Suppose you’re a bureaucrat charged with regulating the price of milk so that the people of your state — the ones who are forced to pay your salary — can enjoy a glass of moo juice without having to take out a loan. Now suppose you find out that a supermarket in your state is selling a gallon of milk for more than a dollar less than competing stores. What do you do?
If you’re Louisiana Agriculture and Forestry Commissioner Mike Strain, you force the market selling the cheap milk to raise its prices. Then, with a straight face, you tell the public that you did so “to keep the price of milk as low as possible.”
According to the Baton Rouge newspaper The Advocate, The Fresh Market, an “upscale supermarket chain,” had a weekly promotion offering “a gallon of skim, 1 percent, 2 percent or whole milk for $2.99 on Tuesdays, limiting the quantity to four per customer.” The regular price for a gallon of milk in the Baton Rouge area at the time ranged from $4 to $6.89, the paper said, with The Fresh Market charging $5.69.
“Strain said his office dispatched an auditor to the Fresh Market in Mandeville after receiving a complaint about the Tuesday promotion,” the Advocate reported. “His press office declined to identify the complainant.”
One can be fairly certain that it was not one of the store’s customers who complained about the low-priced milk. Most likely it was a competitor who realized he was losing business to The Fresh Market; and rather than cutting his own price or finding other ways to compete, he appealed to the state to force The Fresh Market’s price up.
The auditor from Strain’s office informed The Fresh Market that it could no longer sell milk at whatever price it chose because state law requires retailers to mark their milk up at least 6 percent above cost-plus-freight.
“They can sell it 6 percent over cost all day long,” Strain told the Advocate. “It’s when they sell it below cost that it becomes a problem.”
“Strain said the regulations exist to keep the price of milk as low as possible.”
How does forcing the price of milk up actually help keep the price of milk down?
“Allowing a supermarket to sell milk below cost could drive competitors out of business, allowing the store to then increase the price of milk, he said.”
Yes, it’s the old “predatory pricing” canard. Economists have been battling this one for well over a century, yet it never seems to die.
First of all, The Fresh Market sells far more than milk, and so do its competitors. The notion that undercutting competitors on one product one day a week would put them all out of business is simply ludicrous.
Second, as Timothy Sandefur observed in his book The Right to Earn a Living,
The problem with this theory is that, as long as new businesses are legally allowed to enter the marketplace, they will do so the moment the large “predator” raises its prices. Keeping the door closed to the new firms would require the predator to cut its prices once again, making the tactic so costly that it is unlikely a predator would find it worthwhile. This is why federal judge Frank Easterbrook has called predatory pricing “not a very good gamble, because it is quite unusual for a firm without a patent to hold a 100% market share and charge a monopoly price for very long.” Whenever new businesses are free to compete, a “predatory-pricing” scheme would at best be only temporarily successful, and consumers would benefit from the resulting “price war.”
In fact, there is virtually no evidence that businesses actually engage in predatory-pricing strategies, or that they ever did…. This has led scholars to describe the predatory-pricing theory as a “myth,” and to conclude that “[p]redatory pricing of the kind designed to eliminate a competitor” is “an infrequent occurrence of fairly insignificant competitive effects.” [Emphasis in original.]
Fear of predatory pricing, therefore, cannot be the reason for the milk price floor in Louisiana. In fact, it is clear that the state — Strain’s words notwithstanding — does everything in its power to make its residents pay far more than necessary for milk.
Years ago the Louisiana Milk Commission set prices at both the processing and retail levels, and those prices were kept above the free-market level. In the 1970s, John G. Schwegmann, owner of a Pelican State supermarket chain, found that he could buy milk at a lower cost from an out-of-state company, but the commission refused to permit it. Schwegmann sued the state in federal court and won. (Schwegmann was a champion of free markets and small government, fighting against encroachments on liberty in court as a businessman and in state government as a legislator and commissioner.)
The state and its friends in the dairy industry, unwilling to give up such power, replaced the Milk Commission with the Dairy Stabilization Board, which sets the minimum price processors must pay farmers for milk. Add to that the minimum 6 percent markup at the retail level, and Louisianans are paying considerably more for milk than people in other states: The average price of a gallon of milk nationwide is about $3.65. (Retailers must be careful not to set their milk prices too high, however, because that is also against the law.)
Whether or not the state’s actions hike the price of milk, the matter boils down to a simple question of morality: Who but the person who owns a product or provides a service has the right to determine the price at which he may sell it?
If you answered, “No one,” your moral compass is calibrated properly. If not, you might want to apply for a job with the Louisiana Dairy Stabilization Board or any of the countless other local, state, and federal bureaus dedicated to violating Americans’ supposedly inalienable rights.
