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Limiting Vertical Integration

Independent retailers often have difficulty surviving in industries marked by a high degree of vertical integration. In the petroleum industry, for example, many gas stations are owned and operated by oil refineries. These companies are able to control the wholesale price of gasoline sold to locally owned franchise stations. They also set the going rate at the pump through company-operated stations. By narrowing the difference between the wholesale and retail prices, oil refiners can squeeze independent and franchise gas stations out of the market.

Although the Robinson-Patman Act bars discriminatory pricing (favoring one company with a lower price not made available to other buyers), the law does not adequately address sales between different segments of a vertically integrated company. For example, refiners may sell gasoline to their company-operated stations at a lower rate than the price charged to franchise or independent stations.

Cities or states can correct this imbalance by restricting a manufacturer's ability to own or operate retail outlets. Several states, for instance, have enacted gas station divorcement laws that bar refineries from operating retail gas stations. Divorcement is one step removed from divestiture. While divestiture requires that a company sell-off the businesses in question, divorcement allows the company to continue to own the outlets, provided that the outlets are controlled by an independent franchise dealer operating under contract.

RULES:

Gas Station Divorcement Law
A gas station divorcement law would prohibit oil companies and refineries from operating retail stations, but would still allow them to own stations as long as they contract them out to independent franchisees. Divorcement is designed to prevent oil companies from using their power within the supply chain to manipulate prices and force independent and franchise gas station owners out of business. Several states have implemented them, including Florida, Maryland, Washington, D.C. and New Hampshire, but most of them have exceptions.