The recent attempt by the retailer Meijer to move into the Wisconsin market has rekindled a long-simmering debate over a Depression-era law, known as the Unfair Sales Act or the Minimum Markup Law, that limits the ability of Wisconsin companies to charge reduced prices. Implemented in 1939, the law prohibits businesses from selling products below cost. Only 16 states have minimum markup laws today.
The Wisconsin law defines cost as the invoice cost or replacement cost, whichever is lower, minus trades discounts, excise taxes, and transportation costs. Gasoline, alcoholic beverages, and cigarettes and other tobacco products fall under a different standard. For alcohol and tobacco, the definition of cost includes a presumptive 3 percent markup by wholesalers and presumptive 6 percent markup by retailers. For motor fuels, the definition of cost is determined by the “average posted terminal price,” with a 9.18 percent markup over this amount. The minimum markup law applies only to the sale of goods; services are not covered.
Supporters of the law argue it protects competition and prevents market disruption by “leveling the playing field.” The law is based on the premise selling below cost is a deceptive business practice that harms competitors who set “fair” prices. Businesses found to be violating the law by the Department of Agriculture, Trade, and Consumer Protection face damages and fines ranging from $50 to $500 for the first violation and $200 to $2,500 for each subsequent violation. The law allows for several exceptions, including price-matching, clearance and liquidation sales, damaged goods, and sales to charities.
Critics of the law argue it is based on inaccurate assumptions about pricing and competition. Larissa Price of the Foundation for Economic Education argues little documentation exists of a monopoly created through minimum markup laws. “Price-cutting is a perfectly normal activity in competitive markets, even when prices fall below cost. When a firm (or group of firms) earns high profits, it entices new competitors into the market. Through the dynamic process of competition sellers compete for the business of consumers, finding new and better ways of doing things in order to offer lower prices and gain customers.”
Several efforts to repeal the minimum markup law in recent years have failed. In an op-ed in the Milwaukee Journal Sentinel, Wisconsin state Sen. Leah Vukmir and state Rep. Jim Ott argue against the law. “Allowing businesses to function freely while allowing consumers to purchase goods at the best possible prices is common sense. The Unfair Sales Act lacks rational basis and is an unnecessary intrusion into the private sector and the free market. It is not the role of government to impose an artificial price on consumer goods.”
Price-cutting can intensify competition, because when a company earns profits with lower prices, it attracts new competitors. Competition breeds innovation and better products and services for consumers. Wisconsin’s minimum markup law hinders competition while indirectly subsidizing the business plans of existing companies. Wisconsin legislators should phase out this outdated, disruptive policy.
The following documents provide additional information on the Unfair Sales Act and other business climate issues.
Ten Principles for Improved Business Climates
http://heartland.org/policy-documents/ten-principles-improved-business-climates
The business climate of a nation, state, or city is the combined effect on businesses of public policies, natural endowments, and other assets that affect business startups and profitability. A good business climate encourages existing businesses to grow, people to start new businesses, and national and international businesses to invest. A poor business climate does the opposite.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. These range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Wisconsin’s Minimum Mark-up Law—The Gift that Keeps on Giving
http://www.maciverinstitute.com/2010/11/wisconsins-minimum-mark-up-law-the-gift-that-keeps-on-giving/
The MacIver Institute examines Wisconsin’s minimum markup law and how it affects the state: “[T]he Federal Trade Commission already polices … anti-competitive price dumping using existing anti-trust laws. Meanwhile, small retailers often lose out on price anyway because they cannot compete with Wal-Mart’s larger purchasing power forcing down costs from their suppliers, or the effects of more sophisticated inventory control by larger retailers.”
New Retailer Under Fire for Illegally Offering Customers Low Prices
http://www.maciverinstitute.com/2015/08/new-retailer-under-fire-for-illegally-offering-customers-low-prices/
Nick Novak of the MacIver Institute discusses Meijer’s entrance into the Wisconsin market and the renewed debate over the Unfair Sales Act.
Wisconsin’s Minimum Markup Law: Government Mandated Pain at the Pump
https://heartland.org/policy-documents/wisconsins-minimum-markup-law-government-mandated-pain-pump
Christian Schneider of the Wisconsin Policy Research Institute examines how the law mandating a 9.18 percent markup on gas in Wisconsin has contributed to skyrocketing fuel prices.
High Gasoline Prices and the Unfair Sales Act in Wisconsin
https://heartland.org/policy-documents/high-gasoline-prices-and-unfair-sales-act-wisconsin
Writing in Regulation magazine, J. Isaac Brannon of the Cato Institute argues the state of Wisconsin, through its Unfair Sales Act, has gone out of its way to reduce competition among gas stations, with the predictable result of higher prices.
Minimum-Markup Laws Gouge Gasoline Buyers
http://fee.org/resources/minimum-markup-laws-gouge-gasoline-buyers/
Larissa Price of the Foundation for Economic Education finds Wisconsin’s minimum markup law increases the cost of fuel for consumers. She questions the rationale for the law.
The Myth of Predatory Pricing
http://www.cato.org/pubs/pas/pa-169.html
Thomas J. DiLorenzo of the University of Tennessee at Chattanooga argues the concept of predatory pricing is mythical and the laws constructed to combat it are misguided. “Unfortunately, the doctrine of predatory pricing still motivates antitrust suits and other protectionist pleadings,” he writes. “Significantly, it is legislation and regulation enacted in the name of predatory pricing (not predatory pricing itself) that are truly monopolizing. Government—not the free market—is the source of monopoly.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
