⁵ See CRS Report RS22236, supra, note 6.

exceptions,¹⁶ and (3) unlike the federal antitrust monopolization prohibition, are “no fault”
provisions that require no competitive injury as a prerequisite to violation.
The FTC report (supra, note 5) sets out both the potential competitive advantages and
the possible misuses of vertical integration, but also notes that at least nine studies have
concluded that “retail [gasoline] prices tend to be lower if one company owns both
refining and retailing operations than if they are owned separately.”¹⁷ At the same time,
the report acknowledges studies that have come to a different conclusion. One study
found, on the basis of its examination of the long-term lease of several independent
stations by a branded refiner-wholesaler (with an accompanying name change on the
stations from the independent to the brand name), that retail gasoline prices in the area
where the leasing/name change occurred did rise slightly.¹⁸ Another found increased
wholesale prices following the merger between a refiner and a refiner-marketer;¹⁹ that
study did not, however, as did a subsequent one, look at the effect on retail gasoline prices
to consumers of mergers.²⁰
Just as existing state divorcement statutes are generally not found in the states’
antimonopoly or antitrust provisions, state “price-gouging” provisions, too, are generally
considered to be consumer-protection legislation crafted as either stand-alone measures
or as part of a more comprehensive consumer-protection code. We emphasize, therefore,
that while they and the antitrust laws were each enacted with the goal of creating and

¹⁶ The statutes do, however, generally recognize existing refiner-run stations and “grandfather”
them if they existed prior to a specific date. The simplest of the state “divorcement” statutes
appears to be Delaware’s, which states: “No manufacturer of petroleum products shall open a
major brand, secondary brand or unbranded retail gasoline outlet or service station in the State,
that would be operated by company personnel, a subsidiary company, or a commissioned agent.”
That statute also recognizes the possibility that it may be necessary or desirable for manufacturers
to operate retail service stations “in times of emergency or similar special circumstances.” 6 Del.
C. §§ 2905(a),(b). Virginia and Puerto Rico also make provision for temporary refiner operation
of retail service stations previously operated by independent dealers, although with no specific
reference to “emergency” situations. Va. Code Ann. § 59.1-21.16:2D; 23 L.P.R.A. § 1102(c).
¹⁷ At 120, citing John Gewecke, Empirical Evidence on the Competitive Effects of Mergers in the
Gasoline Industry (2003). The concurring statement of Commissioner Leibowitz notes that
“[t]he Report ... clearly describes to consumers and policymakers the factors that affect gas prices
and contribute to price increases ... and it places these price changes into context.” (Complete
statement available at the FTC website, [http://www.ftc.gov]). The full Gewecke survey is
available at [http://www.ftc.gov/bc/gasconf/comments2/gewecke1.pdf].
¹⁸ Justine Hastings, Vertical Relationships and Competition in Gasoline Markets: Empirical
Guidance from Contact Changes in Southern California, 94 A^M.E^CON.R^EV. 317 (2004).
¹⁹ Richard Gilbert and Justine Hastings, M^ARKETP^OW^ER,V^ERTI^CALI^NTEGRATI^ON,^{AND THE}
W^HOLESALEP^RI^{CE OF}G^ASOLI^N^E, Univ. of Cal. Energy Inst., Working Paper No. PWP-084, 2001,
rev. 2002, available at [http://aida.econ.yale.edu/~jh529/RRC_Revision0604.pdf].
²⁰ Christopher T. Taylor and Daniel S. Hosken, T^HEE^CONOM^I^CE^{FFECTS OF T}^H^EM^ARATHON-
A^SHLANDJ^OI^NTV^ENTURE:T^HEI^M^P^{ORTANCE OF}I^NDUSTRYS^U^PPL^YS^{HOCKS AND}V^ERTI^CAL
^M^A^RKETS^TRUCTURE, FTC, Bureau of Economic, Working Paper No. 270, 2004, available at
[http://www.ftc.gov/be/workpapers/wp270.pdf]. The authors note that although the joint venture
they studied did, in fact, increase wholesale gasoline prices, those increases were not passed on
by retailers to gasoline consumers.

preserving consumer benefits in the form of reasonable prices, the direct “regulation” of
prices that characterizes “price-gouging” laws is, in effect, the flip side of the antitrust-law
encouragement of marketplace competition to set prices.
The “price gouging” measures currently pending in the 110^th Congress would treat
violations of their prohibitions, however they define “price gouging,”as if they were
violations of an unfairness rule promulgated under the FTC’s rulemaking authority;²¹ most
would provide for FTC enforcement “as though all applicable terms and conditions of the
Federal Trade Commission Act were incorporated into and made a part of this Act.”²²
The so-called “NOPEC” measures²³ would each amend section 1 of the Sherman
Antitrust Act to make “oil-producing and exporting cartels illegal” under U.S. antitrust
laws, and to authorize suits against such entities by the Attorney General.

²¹ E.g., section 3(a) of H.R. 1252; section 7(b) of S. 1263. Pursuant to its enforcement authority
provided in Subtitle B, Title VIII (sections 811-815) of the Energy Independence and Security
Act of 2007 (P.L. 110-140), and particularly that set out in section 811, which prohibits the use
of “any manipulative or deceptive device or contrivance” in contravention to a rule or regulation
the FTC “may prescribe as necessary or appropriate in the public interest or for the protection
of United States citizens,” the Commission has announced an Advanced Notice of Proposed
Rulemaking (ANPR) to request “comment on the manner in which it should carry out [those]
rulemaking responsibilities ....” (73 F^EDERALR^EGI^S^TER 25614-01 (May 7, 2008), 2008 WL
1957726.) Public comments in response to the ANPR are due June 6, 2008. The FTC’s
rulemaking authority with respect to the FTC Act (15 U.S.C. §§ 41 et seq.) is contained in 15
U.S.C. § 57a(a)(1)(B).
²² E.g., section 3(a) of H.R. 1252; section 5(b) of S. 94; section 205(a) of S. 2991. S. 1520 would
directly amend the FTC Act to prohibit fuel price gouging subsequent to a Presidentially declared
“major disaster.”
²³ E.g., House-passed H.R. 6074, H.R. 2264; Title IV of S. 2991 (pending in the full Senate,
together with the House-passed measures), S. 879 (pending in the Senate Judiciary Committee).