My optimism about a strengthening of gasoline prices would be greater if factors other than over supply and demand were not also at work in the market place. Among these factors are:

The mounting pressure on the retail operator, whether he be the dealer of a major, independent, or nonrefiner marketer, to increase his volume by selling the "incremental" gallons.

Shifting consumer preferences which have favored the growth of independent refiners and marketers have also been a factor. Among other things, this has caused repeated disputes as to what retail price differentials various marketers can live with without losing volume. There has also been a greater price consciousness in the motoring public in recent years.

Finally, a host of other subtle influences, often peculiar to individual markets, have contributed to instability in gasoline prices.

In order to give you some idea of how these factors contribute to gasoline price wars and how they vary from one market to the next, three metropolitan areas have been selected for a concrete discussion of price war activity.

The three markets are Detroit, Kansas City, and MinneapolisSt. Paul.

I don't claim that these three markets are necessarily representative of all other retail markets. However, they do offer good illustrations of some of the principal causes of price disturbances.

It must be emphasized that all of the factors contributing to price war activity cannot be exhausted even in these three metropolitan areas. In the time allotted, I only hope to point up the general nature of the problem.

A series of charts has been prepared to illustrate graphically a number of the points which I wish to make. The first chart covers Detroit.

(The charts referred to were marked "Yarrington Exhibits Nos. 1 through 8" for identification, and appear in the appendix at pp. 846855.)

This chart (1) portrays changes in American's suggested retail prices during the two year period 1963-64.

It should be stressed that this is the suggested price for regular grade gasoline. There are frequent and sometimes wide variations in the prices at which American dealers are actually selling.

I also stress that this is American's suggested price. The retail outlets of some other so-called majors and most so-called independents may sell from 1 to 5 cents or more below this price.

At the bottom, we have estimated the share of retail gasoline sales enjoyed by various majors and the independents, as a group.

It should be clear that Detroit has not been selected as a vehicle for putting the blame for price wars on the independents.

At the same time, the fluctuation in the red line contradicts any claim that there is a lack of price competition among the larger oil companies.

It also dispels any notion of price leadership.

You will note that the terms "major" and "independent" are in quotations. This has been done because these terms need explanation:

For example, the market shares refer to the retail sales under the various brands and not to the source of supply. Thus, the 0.2 percent figure for Ashland reflects only Ashland's retail sales under

55-013-66-vol. 1—12

the Ashland brand. The larger quantity of gasoline which Ashland sells to nonrefiner marketers in Detroit is included with the independents.

The inclusion of Ashland with the majors also points up a problem of definition. Many marketers might not consider Ashland a major, even though it has grown to be the 16th largest refiner, ranking above such companies as Standard of Ohio, Skelly and Union Oil Co.

It should also be stressed that while the so-called independents typically sell at lower prices than the so-called majors, this is not uniformly true. There is usually a range of prices at which major brand stations sell, with the less well-known major brands tending to sell at lower prices. There is usually a similar range of prices at independent stations.

The most obvious thing about this chart is the frequent and sometimes extreme fluctuation in price, referred to in the industry as a "yo-yo" price pattern

American does its level best not to be the cause of this price volatility. Such extreme price instability is hard on our company, on our dealers and on our jobbers. Consistent with this objective: American initiated none of the price declines which you see on the chart; and

American led prices up on 17 of the 31 occasions during 1963 and 1964 when an attempt was made to raise prices to more normal levels.

Despite American's efforts, most of these price increases did not hold and price instability has continued. Fundamentally, this is because the gasoline business is a very competitive one. But an insight into some of the more immediate reasons can be gained by focusing on the period of apparent price stability which existed in Detroit from July through mid-October 1964.

During this, as in other periods on the chart, the price stability which the red line seems to suggest, hides a deterioration in prices among individual dealers. As I indicated earlier this is only American's suggested price surveys of the Detroit metropolitan market during September 1964, just before the price drop in October, showing the following:

Slightly over 25 percent of the retail outlets for the majors were selling below American's suggested retail price of 29.9 cents.

About 45 percent of the retail outlets of the independents were selling more than 2 cents below American's suggested price.

Around 60 percent of the retail dealers handling the subregulars of Gulf and Sun were pricing those subregulars more than 1 cent below our suggested retail price for regular grade gasoline of 29.9 cents. These statistics highlight what, in my opinion, are two of the principal underlying causes of price war activity in the Detroit market: First, the so-called maverick dealer, who prices his gasoline below the suggested retail price in order to build volume.

Second, the adjustment by major and independent retailers to competition from the subregular gasolines marketed by some of the larger oil companies.

The maverick dealer problem is simply one reflection of the pressure to sell the incremental gallon. I use the term "incremental gallon" because most people in the industry are acquainted with the related concept of the incremental barrel at the refining level. The incre

mental gallon is a similar influence at the retail level. It describes the incentive placed on retail operators to build volume, and hopefully profits, even if it requires some price cutting.

The maverick dealer or incremental gallon problem is especially acute in markets where relatively small reductions in prices may cause a significant increase in volume. Detroit happens to be such a market. There is a closer correlation between price and volume in Detroit than in some other markets because of the basic makeup of the city and the people who live there. This is highlighted on the next chart, chart 2.

The first significant point about Detroit is that it is a city on wheels. Detroit is the motor capital of the world. More important for our purposes, it is one of the few very large metropolitan areas which has no developed public transportation system. Most of the people in Detroit commute by car.

Huge traffic flows move along the major arteries which are portrayed on this map. Only people who have lived in Detroit can appreciate how much traffic moves along Woodward, Gratiot, Grand River, and the Mile Roads. These large traffic flows stimulate retailers located along these major arteries to build added gasoline volume by price cutting.

Our research also tells us that there are more gasoline stations per square mile in Detroit than in nearly any other city. Accordingly, the competition among retailers is extreme.

Finally, Detroit is a particularly price conscious city. This is probably due to the cyclical nature of the auto industry, itself. Additionally, from about 1955 to 1961, the Detroit economic picture was relatively stagnant. Detroit consumers became more attuned to minor price differences than has been true in some other markets. This, too, stimulated retailers to seek added volume by price reductions.

In order to illustrate how this price cutting along the major traffic arteries in Detroit operates and how it affects the overall market, I would like to focus your attention on the Telegraph Road strip which is outlined by the red square on this map and which is blown up on the next chart.

Chart No. 3 covers about 3 miles along Telegraph Road, which is U.S. 24, one of the major north-south arteries in Detroit.

Just to give you some idea of the traffic along this strip, the car count at the Telegraph and Warren intersection showed about 50,000 cars moving north and south along Telegraph Road during a 24-hour period and 18,000 moving east and west. This is extremely high; 25,000 cars is an exceptionally fine location.

It is little wonder that dealers who have this amount of traffic passing their stations seek to bring some of those cars into their station by price cutting.

We have located the retail service stations along this Telegraph Road strip. It should be reiterated, however, that we are not trying to "point the finger" at anyone. The price disturbance which starts at one station one week may start at another station the next week. The important point is that almost any dealer who cuts his price along the Telegraph Road strip will be matched, sooner or later, by most of the other stations along the strip. This tends to pull down the whole price structure along Telegraph Road. Eventually, the

squabbling on this and similar strips brings down the entire metropolitan area.

The willingness of the maverick dealers along the Telegraph Road strip to sell below the suggested retail price levels in Detroit can be illustrated by some of our recent price surveys.

On February 16 of this year, when American's suggested retail price was 25.9 cents in Detroit, only two of the stations shown on this map were actually selling at that price. The remainder were selling anywhere from 1 to 2 cents off the 25.9-cent level. The Gulf and Sun stations were selling their subregulars 3 to 4 cents below that level.

A March 2 survey, when the suggested retail price was 27.9 cents, again showed only two outlets at the suggested price and all the remainder, including the subregulars, 1 to 4 cents below that price. Similar results are shown by even more recent surveys.

Not only do these surveys point up the maverick dealer problem, they also highlight the competition from subregulars. Inevitably, disputes among various retailers along the strip as to what should be the differential between various regulars and subregulars have aggravated the price disturbances.

I am not condemning the decision of Gulf and Sun to market subregular gasolines. This is just another aspect of the vigorous competition in the gasoline business today. It demonstrates that there is an extreme diversity among the majors, as well as between majors and independents.

Having described the maverick dealer problem in Detroit and also the influence of subregulars as they affect price war activity in that market, let us turn to Kansas City.

You will observe on chart 4 the same basic "yo-yo" price pattern in Kansas City as in Detroit. On the surface, the price war situation might appear to be the same. As a matter of fact the competitive influences at work in Kansas City are quite different from those in Detroit.

Chairman DIXON. I would like to interrupt you. It is a few minutes after 5. We just got to Kansas City.

Mr. YARRINGTON. And they move much faster.

Chairman DIXON. I would suggest we stand in recess until 10 o'clock tomorrow morning and we will start with you, sir. We will pick up where we are on your schedule.

(Whereupon, at 5:10 p.m., May 4, 1965, the hearing in the aboveentitled matter was recessed, to reconvene at 10 a.m. Wednesday, May 5, 1965.)

FTC INDUSTRY CONFERENCE ON MARKETING OF

AUTOMOTIVE GASOLINE

WEDNESDAY, MAY 5, 1965

FEDERAL TRADE COMMISSION,

Washington, D.C.

The Commission met in public hearing, pursuant to recess, at 10 a.m., in room 532, Federal Trade Commission Building, Hon. Paul Rand Dixon, Chairman, presiding.

Present: Paul Rand Dixon, Chairman; Philip Elman, Commissioner; A. Everett MacIntyre, Commissioner; John R. Reilly, Commissioner; and Mary Gardiner Jones, Commissioner.

The BAILIFF. The Honorable, the Commissioners of the Federal Trade Commission. The Commission is now in session.

Chairman DIXON. We resume this morning with a continuation of the testimony of Mr. B. J. Yarrington.

Mr. Yarrington?

We had just gotten to Kansas City, I believe. If you will take up there, we would appreciate it.

TESTIMONY OF B. J. YARRINGTON-Resumed

Mr. YARRINGTON. With your permission, I would like to make just one or two brief summary comments to pick up the thread of my comments of yesterday on the underlying causes of price wars.

First, I mentioned that part of the reason lay in the industry's excess capacity relative to demand.

Second, I stated that there were a number of other subtle factors, which often varied from market to market. And to illustrate the latter type of price influences, I indicated that we had selected three markets for analysis.

My discussion of Detroit highlighted two price war causes that I would like to remind you of.

First, the maverick dealers along major traffic arteries, who seek to build volume by price cutting and to a lesser extent the competition from subregular gasoline.

Having discussed the Detroit situation, I had just turned to Kansas City. I pointed out that you will observe on chart 4 the same yo-yo price pattern that we had in Detroit, and that on the surface the price war situation might appear to be the same, but, as a matter of fact, the competitive influences at work in Kansas City are quite different from those in Detroit.

In contrast to Detroit where one of the principal reasons behind the depressed price situation lies in price battles among the major brand retailers, the principal battles in Kansas City have raged among the independents.