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Excess capacity in gasoline retailing. McFadyen, Stuart Malcolm 1968

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EXCESS CAPACITY IN GASOLINE RETAILING by STUART MALCOLM McFADYEN B.Sc, The University of Manitoba, 1959 M.A. University of California, 1967 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS iri the Department of Economics We accept this theei^ as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA A p r i l , 1968 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the r e q u i r e m e n t s f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h C olumbia, I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and Study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u rposes may be g r a n t e d by the Head o f my Department or by h.ils r e p r e s e n t a t i v e s . It i s u n d e r s t o o d t h a t c o p y i n g or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . Department The U n i v e r s i t y o f B r i t i s h Columbia Vancouver 8, Canada ABSTRACT The purpose of this study was to analyse the competitive pressures producing excess capacity in gasoline retailing and to attempt to e s t i -mate the excess capacity existing i n this industry in Bri t i s h Columbia. Before either of these tasks could be undertaken i t was necessary to decide exactly what i s meant by the term "excess capacity." A study of the relevant literature led to the choice of the following definition: Excess capacity = (number of outlets existing i n an industry under present competitive conditions) - (number of outlets which could be expected i n the industry under conditions of active price competition). This definition of the optimum number of firms in an industry makes i t possible to measure the excess amount of resources i n an i n -dustry over the most efficient amount. The key to the definition i s the presence of active price competition i n the market under considera-tion. I f this condition i s met a number of outlets satisfying the Chamberlinian "sort of ideal" w i l l be present i n the industry when long run equilibrium i s achieved. To determine whether active price competition was present i n a given market, evidence (gathered by means of an interview survey) was considered on the following points: ( i ) The prevalence of consignment selling, ( i i ) The degree of uniformity of the r e t a i l price of gasoline in a given sub-market, ( i i i ) The height of dealer margins. Supple-mentary evidence bearing directly on the extent of excess capacity was gathered on: (i) Rent subsidization, ( i i ) Direct observation of excess i i i i i capacity and, ( i i i ) Estimates by service station operators of the degree of underutilization. Sixteen operators were interviewed in two urban sub-markets and on the basis of a detailed evaluation of the above evidence six service stations were estimated to constitute excess capacity. The oligopolistic interdependence of the major o i l companies which dominate gasoline retailing i n urban areas prevented an extension of this pro-portion to a l l urban stations. In non-metropolitan areas of the province 39 out of 110 stations were estimated to be excess capacity. Because the influence of the major o i l companies i s much less i n these areas this proportion can be extended to show approximately 7^0 stations to be excess capacity out of the 2107 stations i n these areas. TABLE OF CONTENTS Page INTRODUCTION 1 Chapter I. THE CONCEPT OF EXCESS CAPACITY 11 I I . RESEARCH TECHNIQUE AND MEASUREMENT METHOD 23 I I I . THE EXCESS CAPACITY ESTIMATES 35 IV. EVALUATION AND QUALIFICATION OF THE EXCESS CAPACITY ESTIMATES h2 V. CONCLUSIONS 51 BIBLIOGRAPHY 53 APPENDICES 56 I. QUESTIONNAIRE USED FOR SURVEY OF SERVICE STATIONS . . . 57 I I . DETAILED DESCRIPTION OF EACH GASOLINE MARKETING AREA AND THE SERVICE STATIONS WITHIN IT 62 I I I . DETAILED DATA AND A DISCUSSION OF THIS DATA ON THE FOLLOWING ASPECTS OF EACH MARKET AREA 80 (a) Posted Retail Prices (b) Rent Subsidization (c) Calculation of Gallonage Required at Five Cents per Gallon Margin to Maintain Dealer Incomes. i v LIST OF TABLES Table Page I. 1963 Refinery Capacity of Major O i l Companies h I I . 1963 Gasoline Sales of Service Stations Classified by Ownership Arrangement 5 : i l l . 1963 Market Shares of Major Brands and Private Brands . . 7 IV. Number of Service Stations i n Br i t i s h Columbia i n 1963 by Location and Type of Onwership 9 V. Dispersion of Posted Prices of Regular Grade Gasoline . . 28 VI. Rent Subsidization of Service Stations 31 VII. Excess Capacity Summary—Metropolitan Areas Sample. . . . 39 VIII. Excess Capacity Summary—Areas Outside Large Metropolitan Centres hO DC. Areas A and B—1963 Sales of Existing Outlets 62 X. Area C—1963 Sales of Existing Outlets 63 XI. Area D—1963 Sales of Existing Outlets 6h XII. Area E—19&3 Sales of Existing Outlets 65 XIII. Area F - - I963 Sales of Existing Outlets 66 XIV. Area G--I963 Sales of Existing Outlets 68 XV. Area H—1963 Sales of Existing Outlets 70 XVI. Area I— 1 9 6 3 Sales of Existing Outlets 71 XVII. Area J— 1 9 6 3 Sales of Existing Outlets 73 XVIII. Expected Results of Active Price Competition i n Area J. . 76 XIX. Area K—1963 Sales of Existing Outlets 76 XX. Area L Sample—-1963 Sales of Outlets Included i n Sample . 78 v v i Table Page XXI. 1963 Posted Retail Gasoline Prices 8U XXII. I963 Gasoline Tank Wagon Prices 85 XXIII. Rent Subsidization of Service Stations by Major O i l Companies 87 XXIV. Calculation of Gallonage Required at Five Cent Margin to Maintain Dealer Incomes—Areas Inside Consignment zones 93 XXV. Calculation of Gallonage Required at Five Cent Margin to Maintain Dealer Incomes—Areas Outside the Con-signment Zones 9^ LIST OF FIGURES Figure Page 1. Monopolistic Competition Long Run Equilibrium ^5 Solution v i i INTRODUCTION Excess Capacity Defined Small scale outlets make up the bulk of the retailers in the market for the most commodities. Everyday observation shows us that the stores (or stations) of these retailers are often quite-empty-and their employees are relatively idle when we patronize them. This observation suggests that excessive amounts of the community's resources are being devoted to retailing. The measurement of the excessive amount of resources devoted to gasoline retailing in B r i t i s h Columbia is the problem to be investigated in this thesis. Of what assistance is economic theory i n attacking this problem? A theory can specify certain c r i t i c a l values of economic vari-ables or parameters on which the solution of a problem might depend, but i n order to measure the magnitudes involved (even to estimate them in a qualitative sense), "a detailed specification of the environment to which the theory i s to be applied" i s required; thus "the role of economic theory in the solution of practical problems i s extremely limited: the important (and more d i f f i c u l t ) part of the task becomes the problem of measurement, however i t i s performed."^" The excessive amount of resources (i.e., the excessive number of service stations) cannot be measured,until the unit of measure—the "Hlarry G. Johnson, "The Taxonomic Approach to Economic Policy," Economic Journal, Vol. 6 l (December 1951)» p. 827. 1 2 service s t a t i o n — i s defined. As with most r e t a i l trades, counting each outlet as one exaggerates the position for there are a large number of tiny outlets. In gasoline retailing the exclusion of certain outlets from the total number of stations i s facilitated through supplementary information as to the nature of associated businesses which can be obtained in an interview survey. The excess must be measured in terms of numbers of "conventional" one and two b.ay stations for a l l of which gasoline makes up a large proportion of total sales. My attention was f i r s t drawn to the excess capacity i n gasoline retailing by general observation of both the large number of service stations i n existence and the low level of u t i l i z a t i o n of these stations (in that they often have no customers and almost never have line-ups even at peak hours). Next an attempt was made to devise a theoretical explanation of these findings in a theoretical definition of excess capacity. The Chamberlinian model of monopolistic competition presents a theoretical explanation of why, when non-aggressive price policies are pursued, an excessively large number of retailers can be expected, on a  p r i o r i grounds alone, to be operating i n a given market area. The use of the term "excessively large" refers to the number of retailers emerging i n the absence of price competition as compared to a "sort of ideal" condition proposed by ehamberl;\in—that i s the long run equil-ibrium which would result i n the face of active price competition. This i s the concept of excess capacity which w i l l be employed and which I have attempted to assess. That i s , I am attempting to measure the difference between the existing capacity of the industry and the capacity which would exist in the case of active price competition 3 (capacity in both cases being measured in standard outlet units). The method used to measure excess capacity in gasoline retailing consisted of interviews with a l l retailers in a chosen area, direct observation of their premises, their methods of operation, and the characteristic features of the market area. An evaluation of this material was used to develop an estimate of optimum capacity, and hence an estimate of excess capacity for each individual area. Since the excess capacity to be measured i n this thesis i s that of gasoline retailing in B r i t i s h Columbia let us now turn to a brief examination of the market structure of that industry. The Market Structure of Gasoline Retailing in British Columbia Petroleum retailing in B r i t i s h Columbia i s dominated by seven major o i l companies. The refinery capacity of each of these firms as shown in the following table gives one indication of their relative importance. In any market where the number of sellers i s this small, interdependencies must exist which would affect the price and output decisions of sellers. If these affects were to be transmitted to the r e t a i l gasoline market our analysis which i s based on an evaluation of the degree to which active price competition i s present would of course be greatly complicated. Fortunately very few stations are directly operated by the major o i l companies. Almost a l l f a l l into three other categories with varying degrees of independence from the supplying o i l company. The four categories whose 1963 gasoline sales are summarized in Table II.are: 1. Stations which were owned or leased by the o i l company and were operated by i t s employees on a salary or commission basis. k TABLE I 1963 REFINERY CAPACITY OF MAJOR OIL COMPANIES Firm Name Re fine ry C apac i t y (Barrels per day) Imperial 32,000 Shell 21 ,000 Standard 18,000 B r i t i s h American 18,000 Royalite 5,500 Pacific Petroleums 3,500 Texaco None Total 98,000 Source: Charles William Morrow, Report of the. Commissioner, Royal  Commission on the Gasoline Price Structure, Victoria, 1966, pT^HT 5 TABLE II 1963 GASOLINE SALES OF SERVICE STATIONS CLASSIFIED BY OWNERSHIP ARRANGEMENT :Ownership Arrangement Gasoline Sales (Thousands of Gallons) Number of Service Stations Gasoline Sales per Service Station (Thousands of gallons) Company-operated 5,559 27 206 Lessee-operated 16^,128 1,310 125 Independents, financed 55,900 822 68 Independents, not financed 32,878 1,068 31 Total . 258,U65 3,227 80 Source: Charles William Morrow, Report of the Commissioner, Royal  Commission on the Gasoline Price Structure, Victoria, 1966, p. 2 1 . 6 2 . Stations which were owned or leased by the o i l company and leased by i t to lessee dealers. 3 . Stations operated by independent dealers who were financed by the o i l companies. k. Stations operated by independent operators who were not financed by the o i l company.2 The independent, not financed, outlets sold an average of 31 ,000 gallons. They constituted 33 .1$ of the t o t a l number of service stations but only accounted for 12.7$ of the gallonage sold. As the detailed questionnaire results showed, many of these outlets are not primarily in the gasoline and lubricant retailing f i e l d but rather are merely adjuncts to other businesses. 'Such; outlets have been excluded from the exeess capacity estimates for the reasons discussed in Chapter I. What of the stations not retailing gasoline of the major o i l company brands, the so-called private branders? It might be thought that their aggressive pricing policies would bring active price competi-tion to B r i t i s h Columbia gasoline retailing. Any such tendency i n the areas of the province outside Metropolitan Vancouver i s very weak however because the number of private branders is so small. This is indicated in Table I I I . In Metropolitan Vancouver, although private branders only made up h.yfo of the stations they had gained 9»7$ of the gallonage. Here the tendency to active price competition among stations was checked by the adoption of a so-called "consignment" system by the major o i l companies. Through this arrangement dealers were guaranteed a 70 per gallon margin regardless of the level of r e t a i l gasoline prices. Thus the effects of active price competition by private branders which would normally have Charles William Morrow, Report of the Commissioner, Royal Com- mission on the Gasoline Prict Structure, Victoria, 1966, p. 2 0 . 7 TABLE III 1963 MARKET SHARES OF MAJOR BRANDS AND PRIVATE BRANDS Metropolitan Vancouver Remainder of Province Brand type percentage of number of station percentage of gallons sold percentage number of stations of percentage of gallons sold Major brand companies 9 5 . 1 9 0 . 3 97.8 9^.3 Private branders including depart-ment stores 9 . 7 2 .2 5 .7 Total 100 . 1 0 0 100 100. Source: Charles William Morrow,. Report of the Commissioner, Royal  Commission on the Gasoline Price Structure, Victoria, p. 3 0 . 8 been reductions in competing dealers? margins, or gallonage, or both (and have thereby led to a reduction in the number of stations i n long run equilibrium) were forestalled by the major o i l companies bearing the brunt of the competitive pressure. In short private branders were not able to bring about the re-sults of active price competition predicted by economic theory. In regions outside Metropolitan Vancouver this was by virtue of lack of numbers: i n Metropolitan Vancouver i t was a direct result of major o i l company subsidization of dealers through their consignment arrangement. The relative proportions i n which each of the four types of major o i l company service stations exist i n a given area has important implications for the measurement of excess capacity. These relative proportions for each of three levels of population density are shown i n Table IV. In can be seen from the above that independent dealers are more numerous i n areas outside the major metropolitan centres. It i s i n these areas, where the area by area evaluations have been made, that the Chamberlinian analysis of monopolistic competition is most applicable since the complications introduced by the oligopolistic interdependence of the major companies in the r e t a i l market areavoided. Chapter I immediately following examines this analysis in detail with special emphasis on the derivation of the concept of excess capacity. In Chapter II the sampling techniques and method of estimation are outlined. A discussion of the significance of various types of evidence of the absence of active price competition [ ( l ) Consignment selling, ( i i ) Uniform r e t a i l prices and, ( i i i ) High r e t a i l margins] as 9 TABLE IV NUMBER OF SERVICE STATIONS IN BRITISH COLUMBIA IN I963 BY LOCATION AND TYPE OF OWNERSHIP Total Company Operated Lessee Operated Financed Independents Not financed Independents Metropolitan Vancouver and Victoria 1120 17 7U8 181 Y(k Other centres over 5000 population 5hk 7 221 156 160 A l l under 5000 population 1563 3 3hl 485 73^ Total 3227 27 1310 . . 822 1068 Source: Charles William Morrow, Report of the Commissioner, Royal  Commission on the Gasoline Price Structure, Victoria, 1966, P. 2 3 . well as supplementary evidence of excess capacity [ ( i ) Rent subsidiza-tion, ( i i ) Direct observation of excess capacity and underutilization and, ( i i i ) Estimates of underutilization by service station operators] con-clude the chapter. After presentation of the estimates of excess capacity for the areas i n which interviews were conducted and for the non-metropolitan areas of the province as a whole i n Chapter III several qualifications and amplifications of these estimates are discussed i n Chapter IV. Con-clusions of the study are statedin Chapter V. CHAPTER I THE CONCEPT OF EXCESS CAPACITY What i s excess capacity? Speaking of the situation i n the United Kingdom i n I966 Harry Townsend states: It i s not easy to decide whether there are too many f i l l i n g stations today. Demand fluctuates hourly with peak t r a f f i c flows, daily with most trade at week-ends, and seasonally with the largest sales in the summer months. How adequate retailing f a c i l i t i e s appear depends to a degree on when and where one wants to f i l l a tank; and i t i s a convenient service the motorist pays for, not the optimum solution to an exercise in l o g i s t i c s . ^ The nature of the "convenient service" offered by a given service station differs from that offered by his competitors according to the personality of the operator, extent of free services provided, relative . proximity to a consumers residence or place of business.:. Thus we are concerned with a market which i s imperfectly competitive and where product differentiation exists. The Chamberlinian analysis of excess capacity deals with precisely this case. This analysis w i l l be examined i n detail i n the following pages. The Unit of Measure Consideration of the Chamberlinian analysis in the following pages "hiarry Townsend, "Competition i n Petrol Retailing," The Three  Banks Review, The Royal Bank of Scotland, Blyn Mills & Co., William Deacon's Bank Limited, (March i960), No. 69, p. 2 2 . 11 12 leads to the conclusion that the criterion for the measurement of excess capacity which i s most meaningful i s : Excess capacity = (number of outlets existing i n the industry under present competitive conditions) - (number of outlets which could be expected i n the industry under conditions of active price competition). This type of a market criterion of excess capacity makes i t possible to avoid the l o g i s t i c a l problem approach.suggested by Townsend above. However denominating excess capacity in terms of the unit "outlet" raises an additional d i f f i c u l t y which i s stated by Townsend i n the following terms: As with most r e t a i l trades, counting each outlet as one exaggerates the position, for there are a large number of tiny outlets. In I 9 6 I , 18 per cent of the outlets supplied by Shell-Mex and B.P., the company with the widest geographical coverage, had annual sales of less than 10,000 gallons, and another 22 per cent had annual sales of between 10,000 and 25 ,000 gallons. For these retailers petrol can only have been a sideline. 2 This last sentence provides the key to the nature of the unit "outlet" which must be used to provide a meaningful measurement of excess capacity. This must be restricted to operations primarily i n the business of selling gasoline and lubricants. Townsend sets out a gallonage criterion for deciding which operations f a l l i n this "primarily gasoline and lubricant sales" category as follows: In stations confined to dispensing petrol and lubricants, annual sales of 100,000 gallons are generally considered the minimum for providing a livelihood to the dealer and a reasonably efficient scale of operation.3 Judge C. W. Morrow suggests a more l i b e r a l gallonage definition of an outlet i n his statement: . . . I f i t were considered that an outlet which sold less than . 2 I b i d . Ibid. 13 50,000 gallons was not a true service station, there would he 1,773 service stations with an average gasoline sale of 129,000 gallons out of a t o t a l number of service outlets of 3,227 whose average sales were 80 ,000 gallons.^ Judge Morrow observed further that most of the outlets i n the over 50,000 gallon category were stations owned and either leased or operated by the major o i l companies or were independent stations which had received financial assistance from the o i l companies. Stations in these categories are of course nearly always of the standard one or two bay service station design. This standard one or two bay service station is our unit of measure i n the measurement of excess capacity i n gasoline retail i n g. I t i s possible for our criterion to be stated in this more explicit fashion (as opposed to merely a gallonage measure) because of the more detailed information available to us on the nature of associated businesses, physical layout, etc. provided i n the questionnaire results. Also, because of the detailed information made available, i t was possible to include as one unit of capacity the few exceptional opera-tions which had as a principal business the dispensing of gasoline and lubricants, but which did not have the physical layout of a standard service station. Most of the 852 independent not financed outlets which had gallonage under 50,000 (out of a t o t a l of 1,050 independent not financed stations) represent the operations of automobile dealers and grocery-gasoline combinations. In each of the detailed area evaluations ^Charles William Morrow, Royal Commission on Gasoline Price Struc-ture, Report of the Commissioner, Victoria, 1966, PP. 27-28. of excess capacity such outlets are specifically segregated and the estimate restricted to the service station category designated above plus the exceptions noted. In summary, the use of the standard one or two bay service station (supplemented by a few exceptional operations chiefly dependent on gasoline .:sales) as our standard unit of measure of excess capacity i s based on the following considerations: (1) Only those operations primarily i n the business of selling gasoline and lubricants can meaningfully be considered part of gasoline retailing capacity. Our criterion provides accurate coverage of this group. (2) Gallonage measures suggested by other writers are inferior i n that they provide only rough approximations as to which outlets are primarily in the gasoline retailing business. (3) The use of an easily identified unit of measure (supplemented by exceptions which clearly require inclusion) provides an objective standard for area by area evaluation of excess capacity and makes the results of the evaluation more meaningful. So much for the unit of measure used i n our estimates. Before considering the estimates themselves let us examine the theoretical reasoning leading to the competitive market criterion of excess capacity (where excess capacity equals the number of outlets by which those i n existence i n the present situation exceed the number necessary i n the industry under conditions of active price competition). In the next section a number of possible interpretations of the term "excess capacity" are set forth and each i s evaluated to determine 15 i t s applicability and usefulness i n the problem at hand: that of actually measuring the excess capacity existing i n gasoline retailing i n B r i t i s h Columbia. As w i l l be seen, by a process of elimination this range of interpretations can be narrowed to one - the Chamberlinian concept of excess capacity determined by the degree to which active price competition exists i n a given market. "Excess" capacity can exist of course only as an excess over some optimum or ideal level of capacity. The theoretical basis of the Chamberlinian "sort of .ideal" which provides the optimum output level for each firm and hence by derivation the optimum capacity for the industry i s also examined i n the following section. A. The Meaning of Excess Capacity Although the basic idea of the concept of excess capacity i s implicit in the term, there are a variety of particular meanings which may be attached to i t . Although the l i s t i s far from exhaustive we can identify three concepts of excess capacity: ( i ) Excess capacity of a l l factors i n the community as a whole (macro-economic sense). ( i i ) Excess capacity of fixed factors i n an industry. ( i i i ) Excess capacity of a l l factors i n an industry. Let us examine each of these i n turn. ( i ) Excess capacity of a l l factors in the community as a whole (macro-economic sense) Excess capacity of a l l factors i n the community, is a macro-economic concept. Much attention has been devoted to the measurement of excess capacity i n this sense i n recent years, but by and large this .. 5L. R. KLein, "Some Theoretical Issues in the Measurement of 16 literature i s not relevant to our present task. However, such excess capacity must show up as excess capacity i n particular industries, including the particular industry which we are studying. Excess capacity would not be expected to emerge to the same extent i n a l l industries in the face of a macro-economic shortfall of demand, but i t would probably affect almost a l l industries to some degree. Its influence on the demand for gasoline has been estimated to be very slight by Spencer, Clark, and Hoguet. They state: One of the interesting things revealed by this analysis was the tendency for total gasoline consumption to have a cyc l i c a l relation to purchasing power, the latter measured by supernumerary income. Thus, the t o t a l amount of driving depends upon the working and l i v i n g habits of people. These habits are strongly enough entrenched so that small variations i n purchasing power exercise only slight effects on gasoline consumption per car, the result being that there i s a tendency for short-term fluctuations i n gasoline consumption to be dampened. But when large fluctuations i n purchasing power occur, as i n the early t h i r t i e s , two consequences become apparent: ( l ) many persons are unable to operate their cars, and (2) those that continue to operate their cars reduce their consumption of gasoline, but not i n proportion to the f a l l i n income. In other words, a sharp drop i n purchasing power reduces considerably the number of cars i n operation, but reduces only slightly the average consumption of gasoline per car. Therefore, as long as supernumerary income has exhibited a generally rising trend as during the past decade, gaso-line consumption for cars and buses could be reasonably well fore-cast without the use of this variable. But i n periods of wide economic fluctuation, supernumerary income turns out to be quite important for improving the accuracy of forecasts.6 This aspect of the problem of measuring excess capacity which has been largely ignored i n the studies surveyed may be safely accorded the same Capacity," Econometrica, Vol. 28 (April i 9 6 0 ) , pp. 272-280. A. P h i l l i p s , "Appraisal of Measures of Capacity," American Economic  Review, Papers and Proceedings, Vol. 53 (May I 9 6 3 ) , PP« 309-313. Milton H. Spencer, Colin G. Clark and Peter W. Hoguet, Business  and Economic Forecasting, Homewood, Irwin, 1961, pp. 217-218. 17 treatment here since no large changes i n purchasing power occurred in the years immediately preceding the date of the study. In a period when such changes had occurred some attempt would have to be made to take account of this factor however. ( i i ) Excess capacity of fixed factors i n an industry The effects of macro-economic excess capacity are closely related to a second concept of excess capacity, that i s what J. M. Cassels refers to as excess capacity of fixed factors i n an industry. This concept may be interpreted as implying essentially a shortfall of production relative to existing productive capacity i n the short-run. This means that fixed factors are not used to their maximum potential, and the firms i n ques-tion are not producing at the minimum points on their short-run cost curves. Such shortfall may arise from various causes, including cyclical fluctuations i n the economy giving rise to macro-excess capacity as discussed above. Other forces such as changes i n the structure of demand (both inter-product and inter-firm) may also be at work. The excess capacity of fixed factors i n an industry or firm i s the variety of excess capacity most familiar to economists and business-men and i t i s this form which i s most obvious because of i t s physical manifestations - idle repair bays and pumping f a c i l i t i e s in the case of service stations, empty shops i n the case of meat retailing. There are however several ambiguities involved i n this short run concept which renders i t inappropriate for our purposes. For instance the importance of any given percentage of excess capacity (in this sense) i n any firm or industry w i l l depend on the relative proportions of fixed and variable factors i n the production function. Also the excess capacity of fixed 18 factors i n an industry i s not necessarily equal to the sum of the excess capacities of the firms in that industry since: . . . there are some factors, such as labor, which tho [sic] variable from the point of view of the firm, may i f specialized or localized, be fixed from the point of view of the industry. It should also be recognized that even from the point of view of the individual firm the factors which have to be regarded as fixed w i l l depend to some extent on the period of time under consideration and the magnitude of the output variations i n question.7 A third source of ambiguity i s the fact that changes i n the valua-tions placed on various factors w i l l alter the measured amount of excess capacity. Since the maximum output physically attainable with the fixed factors would not be economically practical, capacity output i s generally agreed to be the minimum point of the short-run average cost curve. The shape of the cost curve and hence the output at_which average costs w i l l be minimized w i l l depend of course on the^cost-rates, applied to the ' / inputs of a l l the factors concerned. Capacity w i l l very directly with the valuation of fixed factors and inversely with the valuation of variable factors. It would thus appear that this i s not a useful concept of excess capacity. In part this conclusion rests on the theoretical ambiguities inherent i n the concept. But the major reason i s that i t i s s t r i c t l y short-run i n nature. It involves taking a snap-shot of the industry at one point i n the process of adjustment to a long term equilibrium, without asking the question: what i s the nature of the long run equilibrium to which i t i s heading? And surely the latter i s the interesting question. It i s what i s implied i n the third concept of excess capacity. 7John M. Cassels, "Excess Capacity and Monopoly," Quarterly  Journal of Economics, Vol. 51 (May 1937) , p. ^28. 19 ( i i i ) Excess capacity of a l l factors i n an industry Cassels has applied the term "excess capacity of a l l factors" to the third concept. The point which we wish to stress, however, i s that i t i s a long run concept. In involves an attempt to assess the nature of the equilibrium to which the industry i s adjusting and to assess the adequacy of the equilibrium productive capacity. In order to see how this long run concept of excess capacity of a l l factors leads to the market criterion of excess capacity which has been outlined above we must examine the monopolistic competition analysis 8 of E. Chamberlain. The usual concept of excess capacity derived from Chamberlin's work relates to the discrepancy between the equilibrium output revealed by the tangency solution and the minimum point on the assumed "U" shaped long run cost curve. Along with Demset;z, Friedman 9 and Stigler and Chamberlin himself we are rejecting this concept. The minimum point can only be reached by tangency of the cost curve with a horizontal demand curve and such a demand curve i s representative only of a purely competitiive market. To base the estimated excess capacity on such a construct would be to ignore the characteristic features of the r e t a i l market being considered, the desire of consumers for product ft E. H. Chamberlin, The Theory of Monopolistic Competition, Cam-bridge, Harvard, 1933, P- 106. Demsetz, "The Nature of Equilibrium i n Monopolistic Competition," Journal of P o l i t i c a l Economy, Vol. 67 (February 1959), •pp.:.21-30 Milton Friedman, "The Methodology of Positive Economics," Essays  i n Positive Economics, Chicago, University of Chicago, 1953. George J. Stigler, "Monopolistic Competition in Retrospect," Five Lectures on Economic Problems, London, Longmans, 19^-9• 20 differentiation which i s reflected by the sloping demand curve and also the fact that a greater quantity of resources w i l l necessarily be re-quired to distribute a given quantity of goods i n an imperfect market. Chamberlin does suggest a "sort of ideal condition - that i s the long run equilibrium which would result in the face of active price competition. He states: We may regard the elas t i c i t y of dd' as a rough index of buyers* preferences for the 'product' of one seller over that of another. The equilibrium adjustment becomes, then, a sort of ideal. With Fewer establishments, larger scales of production, and lower prices i t would always be true that buyers would be w i l l i n g to pay more than i t would cost to give them a greater diversity of product; and conversely, with more producers and smaller scales of production, the higher prices they would pay would be more than such gains were worth.10 It i s important for the logic of the analysis to recognize that product differentiation does not of i t s e l f account for the development of excess capacity. Chamberlin makes clear i n the following passage that i t i s the' absence of active price competition which i s at the heart of the excess capacity problem. . . . whenever price competition f a i l s to function, whether because each seller i s in close competition with only a few others or for any other reason, the result i s not merely higher prices, but also excess capacity as a permanent and normal char-acteristic of the equilibrium adjustment. In the measurement of excess capacity, then, much of the burden must be thrown on an assessment of the degree of price competition which is present i n the market and from there on an evaluation (necessarily hypothetical) of the structure of the industry i f active price competi-tion existed. This, divergence from the "sort, of ideal" is the concept of excess 'Chamberlin, op. c i t . , pp. 93-9^. 21 capacity which we employ and which we are attempting to assess. That i s , we ^ e^attempting to measure the difference between the existing capacity of the industry (measured i n standard outlet units) and the capacity which would exist i n the case of active price competition. The c r i t e r i a used to determine whether active price competition was present i n a given market are : (i) Whether price-cutting i s used as a competitive device to give consumers a varied choice of combinations of service, convenience and price. ( i i ) Whether r e t a i l profit margins i n the market are at a low level. A Broader Concept of Excess Capacity Cassels introduces a more fundamental definition of excess capacity saying: What i s actually meant by Chamberlin i s the presence i n an industry of an amount of general productive resources which i f they were more effic i e n t l y employed could produce an output that would add more to the national, dividend.H This i s of course the true object of concern but i t i s not measurable. The Chamberlin case on the other hand i s measurable. While the links between the two cases are not easily determined i t seems clear that i f there i s excess capacity i n the Chamberlin case, there i s excess capacity i n the more fundamental sense. We have confined ourselves to the Chamberlin case throughout this thesis. Conclusions The optimum amount of resources to be devoted to an industry can •^Cassels, o£. c i t . , p. 1+33. 22 be estimated as the amount which would be devoted to the industry in a hypothetical situation where the industry i s in long-run equilibrium and i s characterized by active price competition. The excess capacity which we are attempting to measure i s the difference between the existing capacity of the industry and the capacity which would exist i n the case of active price competition (both measured in standard outlet units). CHAPTER II RESEARCH TECHNIQUE AND MEASUREMENT METHOD Even given the conceptual definition of excess capacity l a i d out in the previous chapter estimation cannot he undertaken u n t i l a specific research method has been decided upon. For the purposes of this study i t was decided to interview block samples of service station operators throughout the province. The sampling technique used in selecting these blocks i s described i n the next section; the regions from which the samples were selected i s described i n the second following section. The remainder of the following chapter i s devoted to a presenta-tion of the various types of evidence of excess capacity which were adduced during the survey. Consignment selling, uniform posted prices and high r e t a i l prices demonstrate a lack of active price competition wherever they are present. Extensive rent subsidization by major o i l companies reinforce such a conclusion. Direct observation of excess capacity and underutilization by interviewers and estimates of under-u t i l i z a t i o n by service station operators provide supplementary data to substantiate the area by area estimates. Sampling Technique A detailed study of gasoline retailing i n B r i t i s h Columbia was necessary to estimate Chamberlin's "sort of ideal" and hence the excess aapacity present i n each market as well as to examine the underutilization 23 2k of existing capacity. Such a study could have been accomplished by interviewing a l l service station operators in British Columbia or a number of them selected at random from a complete l i s t i n g . It was f e l t that obtaining either complete coverage or a random sample large enough to be informative would be excessively costly, and thus a third alternative was adopted. The province was divided into regions to ensure adequate coverage of a l l geographic areas of the province. Within each region the specific market areas to be interviewed were selected at random. The 100$ coverage of the chosen locations made possible a more accurate assessment of each. It was my opinion that an extension of this more accurate result to other markets would provide a more accurate assessment of excess capacity for the province as a whole than a less accurate assessment on the basis of a large sample. The Regions Surveyed The province was divided into five regions ordinarily considered geographically disparate. These are: (1) Lower Mainland comprising metropolitan Vancouver and a l l mainland centers within a two hundred mile radius. (2) The whole of Vancouver Island. (3) The Okanagan. This region includes not only the Okanagan valley from Penticton to Salmon Arm but also points east to the Alberta border and west to Kamloops on the Trans Canada Highway. (k) The South-east to include the area south of the Trans Canada Highway and east of the Okanagan Valley. (5) The Worth made up principally of a l l points north from Hope to Prince George and west to Prince Rupert.-25 The Questionnaire The questionnaire used i n the survey was designed to e l i c i t a picture of each service station's ownership, operation, and pr o f i t a b i l i t y which would be complete enough to accurately assess the probable reaction of i t s operator to a more competitive environment. Inquiries were made as to station ownership (including details of leases and mortgages), the length of time the present operator had been at the location and as to his previous job. The wages paid the operator and his employees were ascertained. The physical f a c i l i t i e s and present gallonage were noted as well as the trend of sales over the years and the peak load pattern both daily and yearly. Each operator was asked to estimate the maximum gallonage increases he could handle under present conditions or alternately with an increase i n variable factors only. Information was also sought as to the price of gasoline, rate of rent and amount of the operator's personal investment. A profit and loss statement was requested from a l l dealers. A copy of the complete questionnaire appears as Appendix I. The Absence of Active Price Competition—Evidence of Excess Capacity Since excess capacity has been defined as the difference between the existing capacity of the industry (measured i n standard outlet units) and the capacity which would exist i n the case of active price competition the fundamental precondition for i t s presence i s the lack of active price competition. Evidence as to the presence of consignment selling, uniformity of posted prices, and a high level of r e t a i l margins i n 26 gasoline retailing i n Brit i s h Columbia -is ! presented in three following sections. This evidence provides substantial support for the conclusion that active price competition i s absent from this industry, (l) Consignment Selling In the large urban centres gasoline retailing i s dominated by a national oligopoly of major o i l companies. Because of their large stake i n the industry these firms are unwilling to engage i n price-cutting and the industry i s characterized by price leadership. It i s i n these areas that the r e t a i l price i s maintained at a specific margin above the tank-wagon price by a consignment arrangement which allows the retailer a fixed commission on each gallon sold. To state that price leadership and con-signment arrangements exist i s not to suggest that competition per se is lacking, since the firms do vie to provide the highest level of credit card and pump island service. The proliferation of service stations in the urban areas i s one of the methods by which the major o i l companies are able to increase the level of service offered to consumers. In centres outside the consignment zones similar forces work to cause r i g i d prices but since these areas are characterized by a different market structure these forces work through different channels. The local oligopoly of dealers with i t s "live and l e t l i v e " attitude i s the principal method of maintaining high dealer margins. The national oligopoly however i s the primary reason these various local oligopolies are able to achieve this result, since the members of the national oligopoly are able to provide support to dealers i n any areas where they are threatened by price competition from "private-brand" or ether discounters. In these areas outside the consignment zones there appeared to be some 27 proliferation of outlets due to building programs of the major o i l companies but the major influence generating excess capacity was the high profit margin maintained by the local oligopolies which enabled low volume outlets to remain open, ( i i ) Uniformity of Posted Prices The second type of evidence which can be adduced to i l l u s t r a t e the absence of active price competition i n gasoline distribution i s data i l l u s t r a t i n g the extent to which firms compete for business by cutting price and the extent to which i t leads to a variety of price and service combinations being offered to consumers. Details of evidence obtained on this point are contained i n the section headed "Posted Retail Prices" i n Appendix I I I . Table V presents a short summary. In the urban centres and nearby areas (not shown above because they are consignment zones) the consignment system accompanied by a fairly"'- stable tank-wagon price has yielded a relatively stable r e t a i l price. In previous years private brand stations have been a source of price competition, but the major o i l companies have j neutralized them by meeting price cuts i n the areas affected and stabilizing prices with only a limited price differential. This results of course inr,a more limited range of alternatives of price and service combinations than can be found i n other r e t a i l industries. Outside the consignment zones operators are free to set their own prices but, as the above table shows, differentials are extremely limited. Often the differentials which do exist are so poorly advertised that they reflect the ignorance of one another's prices by the operators 28 TABLE V DISPERSION OF POSTED PRICES OF REGULAR GRADE GASOLINE Market Area Number of stations Range between highest and lowest price (cents per gallon) Difference between modal and lowest price (cents per gallon) A and B 3 4 . 9 . 0 C 3 1.1 -D 6 1.6 . 0 E 15 1.4 . 1 F 9 1.1 .1 G 11 0 . 2 .2 J 38 5 . 0 3 . 0 K 10 1.5 1.5 Note: The inference that none of these markets are characterized by active price competition must be drawn from the evidence i n the fourth column showing the difference between the modal and lowest price i n each market. The data il l u s t r a t e that there i s very l i t t l e divergence downward from the most common price i n any of the markets (except for Area J where two stations i n an isolated sub-market have indulged i n price cutting). The fact that the range between the highest and lowest price i n each market i s of considerably greater magnitude i s not how-ever contradictory evidence. It merely reflects the fact that isolated convenience outlets often charge prices considerably higher than accepted levels because of the additional services involved. 29 more than a tendency towards aggressive price cutting behavior. At times this pattern i s disturbed but under normal market conditions the consumer faces only a limited choice of price and convenience even outside the consignment zones, ( i i i ) High Level of Retail Margin A high level of r e t a i l margins i s the third type of evidence which can be presented to illu s t r a t e the absence of active price com-petition. The 70 margin prevailing in the consignment zones, although lower than margins in these centres prior to the adoption of the con-signment arrangement ;was. higher than the margin prevailing in other Canadian c i t i e s . In 1963» the r e t a i l margin was 60 i n Winnipeg, 6.50 i n Calgary, Edmonton, Montreal, Toronto, and Regina, and 7$ i n Vancouver and Victoria."*" As the data i n Appendix I I I on margins and prices show, margins i n areas outside the consignment zones are s t i l l higher, ranging up to 11.70 i n area K. Thus the information on consignment selling, uniformity of posted prices and high r e t a i l margins leads us to the conclusion that active price competition i s afeeift and hence excess capacity must be present in the r e t a i l gasoline market i n Br i t i s h Columbia. Additional Evidence of Excess Capacity The specific estimates of excess capacity for each area are based on an evaluation of the manner i n which the industry might adapt to increased price competition (included i n the detailed area evaluations •'•Initial submission of Imperial O i l Limited to the Royal Commission on the Gasoline Price Structure. Facing p. 3 8 . 30 i n Appendix II) along with the information to be considered i n the next three sections. These deal with rent subsidization, direct observation of excess capacity and underutilization, and estimates of under-u t i l i z a t i o n by service station operators. Rent Subsidization The analysis of rent subsidization was undertaken to determine the extent to which the service stations whose operators were interviewed were viable economic units. The basic premise of the analysis i s that with profit maximizing lessors and operators earning opportunity incomes, a station which i s a viable economic unit should be paying a rent which i s sufficient to cover the f u l l costs incurred by i t s owner, i.e., not only explicit costs such as property taxes but also implicit costs such as depreciation and return on invested capital. The t o t a l dollar value of the annual subsidization received by each station i s shown by the subsidization per year figure shown for each station. Since the rent subsidization must be received by the o i l companies i n the form of their share of profit on the gasoline handled by each station, the subsidiza-tion per gallon has special significance and hence i s shown separately for each station. The median subsidization per gallon for each area i s shown i n the following table (Table VI). The highest degree of subsidization occurs i n L and I areas. Both of these are i n the present consignment zones which are the site of past price wars. Thus the conclusion may be drawn that the o i l companies have forestalled the market adjustment process which would normally take place i n the face of active price competition. The exit of firms to the point where the number remaining would correspond to 31 TABLE VI RENT SUBSIDIZATION OF SERVICE STATIONS Market Area Median Subsidization (cents per gallon of last com-plete year's sales) E 1.2 G 1.5 I 1.8 J 1.1 L 1.9 the number encompassed by the Chamberlinian "sort of ideal" has been prevented by means of each o i l company granting larger subsidies (in the form of rents below the level of f u l l owners costs) to those of i t s dealers who are located i n aceas where active price competition prevails. Direct Observation of Excess Capacity and Underutilization The sight of a service station every few blocks i n certain populated areas as well as the occasional intersection with two or even three of the corners occupied by service stations leads to the casual observation among the general public that there are too many service stations. The number of occasions when these r e t a i l outlets are serving no customers and the rarity of any waiting period even during rush hours provide the impression that there i s extensive underutilization of these stations. The direct observations resulting from the survey served mainly to confirm the above impressions and to reveal evidence of latent capacity in the form of land area available for additional repair bays or pumping f a c i l i t i e s at many stations. Three qualifications to conclusions based 32 on these direct observations must be taken into account. The f i r s t i s in regard to the observation of excessive numbers of service stations. Zoning regulations and the buying habits of consumers sharply limit the area within which service stations can locate. Thus a group of stations located one on every other block may be serving a large hinterland and the f i r s t impression as to the extent of overcapacity may be exaggerated. This d i f f i c u l t y has been partially obviated by the use of exact information on the operations of each station. The second qualification relates to the identification of specific service stations as the excess capacity in a given r e t a i l gasoline market area. Certain establishments whose operators were interviewed were in the process of exiting from the industry as a result of the normal workings of the market over time for example changing consumer tastes or changing t r a f f i c patterns. The estimates of excess capacity are subject to the criticism that gasoline outlets which are exiting for these normal market reasons cannot be identified e x p l i c i t l y and excluded. This i s not a serious d i f f i c u l t y however since in a given market at any point of time the number of firms exiting for this type of reason i s offset by the number entering for similar reasons (e.g., located on the new road). Also the estimates of excess capacity are not based solely on the performance of individual dealers but rather on a comparison of the present number of outlets to the number which would be present under conditions of active price competition. The third qualification i s i n regard to the accuracy of the impression of underutilization of capacity. Most service stations are integrated gasoline and repair businesses; each gallon of gasoline sold 33 i s accompanied by a certain volume of service and repair work. Thus although observation of the pumping f a c i l i t i e s alone leads to a facile conclusion of underutilization i t must be recognized that although the service station operator could easily add substantially to his gasoline gallonage he might quickly find that his service and repair f a c i l i t i e s would become overtaxed. The discussion of underutilization has attempted to take into consideration the integrated nature of the service station business. Estimates of Underutilization by Service Station Operators The examination of Appendix I shows that dealers were asked to make three different types of estimate of their full-capacity output. Since information on present output was available, comparison of present output to full-capacity output was possible i n order to shed light on the degree of underutilization of existing capacity. Operators were f i r s t asked to estimate the amount of additional gasoline sales they could handle with their existing plant, equipment and labor force, secondly what they could handle with the existing plant and equipment but with additional labor. Thirdly they were asked to estimate the maximum gallonage which could be handled at the site i f new plant and equipment were introduced and additional labor hired. The estimates appeared to be of uneven quality. One bias which was discernable was the direct correlation between the size of the present operation and the estimate of capacity. For example operators with very low gallonages consistently supplied very modest estimates of the extent to which they could expand output. In short only limited reliance could be placed on these estimates, but they were helpful i n 3h providing general guidance and served to point out the problems involved in making such estimates. Conclusions The f i r s t step i n the estimation of excess capacity i n gasoline retailing i s a demonstration of the absence of active price competition. The evidence of consignment selling, the absence of price cutting behavior, and the presence of high r e t a i l margins serves this purpose. The data on rent subsidization strengthens the conclusion. The measure-ment of this excess depends however upon insight into the l i k e l y long run adjustment of the industry to a market structure characterized by active price competition. The estimates of service station operators offer only general guidance to the evaluation of the degree of underutilization. This evaluation depends largely on direct observations (suitably qualified) and a consideration of the overall results of the interviews. CHAPTER III THE EXCESS CAPACITY ESTIMATES We now proceed to a brief summary of the area by area estimates of excess capacity followed by an overall evaluation for the areas covered and for the rural areas of the province as a whole. In con-sidering the following estimates the reader must keep i n mind that, for the reasons outlined in Chapter I the unit of measure of excess capacity i s the standard service station and that for this reason other types of outlets must be segregated in each instance. Because of the confidential nature of the information involved each area has been designated only by a letter of the alphabet. Areas A and B Three rural outlets each pumping less than 70,000 gallons per year. Excess capacity: The single standard service station. Area C Three rural outlets each pumping less than 75,000 gallons per year. Excess capacity: Although two outlets would probably close i n the face of active price competition our estimate must be restricted to the one standard service station i n the area. Area D This i s a small town where isix outlets pump a to t a l of 200,000 35 36 gallons per year. Excess capacity: Four outlets would probably close in the face of active price competition but since one of these i s a motel with gasoline as a sideline our estimate i s a three station excess capacity. Area E This area i s a large town with six downtown businesses offering gasoline i n association with their other services and goods. Along the highway through the town there are seven service stations and two motel and gas combinations. Excess capacity: Only one of the seven highway stations i s associated with a dealership or other business. The gallonage of the remaining six could easily be handled by the other outlets i n a more competitive environment i.e., our estimate i s six service stations. Area F This large town contains six dealers pumping 1+50,000 gallons per year and four high volume service stations pumping 650,000 gallons per year as well as ten marginal outlets averaging 1+5,000 gallons per year each. Excess capacity: It i s estimated that i n the faee of action price competition ten outlets would close but since only eight of these are standard service stations our estimate of excess capacity i s limited to the latter figure. Area G This area can be divided into three geographical locations: the highway leading into town (one outlet); a northerly suburb (six outlets); 37 the town proper (six outlets). Excess capacity; the single integrated outlet on the highway would he relatively unaffected by price competition. The three integrated outlets would easily handle a l l sales leaving excess capacity equal to three service stations in the suburb. In the town proper more active price competition would probably result i n one dealer and one service station exiting. Thus excess capacity equals one station in this area for an overall total for area G of four stations. Area H This area contains five stations i n an urban suburb pumping an average of 170,000 gallons per year each. Excess capacity: Active price competition would probably result in the closing of two marginal stations i f no supportive action were taken by the major o i l companies. Area I This area is another urban suburb with eleven stations again pumping an average of 170,000 gallons per year each. Excess capacity: If the major o i l companies did not interfere with the competitive adjust-ment process four stations would probably close i n the face of active price competition. Area J This small city was the largest single unit covered by the survey. The results can be best analysed i f the large number of stations involved (36) i s segregated into six meaningful sub-regions. Region 1. Seven downtown dealers pumping an average of 70 ,000 gallons per year each. Excess capacity: None since these are convenience 38 outlets only. Region 2 . An industrial area with three stations mainly involved i n repair work. Excess capacity: One station which has a low volume of both gasoline sales and repair work. Region 3 . There are three marginal stations and a dealer pumping an average of 6 0 , 0 0 0 gallons per year each i n this suburb. Excess capacity: The two service stations which would almost certainly exit i n the face of active price competition. Region k. An isolated integrated outlet. Excess capacity: None since although this outlet would probably close i n the face of active price competition i t i s not a standard service station. Region 5. This i s an a r t i f i c i a l region consisting of one service station and six outlets combined with various businesses which have i n common only the fact that although they are scattered throughout the city none of them i s on a highway. Excess capacity: The one service station i s excessive. Region.6. This region consists of the seventeen relatively homogeneous service stations located on the major t r a f f i c arteries of the city and pumping a t o t a l of 2 . 3 million gallons per year. Excess capacity: 2 . 3 million gallons i f pumped by ten stations should be sufficient volume to enable them to compete vigorously on the basis of low cost and efficient operation. Thus excess capacity equals seven stations. Summary: Of the t o t a l 39 outlets i t has been estimated that excess capacity consists of eleven stations. 39 Area K This small isolated city i s serviced by four dealers, a parking garage and seven service stations. Excess capacity: Five of the more marginal service stations would probably close i n the face of active price competition. Overall evaluation of a l l areas i n which interviews were conducted The excess capacity estimates are summarized i n the two tables shown below (Table VIII and Table IX). The estimates for areas H and I have been shown separately since i n metropolitan centres the oligopolistic interdependence of the major o i l companies coupled with their strong influence i n the r e t a i l market through their leased stations makes the emergence of active price competition very unlikely and hence the theoretical basis of the excess capacity estimates i n these areas less satisfactory. TABLE VII EXCESS CAPACITY SUMMARY - METROPOLITAN AREAS . ; , . SAMPLE Present Number of Outlets Area Dealers and integrated businesses Service stations Excess Capacity H 0 5 2 I 0 11 k: Total 0 16 6 1+0 TABLE VIII EXCESS CAPACITY SUMMARY - AREAS OUTSIDE LARGE METROPOLITAN CENTRES Area Present Number of Outlets Excess Capacity Dealers and integrated business Service station A and B 2 1 1 C 2 1 1 D 3 3 3 E 8 7 6 F 7 12 8 G 6 7 1+ J 15 2U 11 K 5 7 5 Total 1+8 621 39 41 Excess Capacity i n the Entire Province of B r i t i s h Columbia It i s very d i f f i c u l t for the reasons advanced i n the previous section to arrive at the meaningful estimate of excess capacity for metropolitan centres. I f the 6 out of 16 proportion for the areas sampled were extended to the 1120 metropolitan stations (1963 total) an excess of the order of 420 stations would be indicated. This estimate must however be viewed i n light of the fact that given the present market structure the theoretical model used as the basis of the definition of excess capacity i s not applicable to these areas. There need be no such qualification to the use of the 39 out of 110 proportion obtained as a result of the estimation of excess capacity i n areas outside the metropolitan centres. Extensive sampling was done over a wide and representative area to j u s t i f y this 35 per cent figure which when applied to the 2107 stations (1963 total) yields an estimate of excess capacity for these areas of approximately 740 stations. CHAPTER IV EVALUATION AND QUALIFICATION OF THE EXCESS CAPACITY ESTIMATES A large proportion of the service stations i n British Columbia have been estimated to constitute excess capacity i n the industry. But several questions remain unanswered: What causes excess capacity to be generated? Does the limitation of the excess capacity estimates to regular service stations bias the estimates because of insufficient coverage? What explains the underutilization of existing outlets which was observed i n the course of the study? These questions w i l l be considered i n turn in the following section of this chapter. Generation of Excess Capacity Through the  Desire for Adequate Brand Representation Competition by the major o i l companies to secure adequate., representation i n a l l market areas i s one of the chief incentives to service station construction and hence the creation of excess capacity. The importance placed on adequate representation i s illustrated by the fact that each market area has roughly the same number of each major company's stations. The only centre varying from this even pattern was Area K where Briti s h American have 9 stations and Standard 7 as against 3 to 5 for other major companies. The duplication of brand stations in a l l the larger centres k2 43 (E, K, G, I, J) would suggest that numbers of stations could be reduced in any centre of over say 2500 population and s t i l l maintain adequate representation. In the smallest centres (A, B, G) some majors have chosen .not to i n s t a l l subsidized, money losing stations to secure representation. This suggests that i n a community such as D where presently the seven major companies each have one station (although the Texaco has been forced to close) i f a more competitive environment were to be introduced, some marginal major company stations would be allowed to close to avoid severe losses. Restriction of Excess Capacity to "Regular" Service Stations As has been outlined above only the "regular" service stations whose principal business i s the retailing of gasoline and lubricants can meaningfully be included i n an estimate of excess capacity. 83 of the 130 stations interviewed f a l l i n this "regular" service station category. We assume these hardest hit i n a more competitive environ-ment. The large number shows there i s adequate room for a working-out of the consequences of a different marketing situation. The other 47 establishments would probably just absorb a reduced margin and continue to pursue their auxiliary businesses (auto dealerships, repairs, motels or stores). Outlets eliminated would probably be mainly i n the service station category but some of the firms with related businesses might choose to discontinue pumping gas i f the margin f e l l too sharply. Others of course would increase gallonage merely by remaining i n business in a new market situation with fewer "regular" service station kk competitors. The view has been taken i n this study that i n the light of this set of opposing forces the market share of this non-service station segment of the market would remain relatively constant in the face of active price competition. Service stations as a group would thus be faced by a constant market share but a lower profit margin and hence lower t o t a l gross income as a result of active price competition. As has been outlined i n the theoretical discussion above, the Chamberlinian "sort of ideal" i n such a situation i s the number of stations which are able to earn a normal return on investment i n such circumstances. In each market acea an attempt was made to estimate this "sort of ideal," the divergence of the existing number of stations from the sort of ideal being the measure of excess capacity. The Chamberlinian discussion i s conducted of course i n terms of an amorphous "quantity of resources" terminology. The quantification i n terms of units of service stations i s possible i n the context of this study since a l l outlets whose principal business i s the dis-pensing of gasoline and o i l at r e t a i l u t i l i z e quite uniform physical plant and operational technique, that exemplified by the standard one or two bay service station. The Underutilization of Capacity If the theoretical concept of excess capacity i s to be restricted to the excessive duplication of outlets then a further explanation must be given for the underutilization of these outlets which was observed i n this study. The excess capacity of a l l factors discussed by Cassels i s a long run concept. Thus each outlet, when long run equilibrium has been reached at a point such as Q i n the diagram shown in footnote 1 below should have adjusted i t s fixed factors to the optimal quantity-required for that output. 1 Three major factors causing the under-u t i l i z a t i o n of the existing units which w i l l be considered for both (a) privately owned stations and (b) major o i l company owned stations are the following: • . (i) The fact that a long run disequilibrium situation i s being observed, i.e., long run equilibrium at Q not achieved ( i i ) Technical bounds to station size ^This i s not precisely true since for a l l equilibrium solutions the downward sloping demand curve DD' i s tangent to the long run cost curve at points to the l e f t of i t s minimum. Therefore DDf must also be tangent to the short run cost curve appropriate in each case at a point to the l e f t of i t s minimum as shown in the following diagram. P Figure 1—Monopolistic Competition Long Run Equilibrium Solution Since Q, the point of tangency when excess capacity i s present, i s to the l e f t of S, the minimum point of the short run average cost curve, some underutilization of fixed factors w i l l be observed even when equilibrium i s achieved at Q. 1+6 ( i i i ) Importance of maintaining the brand image. Privately Owned Stations ( i ) Long Run Disequilibrium When long run equilibrium i s attained at a point such as Q, because of the absence of active price competition i n the market con-cerned an excessive number of optimum sized (as qualified by note l ) outlets w i l l be i n existence. This equilibrium cannot be achieved instantaneously since adjustment of fixed factors i s a lengthy process. Thus when the present market structure i s examined and much underutilization of factors i s encountered, this can be attributed partly to the fact that firms have not had sufficient time to adjust to the new lower outputs which they w i l l be handling when equilibrium i s reached. The importance of this factor i n the gasoline retailing industry is indicated by the long life-span of the fixed factors used. Thus when an outlet i s constructed on the basis of a certain expected level of output and the entry of new stations to the marketing area reduces i t s output i t may be ten or twelve years before the existing physical plant requires replacement. During this entire ten to twelve year period the firms i n this area w i l l be in long run. disequilibrium and under-u t i l i z a t i o n of the existing capacity w i l l be observed. A second dynamic factor which may account for part of the under-u t i l i z a t i o n i s the fact that market demand may be growing or be expected to grow. In this case outlets may be larger than would be optimal in view of present conditions since entrepreneurs are considering these growth factors i n determining the size of outlet to be constructed. hi In the case of privately owned stations growth factors w i l l be of secondary significance since most operators lack sufficient investment capital to construct stations larger than present demand would warrant. ( i i ) Technical Bounds to Station Size Technical considerations i n regard to the physical operation of a service station set a lower bound to their size. Thus even although a very low gallonage may be available to a station technical considerations dictate the construction of a building large enough to hold at least one bay (and nearly always two) plus an office, the installation of two pumps, and the paving of an area large enough to provide parking and access. I t i s true of course that i n rural areas gasoline dispensing may be combined with other businesses and this type of technical i n d i v i s i b i l i t y overcome. But even here the fact that the individual operator i s indivisible means that i n an area where demand i s not sufficient to justify the employment of one man i n an outlet under-u t i l i z a t i o n w i l l be observed even i n such a small one man operation. ( i i i ) Maintenance of the Brand Image Since the actions of any single dealer cannot significantly affect the overall brand image of the o i l company whose products he distributes, considerations affecting the maintenance of this image play only a minor role i n determining the size and nature of outlet to be constructed by private investors. To the extent that major o i l companies are able to influence these investment decisions through their power to refuse to allow their products to be sold through sub-standard outlets maintenance of the brand image becomes operative i n the same fashion as for leased stations as described below. U8 Stations Leased from Major O i l Companies (i) Long Run Disequilibrium As for privately owned stations a long run equilibrium may be achieved with an excessive number of optimum sized outlets i n existence. The adjustment by the major o i l companies of the scale of their outlets to a size appropriate to the gallonage to be handled at this long run equilibrium i s slowed i n the same fashion by the long l i f e of the fixed factors involved. During the ten to twelve year physical l i f e of a station the firms w i l l be i n long run disequilibrium and underutilization of existing capacity w i l l be observed. Expectations of future market growth play an important role i n the investment decisions of major o i l companies. Growth considerations become important in the determination of the size of outlets principally because the o i l companies possess the financial resources to implement programs designed to provide capacity which w i l l necessarily stand idle for perhaps several years i n order to service future increases i n volume without station alterations. The data on rent subsidization.shows.in part that the o i l companies are prepared to sustain current losses on their service station investments i n order to provide outlets which are of larger than optimal size. Thus expectations of future market growth are an important factor leading to an underutilization of existing capacity. ( i i ) Technical Bounds to Station Size Since both the o i l companies and private owners operate outlets of identical technical nature, the conclusions reached i n the discussion of privately owned stations i s equally applicable here. h9 ( i i i ) Maintenance of the Brand Image The maintenance of the brand image of the major o i l company is an important factor influencing the building of stations which are too large by the standard of any present or expected future demand. Just as the major o i l companies wish to have a representative of their brand i n every market area in order to service regular customers who are touring, they also wish to maintain each of these stations at an equally high standard. Considerations of this sort i n addition to the advantage for advertising purposes of having a chain of identical outlets dictate in some market areas an outlet larger than that which would, these considerations aside, be needed to handle the gallonage available. This also i s then a possible cause of the underutilization of existing capacity which was observed in the study. Conclusions The desire for adequate brand representation i n each sub-market appears to be an important influence in.the generation of excess i capacity. Evidence indicates however that i f excessive losses occur in a certain sub-market the major o i l companies w i l l sacrifice brand representation. Excess capacity should be restricted to units of "regular" service stations since these are the outlets whose main business i s the r e t a i l dispensing of o i l and lubricants and hence are the group which would bear the brunt of the closures i n the face of more active price competition. Finally we have seen above that although;lithe Chamberlinian analysis provides us with a rationale to explain the excessive prolifera-tion of service stations additional explanations must be sought for the underutilization of these outlets which was observed i n the course of 50 the study. The following three explanations were considered: ( i ) The situation presently being examined i s often one of long run disequilibrium. ( i i ) There are minimum technical bounds to the size of service stations which can be constructed. ( i i i ) A minimum standard i s required of any service stations i n order to maintain the brand image of the major o i l company which w i l l supply i t . These three explanations provide a sufficient explanation of why both privately owned and leased service stations could have been expected to be underutilized at the time of the study. CHAPTER V CONCLUSIONS The purpose of this study was to analyse the competitive pressures producing excess capacity and causing the underutilization of capacity i n gasoline retailing. Furthermore an attempt was made to estimate the excess capacity existing i n this industry in Bri t i s h Columbia. Before excess capacity could be measured or the competitive pressures producing i t could be analysed i t was necessary to decide exactly what i s meant by the term. A study of the relevant literature led to the choice of the following definition: Excess capacity = (number of outlets existing i n an industry under present competitive conditions) - (number of outlets which could be expected i n the industry under conditions of active price competition). In more general terms "excess capacity" refers to the presence i n an industry of an amount of general productive resources which i f they were more efficiently employed could produce an output that would add more to the rational income. The definition used i n this thesis has proven to be a useful criterion to quantify the resource misalloca-tion present in gasoline retailing i n Bri t i s h Columbia. To measure excess capacity i t was necessary to hypothesize the long run equilibrium result of active price competition i n each sub-market under consideration. For each area an estimate of excess capacity 51 52 was calculated by comparing the number of outlets which would result in long run equilibrium under conditions of active price competition to the number presently operating i n the market. Using this procedure for metropolitan areas i t was estimated that six out of sixteen service stations interviewed constituted excess capacity. However because of the strong influence of the major o i l companies i n the metropolitan r e t a i l gasoline market and the compli-cation introduced by their oligopolistic interdependence this investi-gator f e l t i t inadvisable to extend this six out of sixteen proportion to the f u l l 1120 metropolitan stations (1963 t©ia<3). The estimation procedure i s however f u l l y applicable to the non-metropolitan areas of the province. In these areas the 39 out of 110 proportion obtained as a result of the interviews can confidently be extended to the f u l l 2107 stations (1963 total) i n this category to yield an excess capacity of approximately 7^0 stations. BIBLIOGRAPHY Andrews, P. W. S. Fair Trade: Resale Price Maintenance Re-examined, London, Macmillan, i 9 6 0 . Andrews, P. W. S. On Competition i n Economic Theory, London, Macmillan, 1964. Bain, J. S. Barriers to New Competition, Cambridge, Harvard, 1956. Baumol, William J. Business Behavior, Value and Growth, New York, Macmillan, 1959. Cassels, John M. "Excess Capacity and Monopoly," Quarterly Journal  of Economics, Vol. 51 (May 1937), pp. 426-44"3T Chamberlin, E. H. The Theory of Monopolistic Competition, Cambridge, Harvard, 1933. Demsetz, H. "The Nature of Equilibrium i n Monopolistic Competition," Journal of P o l i t i c a l Economy, Vol. 67 (February 1959), PP. 21 -30. Demsetz, H. "The Welfare and Empirical Implications of Monopolistic Competition," Economic Journal, Vol. 74 (September 1964) , pp. 623-6U1. Dow, Louis A. and Lewis M. Abernathy. "The Chicago School on Economic Methodology and Monopolistic Competition," American Journal of  Economics and Sociology, Vol. 22 (April 1963) , pp. 235-250. Fellner, William. Competition Among the Few, New York, Knopf, 1949. Ford, P. "Decentralization and Changes i n the Number of Shops, 1901-1931," Economic Journal, Vol. 46 (June 1936) , pp. 359-363. Ford, P. "Excessive Competition i n Retail Trades. Changes i n the Number of Shops, 1901-1931," Economic Journal, Vol. 45 (September 1935) , pp. 501-508. Friedman, Milton. "The Methodology of Positive Economics," Essays  i n Positive Econimics, Chicago, University of Chicago, 1953-Hall, Margaret and C. Winsten. "The Ambiguous Notion of Efficiency," Economic Journal, Vol. 69 (March 1959), pp. 71-86. 53 54 Hall, Margaret. Distribution i n Great Britain and North America, London, Oxford, 1961. Hall, Margaret. Distributive Trading, London, Hutchinson's, 1949. Hall, Margaret and John Knapp. "Gross Margins and Efficiency Measure-ment i n Retail Trade," Oxford Economic Papers, N.S. Vol. 7 (October 1955) , PP. 312-326. Harrod, R. F. Economic Essays, London, Macmillan, 1952 Hicks, J.. R. "The Process of Imperfect Competition," Oxford Economic  Papers, N.S. Vol. 6 (February 1954), pp. 41-54. Johnson, Harry G. "The Taxonomic Approach to Economic Policy," Economic  Journal, Vol. 6 l (December 1951) , PP. 812-832. Kahn, R. F. "Some Notes on Ideal Output," Economic Journal, Vol. 45 (March 1935) , PP. 1-35. Kaldor, Nicholas. "Market Imperfection and Excess Capacity," Economica, New Series, Vol. 2 (February, 1935) reprinted i n Readings i n  Price Theory, G. J. Stigler and K. E. Boulding editors, Chicago, Irwin, 1952. Klein, L. R. "Some Theoretical Issues i n the Measurement of Capacity," Econometrica, Vol. 28 (April i 9 6 0 ) , pp. 272-286. Lewis, W. A. "Competition i n Retail Trade," Economica N. S. Vol. 12 (November 1945) , pp. 202-234. Morrow, Charles William. Royal Commission on Gasoline Price Structure, Victoria, Queens Printer, 1966. P h i l l i p s , A. "Appraisal of Measures of Capacity," American Economic  Review, Papers and Proceedings, Vol. 53 (May I 9 6 3 ) , pp. 309-313. Robinson, Joan. Economics of Imperfect Competition, London, Macmillan, 1933. Schumpeter, Joseph A. Capitalism Socialism and Democracy, New York, Harper, 1942. Smithies, A. "A Theory of Value Applied to Retail Selling," Review  of Economic Studies, Vol. 6 (June 1939) , pp. 215-221. Spencer,...Milton H., Colin G. Clark and Peter W. Hoguet. Business and  Economic Forecasting. Homewood, Irwin, I 9 6 I . Stigler, George J. . "Monopolistic Competition in Retrospect," Five  Lectures on Economic Problems, London, Longmans, 1949-Townsend, Harry. "Competition i n Petroleum Retailing," The Three  Banks Review, The Royal Bank of Scotland, Edinburgh, 1966. Wilson, T. and P. W. S. Andrews, eds. Oxford Studies i n the Price  Mechanism. Oxford, Clarendon, 1951. APPENDICES I. Questionnaire used for survey of service stations I I . Detailed description of each gasoline marketing area and the service stations within i t . I I I . Detailed data and a discussion of this data on the following aspects of each market area: (a) Posted r e t a i l prices (b) Rent subsidization (c) Calculation of gallonage required at five cent per gallon margin to maintain dealer incomes. APPENDIX I SURVEY OF SERVICE STATIONS being carried out for THE ROYAL COMMISSION ON THE GASOLINE PRICE STRUCTURE The purpose of this questionnaire i s to aid the Commission in assessing the economic efficiency of the r e t a i l distribution system for gasoline i n B r i t i s h Columbia. The information obtained from this survey w i l l be treated as confidential. The answers given to the following questions w i l l be used i n the study but the service stations providing the information w i l l not be identified. Name and Brand Designation Location Kind of Station: Self-owned and operated.. Is there a mortgage on the property?.. Leased from o i l company from other Other Number of Islands Number of Hoses.... Number of Bays Size of Lot Name of person interviewed Position lesee . . . . owner manager other 57 1. How long have you been i n charge of the station? 2. What was your previous position? 3. About what percentage of your gasoline business comes from people who liv e and work i n this area? * k. With how many stations are you i n direct competition? 5. About what percentage of your gasoline business i s handled with Credit Cards? $ Charge Accounts $ Cash? % 6 . What was the gallonage here last year? 7. How does this gallonage compare with previous years? 8. How many gallons did you s e l l i n your best year at this station? in your worst year? 9. Average monthly sales last year = 12 10. What was the monthly pattern of your gasoline sales last year, i.e., what months were busier or quieter than the average? January May September February June October March July November A p r i l August December 11. Is this the usual pattern? 12. Daily average last month ___________ = 13. What are your busy days and what are your slack days during the week? Monday Friday Tuesday Saturday Wednesday Sunday Thursday 59 lU. What are your hours of operation? 15 . (a) What are your busy and slack periods during the day? (b) What percentage of daily gallonage i s pumped during your busy periods? % 16. What i s your estimate of the gallonage of sales you lose because your customers have to wait?? 17. Including yourself, how many persons are employed at this station and how many hours a week do they work? Hours per week Wages per hour Owner-Lessee-Manager ______________ Employees: Full-time Part-time 1 _______________ 18 . How i s the time of yourself and your employees divided among: (a) gasoline sales and pump island sessions j0 1 (b) service and repair work % 1 (c) idle time i ? 1 9 . What i s the largest gallonage ever sold i n one month at this station? 2 0 . Given the present time pattern of your sales how many gallons of gasoline per month do you estimate could be sold at this station with no increase i n the number of hours worked, no change i n the physical f a c i l i t i e s of the station and without a line-up for service? 2 1 . I f you could s e l l more gasoline with the existing number of hours worked what changes i n working arrangements would be made by you and your employees? 2 2 . What i s the maximum gallonage you could possibly handle at this station, after adding new employees and pumps? 2 3 . For what percentage of your customers do you provide the following free services? (Percentage applies to tot a l number of individual gasoline purchases.) 60 Windshield wiping Water, battery and o i l checks Check tires Other 2k. I f you didn't perform these free services by how much could you reduce your labour requirement? 2 5 . What rental i s paid to the supplier company? 2 6 . What free painting, advertising, training, etc. have been provided by the supplier company i n the last two or three years? 2 7 . What are the suppliers' policies with respect to repair work, o i l , and T.B.A. 2 8 . T.W. Price Retail Price Margin-(or Consignment Commission) Regular Premium 2 9 . What was your t o t a l income from this station i n the last financial year? 3 0 . What fraction of this income would you attribute to the sales of gasoline? sales of T.B.A. service and repairs _________»___»_ 3 1 . Investment Date of Investment Actual Value per Tax Assessment By dealer Land By company ______________ Improvements Total $ Total $ 3 2 . In general what are the biggest problems that service stations are facing today? 61 SURVEY OF SERVICE STATIONS being carried out for THE ROYAL COMMISSION ON THE GASOLINE PRICE STRUCTURE You are requested to provide, on a confidential basis, the following information on gross profits and investment to The Royal Commission on the Gasoline Price Structure. The answers given to the questions w i l l be used i n the study of the r e t a i l gasoline distribution system but the service stations providing the information w i l l not be identified. Name and Location of Station From the balance sheet at your last financial year end: For Partnership or proprietor For limited Company Owner's (or partners*) equity$ ' Capital stock ipT Long term debt Earned surplus _ Total Investment $ Long term debt _ Total investment $ From the income statement for your last financial year end: Gasoline O i l Tires, Batteries, Accessories Service and Labor Expenses Occupancy - Rent Wages Front-end Wages Repair Shop Other Expenses Please return the completed form to: Sales - Cost of Sales = Gross Profit $ $ $ Total Gross Profit Dealer Income $_ $ Dr. J. Young, Economics Department University of Briti s h Columbia Note: I f a Limited Company please state wages paid to owners: Thank you very much for your co-operation i n this study. APPENDIX II This appendix contains a detailed description of each market area and the service stations within i t . In the discussion of areas for which estimates of excess capacity were developed, there i s included a detailed evaluation of the probably long run equilibrium results of active price competition i n each market. TABLE IX AREAS A AND B 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (l ) Repair garage 50 (2) Store and gas 67 (3) Service station 4o Total 157 Areas A and B are on the border of a price war area. Station (3)'s price i s 4 . 9 cents higher on regular gasoline than the price posted by the other two stations. Conclusions for Areas A and B (a) Dealers were unaware of the possibility of going off con-signment. (b) The operators interviewed f e l t that r e t a i l sales by bulk 62 63 dealers were as important a factor i n reducing gallonage i n this area as the price differential between this area and the price war area. (c) Low variable costs and low opportunity incomes combine to keep sub-marginal rural stations open. TABLE X AREA C 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (l) Service station and cafe 75 (2) Repair garage 19 (3) Store and gas 28 Total 122 Conclusions for Area C The t o t a l gallonage could easily be pumped by any one of the concerns. I f a more competitive environment were introduced (perhaps by a ripple effect from D) the most l i k e l y result would be to put ( l ) and (3) out of the gasoline business. Summary Two outlets closed. One store/gas combination pumping 122,0000 gallons per year l e f t . 6k TABLE XI AREA D 1963 SALES OP EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (l ) Service station 35 (2) Service station 30 (3) Service station 30 (k) Repair garage 55 (5) Store and gas *5 (6) Motel and gas 5 Total 200 Conclusions for Area D A more competitive environment would probably result i n the closing of a l l outlets save (k) and ( 5 ) . Since (k) does the repair work for a saw-mill owned by i t s owner and (5) has an active r e t a i l grocery business, they would maintain their operation. I f the gallonage were s p l i t approximately evenly (i . e . , 100,000 gallons per year each), both would be well within the limits of physical capacity. Summary Three service stations and one motel/gas combination closed. One store/gas and one repair garage remaining open pumping a t o t a l of 200,000 gallons per year. 65 TABLE XII AREA E 1963 SALES OF EXISTING OUTLETS Type of outlet : Sales (Thousands of Gallons per year) (a) Highway stations: ( l ) Service station 26 (2) Motel and gas ho (3) Service station 90 (h) Service station 120 (5) Service station 70 (6) Motel and gas 20 (7) Service station 80 (8) Service station 90 (9) Service station ho Total 576 (b) Town stations: (10) Co-op store and gas 67 (11 Dealer and shop +plus gas 60 (12) Dealer and shop plus-gas 80 ( l 3 ) Repair garage 30 (ih) Repair garage 36 (15) Dealer 70 Total 3^3 Conclusions for Area E The town stations are a l l integrated with other businesses. They estimate they could handle 500,000 gallons per year without any increase i n the number of hours worked. One of the highway stations i s associated with a dealership. Therefore this station plus perhaps the two motel/gas combinations i n association with the town stations could handle the t o t a l annual gallonage of 920,000 gallons. This would be a probable result of a more competitive environment 66 since the service stations have very low gallonage and would be un-economic at lower margins without additional subsidization. Summary, 6 service stations closed. Two motel/gas combinations and seven stations combined with dealerships l e f t . TABLE XIII AREA F 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (a) Dealers who would remain i n business despite a more com-petitive marketing situation ( l ) Dealer 60 (2) Dealer 85 (3) Dealer 60 (k) Dealer 50 (5) Dealer 123 Total 378 (b) Service stations presently pumping over 100,000 gallons per year (6) Service station 200 a (7) Service station 240 (8) Service station 105 (9) Service station 1 0 8 a Total 653 67 TABLE XIII (Continued) 1963 SALES OF IXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (c) Low volume marginal outlets (10) Service Station 50 ( l l ) Service station 4 o a (12) Grocery store and gas 1 2 a (13) Service station 4 o a (14) Service station 4 o a (15) Dealer 70 ( l 6 ) Service station 38 (17) Service station 4 o a (18) Service station 5 0 a (19) Service station 75 Total 455 aDenotes operator of outlet not interviewed. Conclusion for Area F The dealer group can be depended upon to carry on their gasoline business i n the face of reduced margins i f for no other reason than merely customer convenience. One dealer however did state that in such a situation he would remove his pumps. This outlet has therefore been shown above amongst the marginal service stations. In this town there is a rather sharp break between the large volume efficient stations and the low volume outlets. The four high-volume stations pump approximately 50 per cent more gasoline than the ten low-volume stations combined. In a more competitive situation i t seems l i k e l y that the 455,000 gallons handled by the latter group could be absorbed by the high volume stations (taking another 200,000 or 300,000) and the balance going to the dealers who are operating on very 68 low volumes at present. Summary Five dealers and four high volume stations l e f t . Ten inefficient stations closed. TABLE XIV AREA G 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) Section 1 (l) Grocery store and gas 75 Section 2 (2) Dealer 50 (3) Dealer 79 (4) Machine shop and gas 100 (5) Service station 87 (6) Service station 84 (7) Service station 5 0 a (8) Dealer 63 (9) Dealer ko (10) Service station 135 (11) Service station 85 (12) Service station 205 (13) Service station 190 Total 1,243 denotes operator of outlet not interviewed. 69 Conclusions for Area G Section 1. A lower margin would result i n lower profits for this operation, but would probably not affect i t s gallonage to any large extent. The associated businesses (repairs and groceries) would enable i t to remain open. Section 2. A more competitive situation would almost certainly close the three service stations i n this area, since they are a l l so extremely marginal now. The two dealers and the machine shop and gas operation would be able to stay open because of their associated businesses. I f expanded to their estimated capacity these three stations could handle the whole gallonage for section three. It i s probably however that the abandonment of doubtful business practices (such as carrying many poor-risk accounts receivable) would result i n a shift of a portion of this volume to Section 3. Section 3. The one very marginal service station and the dealer who pro-fessed a lack of interest i n gasoline would probably drop out i n a more competitive environment, whereas the three high volume service stations and one dealer would stay. Summary Section 1. One station remains. No closures. Section 2. Three service stations closed. Two dealers plus one machine shop and gas combination remain. 70 Section 3 . One station and one dealer closed. Four stations remain open. Eight out of twelve are efficient economic units. TABLE XV AREA H 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (l ) Service station 120 (2) Service station 2i+0 (3) Service station 200 (k) Service station 180 (5) Service station 100 Total 840 A l l stations are pumping at capacity during the four o'clock to six o'clock rush hour. Conclusions for Area H Physical pumping capacity and an adequate level of operator income could be provided by three stations. Both the low gallonage stations (l) and (5) are marginal and would probably be forced out i n a more competitive environment. This however would result i n a degree of reduction i n customer satisfaction. Since the five stations presently operate at capacity during the four o'clock to six o'clock ruth, a reduction i n their number would force some consumers either to change their time of purchase or to purchase their gasoline i n some other d i s t r i c t . Summary Three service stations l e f t . Two closed. TABLE XVI AREA I 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) (l ) Service station 262 (2) Service station 260 (3) Service station 250 (U) Service station 2 0 U a (5) Service station 180 (6) Service station 180 (7) Service station 170 (8) Service station 150 (9) Service station 120 (10) Service station 100 ( l l ) Service station UO Total 1,916 ^Denotes operator of outlet not interviewed. 72 Conclusions for Area I Stations (9) and ( l l ) , besides being among the lowest gallonage stations, also did the lowest volume of repair work. Station (10) was the second lowest i n gallonage. Although i t does a good repair volume, the advanced age of the f a c i l i t i e s limits i t s efficiency. A more competitive situation would eliminate these three. The annual sales of 1 ,916,000 gallons could be pumped by five stations, but five stations could not provide adequate repair f a c i l i t i e s for this area. Either six or seven stations would be required to pro-vide both repair and pumping f a c i l i t i e s . As i n the area discussed above, the peak load problem from four o'clock to six o'clock would mean some losses in consumer satisfaction with this reduced level of service. The problem however i s not so severe in this area. Summary Six or seven stations remaining open out of eleven. 73 TABLE XVII AREA J 1963 SALES OF EXISTING OUTLETS Type of outlet Sales (Thousands of gallons per year) Section 1 (1) Dealer 30 (2) Dealer 65 (3) Dealer 75 (k) Dealer 66 (5) Dealer 20 (6) Dealer 100 (7) Dealer 46 Total 1+02 Section 2 1 (8) Gas plus large repair volume ho (9) Gas plus large repair volume 1+0 (10) Gas plus large repair volume 55 Total 135 Section 3 (11) Service station 90 (12) Dealer 1+8 (13) Service station 60 (ik) Service station 38 Total 236 Section h (15) Grocery store and gas 12 Section 5 (16) Service station 1+8 (17) Repairs (not interested in gas) 7 (18) Groceries and gas 1+0 (19) Groceries and gas 15 (20) Groceries, motel and gas 17 (21) Dealer 101 (22) Groceries, motel and gas 52 Total 280 TABLE XVII (Continued) Type of outlet Sales (Thousands of gallons per year) Section 6 (23 (24 (25 (26 (27 (28 (29 (30 (31 (32 (33 (31* (35 (36 (37 (38 (39 Service station 118 Service station 60 Service station l l U 8 Service station 1+0 Service station 60 Service station 70 Service station 50 Service station 93 Service station 165 Service station 252 Service station 230 Service station 322 Service station 140 Service station 130 Service station 160 Service station 190 Service station plus large repair shop 75 Total 2,303 Conclusions for Area J Section 1. Since a l l dealers supplied gasoline to their customers to a large degree mainly as a convenience item, i t i s assumed that a more competitive situation would not change their attitude i n this regard and that i n such a situation they would continue to pump approximately their present gallonage. Section 2 . These outlets, since they are i n an industrial area, depend heavily on their repair work. Station (10) has a small volume of repair work. A more competitive environment would eliminate him. Section 3 . The dealer in this section expressed l i t t l e interest i n gasoline sales and need not be assumed to continue providing i t 75 even on a convenience basis. The three service stations a l l rely-heavily on gasoline sales and are a l l very marginal. There i s only sufficient volume i n this area to support one efficient station i n a competitive marketing situation. Section h-. Gas insignificant for this outlet. It would close i f margins reduced. Section 5« (16) i s a very marginal station and (17) i s very uninterested i n gasoline sales. Competition would probably close these. Since the remaining outlets are a l l associated with other businesses i t seems l i k e l y that they would continue to operate despite the reduced margins that competition would bring. Note: It i s not suggested that the repair portion of ( l 7)'s business would close down. He would probably concentrate on i t exclusively. Section 6. In this urbanized setting, this selection of the outlets (excluding dealers) i s relatively homogeneous. The economic efficiency of the various stations can be judged roughly by the com-parative gallonage figures. (39) does not f a l l into this pattern be-cause i t has a large repair business. Assuming that those stations which have been unable to achieve large gallonages i n present circumstances would continue to do rela-t i v e l y poorly, i t would appear that a more competitive environment would eliminate stations (2U) to (30) inclusive. The ten remaining stations would each have a share of the 2 , 3 0 3 , 0 0 0 gallon per year t o t a l , which should be sufficient to enable them to compete vigorously on the basis of low cost, efficient operation. 76 TABLE XVIII EXPECTED RESULTS OF ACTIVE PRICE COMPETITION IN AREA J Outlets Outlets Annual gallonage Section Closing Remaining Open (thousands of gallons) 1 None Seven dealers 402 2 One low repair Two high repair 135 3 Three low gallonage One station 236 4 One not interested None 12 5 One service station Five combined 280 and one repair shop businesses (gasoline section only) 6 Seven service stations Ten service stations 2 ,303 Total . Fourteen stations Twenty-five stations 3,368 TABLE XIX AREA K 1963 SALES OF EXISTING OUTLETS Type of outlet Sales . . . . . (Thousands of gallons per year) (1) Auto parts and gas 42 (2) Dealer 75 (3) Dealer 155 (h) Service station 146 (5) Service station 80 (6) Service station 125 (7) Dealer 112 (8) Service station 185 (9) Parking garage and gas 96 (10) Service station 180 (11) Service station 175 (12) Dealer 100 - Total 1,471 77 Conclusions for Area K (9) buys on a tender basis and would continue to supply customers as a convenience i f margins were reduced. The dealers, since they operate integrated businesses, would probably continue to pump their present volumes (at least) i n a competitive market with fewer stations. These outlets ( 2 ) , ( 3 ) , ( 7 ) , (9) and (12) account for 538,000 gallons per year. Stations ( l ) , (h) and (5) are extremely marginal and would be the f i r s t to close i n a more competitive market. They presently account for 268,000 gallons per year i n t o t a l . Although these three closures would leave 665,000 gallons for the remaining four service stations, i t must be borne i n mind that the high level of wages and profits (which are necessary i n this area because of the isolated geographic location) mean that higher than ordinary gallonages would be required i f margins were to be reduced. Also part of this 665,000 gallons might be diverted to the dealers. We may thus conclude that a reduction to two i n this last group of service stations might be l i k e l y i n a more competitive market situation. Remaining: k dealers plus parking garage 538,000 gallons per year Summary plus share of closures 2 service stations 933,000 gallons per year less share of closures going to dealers Closing: 3 marginal service stations 268,000 gallons per year 2 service stations 320,000 gallons per year 78 TABLE XX AREA L 1963 SALES OF OUTLETS INCLUDED IN SAMPLE Type of outlet Sales (Thousands of gallons per year) (1) Service station 210 (2) Service station 235 (3) Service station 335 Service station 265 (5) Service station 1100 (6) Service station 135 (7) Service station 188 (8) Service station 242 (9) Service station 350 (10) Service station 180 (11) Service station 70 Conclusions for Area L The d i f f i c u l t y of drawing firm conclusions from this technique of random sampling over wide areas was one of the determining factors in deciding on the block sampling technique used i n the remainder of the study. Fifty - s i x per cent of stations named four or more direct com-petitors, but 85$ of the stations stated that 70 per cent or more of their business came from those who lived or worked i n the area of their station. This seems to be the strongest evidence of overcapacity. 79 Gallonages ranged from 7 0 , 0 0 0 to 350,000 gallons with physical plants which were very similar. Thus although Area L has a distinct peak load problem (i.e. , at 4 : 0 0 - 6 : 0 0 , week-ends, and July, August) i t seems that the smaller volume stations are definitely under-utilized. This conclusion i s borne out by the fact that operators estimated that at present they were pumping, on the average, only 57 per cent of their capacity with present number of hours worked. APPENDIX III This appendix contains detailed data and a discussion of this data on the following salient aspects of market areas i n which inter-views were conducted: (a) Posted r e t a i l prices (b) Rent subsidization (c) Calculation of gallonage required at five cent per gallon margin to maintain dealers incomes. (a) Posted Retail Prices In each market area procing policies were evaluated to determine the degree of active price competition present. The results were as follows: In market areas L, I, H, identical prices of 3 9 . 9 (cents) for regular and 4 4 . 9 for premium were posted by a l l stations since a l l those markets were i n the metropolitan Vancouver area covered by the consignment arrangement whereby the major o i l companies determined the r e t a i l price and paid a commission of 7 cents for each gallon sold. Market A stations, although they also were covered by consignment arrangement, posted 4 0 . 9 and 4 5 . 9 since transportation charges to this area were one cent per gallon. The 4 . 9 cent price differential on regular between these stations and the one at B reflect only the different treatment accorded purchases i n the B market area by the o i l companies (the B price i s made up of the tank-wagon price plus the dealer's choice 80 81 of a mark-up). The wide price difference i s not the result of price competition by the A market area stations. Station (2) i n C market area posted approximately one cent higher than the other two stations since he was not interested i n gasoline business. The two other stations posted almost identical prices. Station (6) (a motel outlet) i n D market area was similar to Station (2) mentioned above i n that his price was 1.3 cents above the lowest price i n the area because of his lack of interest i n the gasoline business. Prices of the other five stations were within .5 cents on regular although there was a spread of 1.6 cents on premium (one com-bination store gas outlet . 9 cents higher than a l l others). No price competition was evident. In Market Area E thirteen of the fifteen stations posted between 47.5 and 4 7 . 9 for regular; 51.5 and 51.9 for premium. The two remaining stations posted higher prices. No evidence of active price competition was observed. Only nine of the nineteen stations i n Market Area F were interviewed. Of these five posted 4 4 . 9 for regular; one was . 1 cents lower which the remainder ranged up to 1 cent higher. Premium prices were grouped i n the narrow range from 48.2 to 48 .9 . No dealer was w i l l i n g to incur the displeasure of other dealers by cutting below prevailing prices to meet the lower prices at stations i n the nearby consignment zone. In Market Area G a l l stations but one posted regular at 4 5 . 9 . The one exception, station (9) posted at .2 cents lower for regular. This station was one of the two posting lower than the 4 9 . 9 premium price of ten of the twelve stations. However, the actions of station (9) 82 cannot be taken as evidence of active price competition since i t i s primarily a dealership and i s not interested i n gasoline business. The majority of stations i n Market Area J posted 5 0 . 9 cents for premium allowing a 9 . 1 cent margin and 46 .9 for regular allowing a 1 0 . 1 cents margin. The price cutting station, (28) posted at 7 . 1 cents margin on regular and 6 .2 cents on premium. His competitor ( 2 6 ) , across the street, obtained 7 . 1 cents on each. The r e t a i l commission dealery; ( 3 7 ) , posted at what would amount to 8 . 1 cents on each. The other four stations charging less than the usual mark-up were a l l small stations strung out along the highway east of. J. With one exception, stations posting higher than usual mark-ups (eight stations) were small gallonage down-town stations. The exception, Station (38) (a 190,000 gallon highway station in town) charged the highest margin of a l l : 12 .1 cents on regular; 11.1 cents on premium. The operator stated that he had not noticed any drop-off i n gallonage because of his higher prices. The actions of station (28) definitely constitute active price competition. Since the station i s off the main t r a f f i c arteries and i s a relatively small establishment, collective action by local dealers has been sufficient to maintain the customary level of r e t a i l prices. Station (37) which i s of the same brand as station (28) and (26) which i s near i t , have been forced to reduce their prices however. In summary, since other dealers have been able to withstand the pressure to cut prices resulting from station (28)*s actions this market cannot be said to be characterized by active price competition. In Market Area K five stations posted regular within .1 cents of 83 U9.9 while four others were within . 1 cents of 48 .5 . Premium prices were scattered over the range from 51.4 to 53.3 except for station (l)'s 49.9 price. This latter was probably more a result of dealer ignorance than any other factor since the operator of this outlet was uninterested in gasoline and sold a very small volume. Price differentials were not advertised and dealers did not appear to be aware of their magnitude. In,-short price cutting did not seem to be a competitive device. Conclusions le^Posted Retail Prices The price cutting of station (28) i n Market area J provides the only real evidence of active price competition uncovered by the survey i n any of the areas i n which interviews were conducted. However even in this case the impact of the price-cutting was as limited by the dealer's isolated location that the conclusion can be drawn that there was no active price competition i n any of the interviewed areas. Evidence for this takes the following forms: (a) Substantial price uniformity i n most areas. (b) Statements by operators that they would not wish to displease their fellow operators by price cutting and that i t would do no good since there was only so much gallonage to go around and competitors would be forced to meet the price cut to maintain their share. (c) Dealer ignorance of price differentials. (d) Reluctance of most dealers to post price signs or otherwise advertise price differentials. (e) High r e t a i l price margins.^ TABLE XXI 1963 POSTED RETAIL GASOLINE PRICES Market Area Station Number Price (cents per gallon) Market. Area Station Number Price (cents per gallon) Regular Premium Regular Premium A 1 40.90 45.90 G 1 45.90 49.90 2 40.9 4 5 . 9 2 . Q ^5.9 4 9 . 9 B 4 5 . 8 N / A 5 4 4 5 . 9 4 9 . 9 5 4 5 . 9 4 9 . 9 C 1 47 .5 51.9 6 4 5 . 9 ^9.9 2 4 8 . 6 - 7 a 3 47.7 52.2 8 4 5 . 9 4 9 . 9 9 45.7 4 8 . 1 D 1 4 8 . 6 5 2 . 0 10 4 5 . 9 . 4 9 . 9 2 4 8 . 3 51.3 11 4 5 . 9 4 9 . 9 3 4 8 . 3 51.3 12 4 5 . 9 4 8 . 9 4 4 8 . 5 51.5 13 ^5.9 **9.9 5 4 8 . 5 52 .9 N / A 6 4 9 . 6 5 2 . 6 J 1 4 6 . 9 2 4 7 . 0 5 0 . 9 E 1 47 .7 51.7 3 4 7 . 8 51.9 2 h7.9 51.9 4 4 6 . 9 5 0 . 9 3 4 8 . 9 52.9 5 47 .9 51 .9 4 4 7 . 8 51.7 6 4 6 . 9 5 0 . 9 5 a 7 4 6 . 9 5 0 . 9 6 47.9 51 . 6 8 4 6 . 9 5 0 . 9 7 4 8 . 9 52 .9 9 4 6 . 9 5 0 . 9 8 4 7 . 6 51 .6 10 • 4 6 . 9 5 0 . 9 9 4 7 . 6 51 .6 11 4 6 . 9 5 0 . 0 10 47.7 51.7 12 47 .9 5 2 . 0 11 4 7 . 6 51 .6 13 4 6 . 9 5 0 . 9 12 4 7 . 8 51 . 8 1 4 4 6 . 9 i 5 0 . 9 TABLE XXI (Continued) Market Area Station Number Price (cents per gallon) Market Area Station Number Price (cent s per gallon) Regular. Premium Regular Premium E 13 47.9 51.6 J 15 47.0 N/A 14 47.5 51.5 16 4 4 . 9 49 .9 15 47.5 51.5 17 4 4 . 0 50.5 18 46.9 5 0 . 0 F 1 > 45.7 48.7 19 46.0 50:0 3 4 4 . 9 48 .9 20 46.7 50.9 4 4 4 . 8 48.8 - 2^1 . 46 .9 50.9 7 44 . 9 48 .9 22 4 4 . 9 4 9 . 9 8 44 . 9 48.5 23 46.9 5 0 . 9 15 44 .9 48 .9 24 47.9 51 .9 16 44 . 9 48 .9 25 47.1 * 51.1 18 45 .9 48 .9 26 4 3 . 9 48 .9 19 45.2 48.2 27 .a 48 .0 28 4 3 . 9 29 46.9 5 0 . 0 . 30 46.9 5 0 . 9 31 46.9 5 0 . 9 K 1 - 4 9 . 9 31 46.9 5 0 . 9 2 33 46.9 5 0 . 9 3 49-9 51.9 34 46.9 5 0 . 9 4 4 9 . 9 51.9 35 46.9 5 0 . 9 5 4 9 . 9 52 .9 36 46.9 5 0 . 9 6 48.5 51.5 37 44 .9 4 9 . 9 7 48.4 51.4 38 48.9 5 2 . 9 8 48.5 51.5 39 48.6 51.9 9 48 .9 51.9 10 4 9 . 8 52.7 11 48.5 51.5 12 4 9 . 9 53.3 ^Denotes operator of outlet not interviewed. 85 TABLE XXII 1963 GASOLINE TANK WAGON PRICES Market Area Price (cents per gallon) Regular Premium A a B -C 37.7 4 2 . 7 D 37.7 4 2 . 7 E 3 8 . 2 43 .2 F 35.9 40.9 G 35.9 40.9 H a I a J 3 6 . 8 41 .8 K 36.4 41.4 L a denotes areas i n -which gasoline i s sold on consignments 86 (b) Rent Subsidization The amount of rent actually paid by each operator during his last financial year as determined in the interview i s shown on the rent sub-sidization schedule under "Annual rent charged." The difference between this figure and the t o t a l costs (both implicit and explicit) incurred by the owner of the station i s shown i n the "Subsidization per year" column opposite each station. Subsidization per gallon i s calculated by dividing the subsidization per year by the annual gallonage. Since no arm's length rentals are paid by owner-operated stations no subsidization of these stations i s possible. The figure for t o t a l owner's costs i s made up of three items, namely taxes, implicit return on invested capital and depreciation,which are calculated as follows: i ) Taxes. These were confirmed either by letters from, or direct inquiry of, the appropriate municipality. i i ) Implicit returns on invested capital. Assessed values of the land, improvements and machinery were obtained for each station from municipal o f f i c i a l s i n the same manner as the taxes. Mar-ket values of each property were estimated as twice the sum of the assessed value of land plus improvements plus machinery. An implicit return of 7 per cent on this market value was calculated and i s shown opposite each station i n Table XXIII i n the column headed "7 per cent Market Value." i i i ) Depreciation. Wo depreciation i s chargeable against land. The market value of improvements (double the assessed value) was depreciated at 5 per cent; that of machinery at 10 per cent. Where no separate figure was shown by the municipality for machinery the entire improvements amount was depreciated at 5 per cent. TABLE XXIII RENT SUBSIDIZATION OF SERVICE STATIONS BY MAJOR OIL COMPANIES o) -p. o H o3 u 0> ,9 o •H - p «j •p CO 03 H co CO H ^ 03 O - P O CO •H CO 03 a) CO > <D fi CO Oi W K-5 <1J CO CO CO <D 3 CO H - P oJ d > I n3 S 0> > CO O CO U 4> Q, co B co h CO - P •p o> w M O M S 3 co H £ o3 a; o > co a - p o CO - r ) O - P O Cfl •H CO O ^ O) 0) Sn S Q) O Q CO CO - p -p -p C CO CO o o « tt) O CO O H bO c3 H ^ co-p a3 03 u o a) E H a> E H g o o •H - P U 03 03 •H ^ CO <L) £ ft CO a •H O -P i N o3 •H bO t! •rl ?H co a) CO E 3 90 $15+30/gal. 4 120 ,$325 6 100 $75+20/gal . 8 90 a 9 80 20 /ga l . 10 .43 a , 11 67 $200 12 60 a 13 80 a 14 30 a 15 36 a G 2 50 •3 79 $325 5 87 $200 6 84 $275 8 63 • 9 40 $425 b 10 135 $115+l^/gal. 11 85 $200 12 205 $5O+20/gal. 13 190 $275 3,535 12,155 2,180 1,213 536 3,929 2 ,880 1,049 1.20 ,6 , 100 17,186 3,250 1,719 1,360 838 5,807 3,900 1,907 1.6 1,700 13,600 2 , l 4 o 502 4,002 2,900 1,102 1.1 925 11,438 1,720 1,144 996 388 3,252 2,851 925 9,955 8,340 1,520 335 1,600 1,251 1.6 420 1J220 834 254 2,308 - -1,490 9,271 1,500 927 338 2,765 2,400 365 .6 2,350 15,780 2,530 2,540 1,578 610 4,718 -)mainly -3,975 14,318 1,540 635 4,607- - ) repr 5. -510 9,110 9,147 1,350 1,580 911 285 2,546 ' - - -2,205 915 362 2,857 - -2,525 10,145 1,780 • 1,015 1,244 4 i 4 3 ,209 " a 0 0 7 ,900 12,435 2,850 860 4,954 3,900 1,054 1.40 3,713 14,950 2,610 1,645 650 4,905 2,400 2,505 2 . 8 3,400 12,755 2,260 2 ,900 1,425 545 4 ,230 5,246 3,300 930 l . l 6,200 4 ,660 14,510 1,601 745 a 0 0 17,585 3,120 5,340 1,909 1,856 710 5,739 5,100 -639b 1.6b 21,070 8,435 17,060 1,272 834 8,468 6,084 2,730 5,738 4 . 2 16,495 3,470 1,780 2,400 3,684 6 . 3 26,100 9,4oo 16,000 5,900 1,750 1 ,748. 1,516 9,166 4 ,700 4,466 1.1 15,980 3,560 840 6,148 3 ,300 2,848 1.5 TABLE XXIII (Continued) <D •p CD •a i - p £ S 3 co « •ri ca pq c CO w 0 CO p p P-H p CO CD WP co 0 a 0 o h O-H 0 0 cog 3 CO cu t o Fh _H u <u e) cd CD ft CD |o> 5 CD c | 5 O EH O •H P h cd cd N CD •H U co cu CO o PO Cdi-H N r l •Hcd •H C0fn CO 'A 1 262 $475/mo. 45 ,000 6 ,000 2 260 $375/mo. 15,380 11,200 3 250 $450/mo. 39 ,200 9 ,000 4 - $3OO+10/gal 24,250 6 ,000 5 180 $365/mo. 30 ,800 5,600 6 180 - 12,000 7 ,000 7 170 20/gal. 33,000 7,500 8 150 $5O+20/gal. 16,185 13,200 9 120 $l4o+10/gal 15,010 9 ,600 10 100 $170+$200 16,300 2 ,400 11 80 10 /gal . 16,335 15,800 5 20 $225 12,700 14,400 7 46 $125+10/gal 16,900 9,100 8 40 $100 1,520 7,900 9 4o $100 4,150 5,9^0 10 ;.5.0 P15:r/jx!. 1 ,290 3,600 23 118 $6O+20/gal 14,580 11,500 24 60 $200 2,290 6,400 25 148 $65+20/gal. 4 , 6 5 0 15,540 27 3 ,650 8,740 31 165 $100+1 1/20 15,100 11,800 32 252 $5O+20/gal 21,100 10,500 33 230 $256 11,250 12,750 34 322 $350 16,400 8,940 35 l 4 o $5O+20/gal. 6 ,870 8,500 7,140 3,720 6,840 4,250 5,100 2,660 5,660 4,120 3,440 2,610 4,500 3 ,800 3,640 1,320 1,410 680 3,610 1,220 2 ,800 3,770 4,320 3,330 3,460 2,150 600 1,120 900 600 560 700 750 1,580 960 240 1,580 1,440 910 790 594 360 1,150 640 1,574 874 1,180 1,120 1,440 964 860 2,083 1,379 2,045 1,251 1,907 836 1,659 1,335 1,222 988 1,544 1,176 1,179 392 434 212 1,134 389 860 510 1,181 1,404 986 1,124 654 9,823 6,219 9,785 6,101 7,567 4,196 8,069 7,035 5,622 3,838 7,624 6,416 5,729 2,502 2,438 1,252 5,894 2,249 5,234 6,131 6,844 5,756 5,548 3,664 5,700 4,500 4,200 N/A 4,380 a 3,840 3 ,600 2,880 2,400 800 2,700 1,960 1,200 1,200 1 ,380, 3,030 2,4oo 3,740 N/A 3,675 5,640 3,072 4,200 3,400 4,123 1,719 5,585 N/A 3,187 0 4,229 3,435 2,742 1,438 6,824 3,716 3,769 1,302 1,238 (128) 2,'814 (151) 1,494 N/A 2,456 1, 204 2,684 1,348 264 1.50 .7 2 .2 N/A 1.8 0 2 .7 2 . 3 .6 1.5 8.5 18.50 8 . 2 3 .2 3 . 1 ( . 2 ) 2 . 4 ( . 4 ) 1 .0 N/A 1.5 .5 1.2 .4 .2 TABLE XXIII (Continued) «3 0) - p - P C •P o a> « w • H CO a) co I - d - d at cd w 1-3 a> CO CO W CO <D - P 3 PS H > 0) (D H CO CO C O •rl r l - P aJ a a) - d h •rl 0) W Pi I o • H C P O G 5 H « r l •rl C8 *d &Q • r l co U 2 Pi CO 36 130 $5O+20/gal 10,000 10,940 2,930 862 835 4,627 3,100 3 ,690 1,527 1.10 38 190 $70+1 l/20 9,200 8,740 2,500 871 784 4,158 468 .3 1 210 $375 8,170 14,000 3,115 1,726 850 5,691 4 , 5 0 0 4,785 1,191 .60 2 235 $105+l/2«5/gal.22,200 13,000 5,080 9,925 1,575 1,910 3,871 8,565 3,780 1.6 3 335 $850 48,900 2 2 , 0 0 0 14,300 2,525 16,322 10,200 5,400 6,122 1.9 265 $450 7,950 3,125 3,596 1,713 937 5,775 6,349 375 .2 5 100 $175+ltf/gal. 13,310 12,400 1,526 1,227 3,100 3,249 3 . 2 6 135 $260 12,270 14,700 3 , 8 0 0 1,668 1,270 6,638 3,120 5,560 3,518 2 .6 7 188 $15O+20/gal. 40,800 13,600 7,550 3,560 1,576 3,095 1,198 12,221 6,482 4 ,689 6,661 3 . 5 8 242 $400 11,290 i 4 , i o o 1,724 4 , 8 0 0 1,682 (1,311) .7 9 350 $500b 10,720 8,500 2,700 4,950 1,058 931 6 ,000 (.3)b 10 180 $250 15,400 2 0 , 0 0 0 2,375 1,794 9,H9 3,000 6,119 3 . 4 11 70 $5O+20/gal. 8,950 14,540 3,290 1,685 10975 6,050 2 ,000 4 ,050 5 .9 denotes a station owned by i t s operator. ^Denotes a station owned by a third party which is not a major o i l company. 0 0 90 Conclusion re rent subsidization The arithmetic mean of the rent subsidization figures for a l l the above stations i s 2 .3 cents per gallon. F u l l costs of invested capital are not being met by Briti s h Columbia service stations even with the existing intensity of price competition. Survey data showed dealers to be earning only their opportunity incomes, thus rent subsidization provides conclusive evidence that costs of a l l factors cannot be covered under existing market conditions. (c) Calculation of gallonage required at five cents per gallon margin  to maintain dealers income The following two tables present the results of an attempt to evaluate the changes i n the; nature of the operations of service stations which might be necessitated by a much lower profit margin per gallon. These results are intended as one type of check on the area by area estimates of excess capacity which have resulted from this study. The hypothesized lower margins and higher volumes appear to be relevant since lower margins (of the order of five cents per gallon) have resulted i n other petroleum marketing areas under conditions of active price competition, and since dealer incomes are already at opportunity income levels in interviewed areas, some increase in physical volume must result i f active price competition were to occur i n r e t a i l gasoline marketing in Brit i s h Columbia. The increases i n physical volume that would result would be reflected not only i n increased gasoline sales, but also in increased repair volume and t i r e , battery and accessory sales. Service station operators generally view each gallon of gasoline sold as bringing i n a 91 fixed gross profit on these latter items i n addition to the gross profit on the gasoline i t s e l f . Thus i n the case of Station ( l ) i n Area L, although each gallon of gasoline provides only seven cents directly, i t is accompanied by, on the average, 10.5 cents gross margin on repairs, t i r e s , batteries and accessories. In the calculation of the t o t a l margin of each station at the increased physical volumes i t was assumed that this gross margin per gallon on related items could be maintained i.e., for Station ( l ) i n Area ,L. on a more competitive environment the t o t a l margin per gallon of gasoline sold would be five cents direct plus 10.5 cents for associated items or a t o t a l margin of 15.5 cents per gallon. This assumption seems reasonable since each gallon of increased volume must be drawn from the business previously done by a firm exiting from the industry i n the face of the active price competition, and this firm w i l l have rendered associated services i n approximately the same ratio with each gallon. In the consideration of costs, because of the underutilization of labor and capital at present volumes, i t was assumed that the larger volume requirements could be handled with no increase i n wages or the items included i n other expenses. Rent, which was not included i n this latter category, was adjusted where information was available,to the value calculated i n Table XXIII as an economic rent for the property. The gallonage required at a 5 cent margin to maintain dealer's income at opportunity income levels was calculated from the above information by using the following formula when x stands for the new larger gallonage required: x • (Total margin) - (Rent-Wages+0ther Expenses) = Dealer Income 92 For example: the data for Station ( l ) i n Area L would be inserted as follows: X • ( .155) - (5700 + 25 ,000 + 7 ,700) = 600 which can be solved to give x = 250,000 gallons. Conclusions re gallonage required at 50 per gallon margin to maintain  income For areas inside the consignment zones, as shown i n Table XXIV, the median figure for present gallonage was 210,000 gallons. The median figure for the results at a five cent margin was 275,000 gallons. For areas outside the consignment zones, as shown i n Table XXV, the corres-ponding medians were 90 ,000 gallons and 148,000. In both categories these results reflect the operations of only the better managed stations, since only for these was adequate accounting information available. However, in spite of this bias, the medians calculated for the two categories provide a useful guideline as to what could r e a l i s t i c a l l y be expected to result in the various areas where estimates of excess capacity were made. The magnitude of the gallonage increase i n the two areas i s especially interesting i n that i t i s 31 per cent i n the consignment zones and 65 per cent outside the consignment zones. This would indicate excess capacity on an overall basis to be of the order of 25 per cent in the consignment zones and 40 per cent i n areas outside the consignment zones. These overall results were obtained independently of the area by area evaluations and thus provide a rough check on the va l i d i t y of the latter estimates. TABLE XXIV CALCULATION OF GALLONAGE REQUIRED AT FIVE CENT MARGIN TO MAINTAIN DEALER INCOMES AREAS INSIDE THE CONSIGNMENT ZONES a> bD S3 o .—* Gross Profit Operating Expenses u tu •rl bO (thousands of dollars) (thousands of dollars) 0} V l O CO H w J trl n S CD 0) C a w o 1 Ga! usani o> Dealer Inc (thousands dollar Market Statio Gasoli (cent gall Annua: (the Gasoli] Repair Se TBA H c3 -p 0 EH Rent Wages Other rotal Dealer Inc (thousands dollar H 3 6.8 190 13.0 4.1 17.1 3.8 5.8 3.2 12.8 4.3 5.0 235 11.6 5.2 16.8 3.8 5.8 3.2 12.8 4.0 4 6.9 180 12.5 11.5 24.0 0 15.8 8.2 24.0 0 5.0 217 10.8 14.0 24.8 Ob 15.8 8.2 24.0 .8 I 2 7.0 260 18.2 18.2 36.4 4.2 13.5 6.3 24.0 12.4 5.0 320 16.0 22.4 38.4 6.2a 13.5 6.3 26.0 12.4 3 7.0 250 17.5 10.2 27.7 4.2 13.8 5.9 23.9 3.8 5.0 370 18.5 14.8 33.3 9.8a 13.8 5.9 29.5 3.8 L . 1 7.0 210 14.7 22.1 36.8 4.5 25.O 7.7 36.2 .6 5.0 250 12.5 26.2 38.7 5.7a 25.O 7.7 38.4 .3 2 7.0 2k0 16.8 7.2 24.0 2.4 17.5 4.1 24.0 0 5.0 300 15.0 9.0 24.0 2.4 17.5 4.1 24.0 0 3 7.0 335 23.5 35.3 58.8 9.6 53.6 9.6 72.8 (14.0) 5.00 420 21.0 44.5 65.5 16.3a 53.6 9.6 79.5 (14.0) 4 6.6 265 17.5 22.5 4o.o 6.4 13.3 9.7 29.4 10.6 5.0 285 Ik.2 25.8 4o.o 6.4a 13.3 9.7 29.4 10.6 6 7.1 i4o 10.0 0 10.0 2.5 1.0 2.0 5.5 4.5 5.0 210 10.5 0 10.5 2.5 1.0 2.0 5.5 5.0 7 7.0 188 13.2 13.4 26.6 6.0 11.0 5.3 22.3 4.3 5.0 275 13.8 19.2 33.0 12.2a 11.0 5.3 28.5 4.5 11 7.0 70 4.9 6.2 11.1 2.0 3.5 2.3 7.8 3.3 5.0 108 5.4 9.8 15.2 6.0a 3.5 2.3 11.8 3.3 of the gallonage calculation. Areas for which no data was available for the .Property values have been l e f t • •- - - "k g - p s t a t i o n s for which no rent has been xncluded. TABLE XXV CALCULATION OF GALLONAGE REQUIRED AT FIVE CENT MARGIN TO MAINTAIN DEALER INCOMES AREAS OUTSIDE THE CONSIGNMENT ZONES CD -p CD u CD o -•P hO U ~ CD CD C S3 CO O •H -P H H S H O CD «J 19 U tO O co CD 09 O co g Gross Profit (thousands of dollars) 3 3' CD fl •r» H O CO It CD E H Operating Expanses (thousands of dollars) p CD K CO CD CD X! P O P O EH CD <M 8 ° O CO . fi nrf w 11 3 . O o «5 .C CD P U CD H D E G 3 8 5 12 2 9 23 25 32 36 39 10.0 5.0 10.0 5.0 9.0 5.0 9.0 5.0 9.0 5.0 8.6 5.0 9.5 5.0 9.0 5.0 8.1 5.0 9.5 5.0 9.5 5*8 9.8 5.0 10.5 10.5 35 53 55 92 90 136 .9P 162 87 148 205 344 65 83 90 116 118 170 148 275 252 390 130 225 75 104 3.5 2.7 5.5 5.6 8.1 6.8 8.1. 8.1 7.8 7.4 17.4 17.2 6.1 4.2 8.1 5.8 9.6 8.5 14.0 13.6 24.0 19.5 13.3 11.2 7.9 5.2 15.8 16.6 6.0 6.9 12.6 15.0 0 0 8.9 11.8 12.1 17.2 5.9 7.8 9.3 11.6 15.4 19.4 6.8 9.5 10.9 16.8 9.7 9.6 19.3 19.3 11.5 11.5 20.7 21.8 8.1 8.1 16.7 19.2 29.5 34.4 12.0 12.0 17.4 17.4 25-'0 27.9 20.8 23.1 34.9 m 14.8 1.1 1.1 0 0 2.8 3.9a 0 Ob 2.4 4.9a 4.3 9.2a 0 Ob 0 Ob 3.0 5.9a 2.9 5.2a 5.4 6.8a 2.8 h.6a. Ob 6.8 6.8 4.9 4.9 7 .4 7.4 6.3 6.3 6.0 6.0 6.1 6.1 3.6 3.6 6.0 6.0 7.8 7.8 5.6 5.6 5.0 .0 .9 4.2 4.2 3.5 3.5 8.5 8.5 (3.0) (3.0) 4.7 4.7 7 .7 7.7 0 0 4.0 4.0 4.2 4.2 5.0 5.0 10.0 2.9 x v ^ n f i g u r e s -"-"J-ed in this way represent adjustments to economic (i.e., non-subsidized) values for purposes of the gallonage calculation. Areas for which no data was available for the property values have been l e f t at the figure for actual rent. Id Self-owned stations for which no rent has been included. 

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