# Appendix — Exxon Corp. v. Governor of Maryland

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1978
- **Citation:** 437 U.S. 117

## Text

SUPREME COURT OF THE
OCTOBER TERM, 1977 ~.

Nos. 77-10, 77-11, 77-12,
77-47, and 77-64

EXXON CORPORATION and PHILLIPS
PETROLEUM COMPANY,

Sueii, Om COMPANY,

CONTINENTAL Oi, COMPANY and
Kayo O11 COMPANY,

Guir O11 CORPORATION,

ASHLAND OIL, INC., COMMONWEALTH Olt
REFINING ComPANY, INC. and PETROLEUM
MARKETING CORPORATION,

Appellants,
vu

GOVERNOR OF THE STATE OF MARYLAND, et ai.,
Appellees.

APPEAL FROM THE
i COURT OF APPEALS OF MARYLAND

APPENDIX
Volume II — Pages 425 - 826

APPEALS DOCKETED JULY 1,8 AND 11, 1977

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TABLE OF CONTENTS Page
VOLUME Il
TRANSCRIPT OF PROCEEDINGS (continuing)
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Defendants’ A — Letter of the Honorable Marvin Mandel,
Governor of Maryland, dated June 13, 1973, to the
Honorable Louis L. Goldstein, Comptroller of the

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Defendants’ B — Retail Service Station Dealer Question-
naire and Cover Letter of the Honorable Louis L.
Goldstein, dated June 29, 1973... 2.2 eee eee eeeees

Defendants’ c i Major Oil Company Questionnaire .....-.

Defendants’ D — Results and Analysis of Service

Station Dealers Questionnaire .....---+e+5eeeeee
Defendants’ E — Analysis of Major Oil Companies

Questionnaire .. 6... 6 eee ee eee eee eee eens
Defendants’ F — Draft of Proposed Legislation Submitted

to the Honorable Marvin Mandel, Governor of Maryland

by the Honorable Louis L. Goldstein, Comptroller of

the Treasury... c ccc cc ccc crereeescceseees
Defendants’ G - Letter of the Honorable Louis L. Gold-

stein, Comptroller of the Treasury, dated January 7,
1974 to the Honorable Marvin Mandel, Governor of

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Defendants’ | — House Bil] 918

Defendants’ K-1 — Statement of James E. Grady, Public
Affairs Manager, Exxon Company, U.S.A., Eastern
Region, Before Senate Economic Affairs Committee

Defendants’ K-2 — Statement of James E. Grady, Public
Affairs Manager, Exxon Company, U.S.A., Eastern
Region, Before House Economics Matters Committec

Defendants’ K-3 — Statement of Shell Oil Company on
Maryland House Bil] 918

Defendants’ K-4 — Statement of Vic Rasheed before the
Economic Matters Committee

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Depositions of Charles H. King and J. D. Campbell,
B.P. Oil Corporation, Filed October 20, 1975

OPINIONS:

Memorandum of the Circuit Court for Anne Arundel!
County dated Octover 14, 1975 appears in the
Joint Appendix to Jurisdictional Statements at
pages 49a to 5la

Memorandum of Opinion of the Circuit Court for
Anne Arundel County dated January 27, 1976
appears in the Joint Appendix to Jursidictional
Statements at pages 53a to 134a.

Opinion of the Court of Appeals of Maryland dated
February 18, 1977 is printed at 279 Md. 410
(advance reports) and at 370 A.2d 1102 and
appears in the Joint Appendix to Jurisdictional
Statements at pages la to 44a.

Supplemental Opinion of the Court of Appeals of
Maryland dated April 13, 1977 is printed at
279 Md. 456 (advance reports) and at 372 A.2d
237 and appears in the Joint Appendix to Juris-

dictional Statements at pages 45a to 48a.

425

(Witness) My name is Charles Horace Berry, I live at 47
Maclean Circle in Princeton, New Jersey.

DIRECT EXAMINATION

By Mr. Greenwald:

Q. Dr. Berry, you hold a Ph. D. in economics from the
University of Chicago, is that correct? A. That’s correct.

Q. And do you currently hold a teaching position? A.
Yes, I do.

Q. Where is that teaching position? A. At Princeton
University.

Q. At any particular school at Princeton? A. My
appointment is in the University as professor of
economics and public affairs. That’s a joint appointment.
I’m a professor of economics for the Economics
Department and a professor of public affairs within the
Woodrow Wilson School of Public and International
Affairs; and the title reflects the fact that it’s an
appointment in each of the two departments as it were.

* * *

(T. 261) (Dr. Berry’s resume (Curriculum citae) filed

herewith as Plaintiffs’ Exhibit No. 5).

Q. Dr. Berry, have you ever testified from the
professional economist’s point of view as to the validity
of diverstiture legislation related to the petroleum
industry? A. To the validity of it?

Q. Yes, as to whether from an economist’s point of
view this is anti-consumer legislation or pro-consumer
legislation? A. I’ve testified as to the desirability of
legislation of that sort on one occasion, yes.

(T. 262) Q. Would you share with us the circum-
stances under which you've so testified? A. About a year
ago, a little bit more than a year ago, I was asked by
Assemblyman Baer of the State of New Jersey to appear
before his committee of the Assembly and give my

426

reaction as a disinterested outsider but as somebody
concerned with analyzing this type of policy proposal as
to the desirability for the consumers population in New
Jersey of adopting of a bill which restricted refiners and
distributors of petroleum products from operating retail
facilities within the state and I did so I believe in
September of last year.

Q. Were you sponsored or supported by any particular
interest group in offering this testimony? A. No, I was
asked specifically by Assemblyman Baer to come in as
somebody who was not directly involved in any way with
the—with those hearings or with the development of that
bill or with its advocates and to react independently and
give the committee my judgment with respect to whether
it was a good bill for the consumers and residents of the
state. I did so in exactly that spirit.

Q. Were you paid for your analysis of this proposed
New Jersey legislaticn or for your testimony? A. No, I
did it because I was asked to do it by Mr. Baer.

* * *

(T. 269) Q. Now, Dr. Berry, you’ve been retained by
Gulf Oil Corporation to act as an expert in this case, is
that correct? A. That’s correct.

Q. And you’re being paid for your efforts, is that
correct? A. Yes, Iam.

Q. Basically Gulf has requested that you review the
legislation at issue here particularly Paragraphs B and C of
Chapter 854 of the Laws of Maryland 1974 from the
point of view of the consuming public, is that correct? A.
That’s correct.

Q. Have you made such a review?

(Mr. Woodstock) Objection, Your Honor.

(Court) All right, sir.

(Mr. Woodstock) I don’t believe that the witness has
been qualified sufficiently to testify as to this legislation,

427

number one, with regards to petroleum marketing;
number two, what the effects of vertical integration in
the retail marketing of Maryland, number three, as a
consumer expert with regards to consumers within the
State of Maryland.
(Court) Overruled.
* * *

(T. 270) Q. Have you made such a review of
Paragraphs B and C of the Laws of Chapter 854 of the
Laws of Maryland 1974? A. Yes, I have.

Q. All right, and have you reached any conclusion
based upon your expertise as a professional economist
whether Paragraphs B and C will benefit or hurt the
Maryland consumer? A. Yes, I have.

Q. What is that conclusion? A. I think that the effect
of the implementation of this law will be adverse to the
interests of the consumers in the State of Maryland.

Q. Why do you say that, Dr. Berry? A. I think if—I
think that the statute if implemented would have three
quite separate and, of course, related effects which would
operate in the direction of lessening the intensity of
competition primarily within the retailing of petroleum
products within the state, possibly within the refining of
the product within the country and that as a consequence
of both of these effects each of them operates in the
same direction, each would tend to alleviate downward
pressure on the price of petroleum products which would
otherwise be present (T. 271) and, therefore, would
operate to the disadvantage of the consumers of
petroleum products within the state, quite possibly also
outside the state; and I can amplify that a little bit if you
would like.

Q. Yes, would you please explain exactly how in your
opinion the Paragraphs B and C of the statute— A. Well,
as I—

428

Q. —accomplish that. A. As I understand the content
of Paragraphs B and C, there would be basically three
things. It would require that a certain ciass competitor
currently active at the retail level within the State of
Maryland would have to either divest themselves of
refining interests outside the state, create them within the
state or have to cease activity as retailers within the state.

Secondly, no refiner or producer of crude petroleum
anywhere in the country would be permitted under these
statutes—under these paragraphs if effected to enter the
state at the retail—in terms of the retail distribution of
petroleum products and that would constitute a complete
barrier to entry. That’s prohibition with respect to entry.

For both those reasons whatever regulatory impact of
with respect to maintain margins low may be present
regarding non-integrated—I’m sorry integrated companies
operating at (IT. 272) the retail level within the state now
and the impact of any integrated refiner which might
integrate to the state would be lost. Therefore, the net
direction of those two effects would be to reduce the
vitality of competition at the retail level within the state.
In addition, no retailer active in the petroleum industry
within the state would under this statute be permitted to
integrate backwards to acquire position in either refining
or production while maintaining his position within the
state and that would exclude that class of competitors
from the potential entry at the refining—at the refining
level, and the direction of that effect is also clear. It
cannot improve vitality of competition at the refining
level. It might quite possibly lessen it and once again for
that reason the regulatory pressure, power of competition
to control prices at the wholesale level would also be lost.
I put these both together and the direction of any effect
in the aggregate, combining the impact would be towards
higher prices. In other words prohibiting, establishing

429

those two bars to entry and excluding a particular class of
competitors presently within the market would have the
net effect, I think, if any, of increasing the price of
petroleum products at retail.

Q. In your judgment is there any particular advantage
to the consuming public in permitting company operated
stations? A. Yes, I think there are, but that’s really just
the (T. 273) mere image of the undesirability of
excluding a particular class of competitor from the
industry at retail. It seems to me that one always—that
one ought to be very concerned whenever a particular
class of competitor is removed from a market and it
seems to me that in the retailing of petroleum products
of this sort and retailing of products of any sort, it’s
highly desirable to let every potential and actual
competitor compete within that market so that the full
array of possible methods of retailing a product may be
preserved. In the cases of the petroleum industry it’s a
rather peculiar industry in that the basic product, which I
take it is gasoline, is typically retailed in conjunction with
a range of the different types and associated services,
ranging from very liberal to a great deal, ranging from a
lower price, for example, at a perhaps net thoroughly
desirable location to a higher price at a very convenient
location. It’s important—it’s important if that market is
to operate satisfactorily that as much opportunity to
move in and offer whatever type of package particular
retailer feels is appropriate, particular seller feels is
appropriate so the consumers can register their choice
within that market; and it’s only by having that array of
options open to the consumer the consumer by reacting
will signal to the sellers of the product in question what it
is that he wants so that that marketer in fact can respond
to that.

* 430

(T. 274) If ome excludes a particular class of
competitor, that means that some type of outlet may be
lost, the potential for consumers to react to that may be
lost, the market may act less perfectly than it otherwise
would.

Q. Are you able to offer us an example of a situation
in which the consumer did lose for a period of time the
opportunity to make a choice? A. I’m not sure that I can
offer a precise—well, perhaps I can. Let me offer, if I
may, two quick illustrations. One that comes to mind is
the situation which existed in this country prior to the
introduction of small foreign-built motor cars, particu-
larly Volkswagens. There had been some debate prior to
that time about what it was consumers really wanted and
it was alleged that the manufacturers felt that consumers
wanted large, powerful automobiles. They did not—they
did not provide—domestic producers did not provide a
viable option in tenns of the small foreign car, but a
potential competitor, a German manufacturer, came in
with another sort package a small Volkswagen which also
was reliable and there was a response within the
American market; and the large domestic producers lost
sales to the new entrant, Volkswagen, and what we’ve
seen since that time for the past fifteen or twenty years is
a response of the American producers to that competi-
tion; and it’s become even more dramatic I think in (T.
275) recent years, that the presence of a new option
within that market resulted in a dramatic shift within—in
terms of the type of product that was made available. It’s
transportation in a different package. The same thing
could happen within the petroleum industry, different
packages presented in terms of that in fact people prefer
that to what existed previously. They respond by moving
in that direction. I would expect producers to respond by
providing more of that type facilities. Very important

431

that one not say you can’t move in and try and
experiment because if you do, it may never be apparent
what in fact it is the consumer in fact would respond to. I
heard earlier I think today in this court there was
mention of the discount house which is the same type of
thing. Here’s an innovation which somebody thought of
and it tured out that this was a particular package of
service plus product people preferred to the type of offer
which existed previously. There was a response not only
on the part of consumers but also subsequent response in
terms of the types of packages of retail goods which
became available.

That’s the type of fluidity which one wants to
maintain within these markets and that’s the type of
fluidity which may be impinged if one says you may not
enter this market arbitrarily; and it seems to me that
these two barriers, barrier to entry by the refiner,
producer at the retail level, (T. 276) barrier to entry at
the refiner, producer level in the case of the retailer only
and the exclusion of that particular sect, producers and
sellers from that market now would offer—would tend to
offer only in the direction of reducing that fluidity,
reducing that flexibility and making those markets work
less perfectly; and therefore, not in the interests of the
consumers without any question.

Q. In your judgment as a professional economist is the
retail gasoline market currently a competitive market? A.
Yes—

(Mr. Woodstock) Objection.

(Court) What’s the objection?

(Mr. Woodstock) The objection is based on I don’t
believe he’s testified that he’s done any studies of the
competitive market or retail sales of gasoline.

(Court) Have you, sir? A. I’m sorry, sir?

432

(Court) Have ycu conducted any study of the market
of gasoline so as to be able to determine whether or not it
is competitive? A. I’ve conducted no study but in the
type of work that we do, the structural characteristics
that are associated with the competitive industry are such
that I think that I can answer that question.

(T. 277) (Court) All right, sir, go ahead.

A. My answer would be yes that as a professional
economist, as somebody concerned with industrial
organization the retailing of petroleum products under
normal circumstances and I'd like to say here and now
that I’m by no means an expert with respect to the
existent controls that are imposed on this industry either
at that level or at any prior level. The structure of that
industry is such that it would be expected to be highly
competitive. I say that because the number of firms
competiting in it is by any measure very large. There are
very many different actors in that particular industry, in
varying degrees. It is not dominated by any single entity.
The establishments themselves create no barrier to entry
by virtue of the enormous financial cost which is
associated with creating one. One might argue, for
example, if you’re talking about refining, the modern
refinery is so expensive that the problem of accumulating
sufficient funds to build it would create a barrier to
entry. No such barrier exists with respect to the retailing
of petroleum products. There are many different types,
many different prices. I think that it’s possible to answer
that question simply by casual observation without
having a detailed study of whether it’s competitive or not
competitive. Another way to look at it is that it must be
obvious to everyone in this court room (T. 278) that his
option with respect to where he can get petroleum
products at retail even within Annapolis are relatively
large. There are lots of outlets. He can swop, the

433

information with respect to the pricing he will have to
pay at each of them is not hard to find, it’s posted. The
costs of getting additional information are not great.
That’s the type of situation in which industry is
necessarily going to be competitive and it will remain
competitive absent the type of regulation which begins to
exclude competitors and prevent the competitive process
from continuing.

Q. When you say that he is able to choose among the
variety— A. He or she.

Q. He or she, who do you mean? A. The consumer.

Q. All right. In your judgment as a professional
economist would the vertically integrated oil companies
be motivated to drive out competition at the retail level?

* * «©

(T. 279) A. Let me answer, Mr. Greenwald, first by
making clear what it is that we’re coming to in analyzing
a situation of -nis sort. Our assumption is typically that
the corporation wants either to maximize its income or
typically to maximize its sales subject to some income
restraint maintaining its income at some target of rate of
return; and under those circumstances it’s in the interest
of the producer of a product such as petroleum, it would
be under those circumstances in the interest of the
producer of a product such as petroleum to (T. 280)
maintain the highest degree of efficiency at the retailing
level as possible. In other words to have his—have the
costs that he bears for the retailing of his product
whether he does that by doing the job himself or whether
he does that by hiring somebody to do it for him by
selling him the product and letting him resell it at least
cost. It would not be in his interest under those
circumstances to drive out more—a more efficient retailer
of his product in terms of an independent sector solely to

434

be vertically integrated. He would have an incentive to
integrate forward if he could do the job more efficiently
at smaller margins which would imply other things being
equal lower prices for consumers and, therefore, higher
sales. He would not have an incentive to drive out
independents, for example, or to integrate forward
exclusively if he were not more efficient in so doing. If he
were less efficient, he would cost them money; and if he
would cost them money, I would assume that that would
not be in the interest of a vertically integrated
corporation.

I can give you a numeric illustration of that, if you
would like, if it would help or if it’s clear from what I’ve
said, I’d be happy to leave it at that.

Q. Why don’t you give us a brief illustration, if you
will? A. Well, let me suppose the formula, I'll make it—
(T. 281) I'll make it very unrealistic and very simple so
that the analytics will become clear.

Suppose that we have a—suppose we’re talking about
gasoline and we're talking about the sale of the gasoline
only, we’re not talking about a situation where there are
lots of different services combined with it just to keep it
simple. We have a producer who has some crude and who
has some refined gasoline which ultimately will be sold to
consumers over some area. We have the gasoline at some
central point. The gasoline at retail wherever he sells it,
another unrealistic assumption, let’s suppose will sell at a
dollar. Our refiner has the refined product, it will sell
throughout the country at a dollar. The question is, you
know, what's it worth to him. Now if his options are only
to hire somebody to take it to the consumer and to sell it
to them at a payment of twenty cents a gallon, that
petroleum is worth to him at his refinery eighty cents, a
dollar less the twenty cents. That’s the income. Now if in
fact he himself could make the investment in the

435

facilities, provide the transportation and get it to that
consumer at a cost of fifteen cents, would clearly be
worth more to him. It would be worth eighty-five cents
to him, a dollar less fifteen cents as opposed to eighty
cents a dollar less the twenty cents and under those
circumstances you would expect a profit making a
corporation go forward, (T. 282) do the job itself because
it’s more efficient. Okay?

Alternatively, suppose that he’s not more efficient at
it, suppose that the market, that those independent
dealers are much better at adjusting to the demands of
the consumers wherever they are and if he does the job
himself, it costs him twenty-five cents whereas he can
hire them to do the job for him at twenty cents. Under
those circumstances he would have absolutely no
incentive to integrate forward vertically. It would cost
him money and I would predict that he would not do it.
Now the real question is which of those two alternatives
exist within the particular market where vertical integra-
tion is at issue. The answer is frequently you don’t know.
Frequently the corporation may not know and so that
one frequently will observe both types of retailing
activity going on simultaneously. Now what that does is
give the seller of the refined product or the product at
wholesale, whatever it is, an indication with respect to
the efficiency of his own operation and is judged by the
efficiency of independents and the efficiency of inde-
pendents is judged by what he knows about his own
operation. It also gives him the flexibility to experiment,
to see whether with different techniques he can’t do
better, provide something which the independents would
emulate, subsequent would demonstrate to him—to them
that this would improve this very technique. If you deny
the option of integration, you (T. 283) deny that check,

436

you deny that element in terms of competition at the
retail level, the likelihood of the consumer will be the
ultimate loser.

I can—there are other I can expand on if you like.

Q. No, I think that’s sufficient, thank you.

Suppose that if the vertically integrated oil companies
embarked upon company operated retail outlets in a large
way, a number of independents would inevitably be hurt.
Wouldn’t this in your judgment adversely affect competi-
tion? A. I think my answer to that, Mr. Greenwald, is
that one must be very, very careful to differentiate
between an adverse effect upon competition and an
adverse effect on competitors. A competitor is in
competition and with intense competition and with an
increase in competition, it’s quite possible the competi-
tors can get hurt. It’s a very bad mistake though it’s a
frequent one, it’s a very bad mistake to infer that because
a particular competitor is losing ground that competition
has been lessened and that the consumer is being hurt.
Quite frequently it’s the other way around. Let me make
that clear by going back to an earlier illustration. I spoke
earlier about the introduction of Volkswagen as a new
competitor within the United States.

Competition I think all of us would agree was
heightened by the presence of that new competitor with
a (T. 284) different technique of providing travel services
to the American public. The domestic corporations got
hurt. They lost the market share, their earnings went
down, a couple went under; and subsequently the
American manufacturers have responded by revising their
notions about what type cf product it is that they can
sell efficiently within this market. The foreign market
gets hurt. Each of those tools increased the efficiency of
competition within those markets. In each case some-
body got hurt, but the consumer was the beneficiary and

437

by the very nature of the competitive process there are
always going to be winners and there are going to be
losers; but what one must be sure is that no class is
artifically protected from the competition of another
group of competitors if one wants to preserve that type
of competition; and in the case I just illustrated if one
had said we’re not going to let foreign cars be sold in the
United States, that would have protected the domestic
producers, that would have hurt the domestic consumer.

The discount stores which I also heard mentioned in
here earlier are another illustration. With the arrival of
the discount store, the department stores got hurt; and
the department stores started to respond by becoming in
part discount stores, the discount stores got hurt. The
consumer was the ultimate beneficiary. Competition was
increased but (T. 285) the process of the increased
competition frequently does hurt some competitors and
one ought to be very careful not to simply look to what
happens to the competitor and say competition has been
lessened. Look at the development of the super market.
The super market came in, it was an innovation in terms
of the retailing of food products. We have an enormous
impact on corner stores.

Q. Corner grocery? A. Corner groceries stores or if
we're talking about discount drug markets, they have an
impact on the corner drug store. One could have jumped
to the conclusion that because those competitors are
dropping out that there is a decrease in competition
within the industry, the competition has been—as it’s
been lessened, not true. Competition was heightened.
Margins came down, some competitors went by the
wayside. The consumer was the ultimate beneficiary and
the whole process of analyzing this type of problem
involved looking at the way in which resources—resources
that are used in providing the types of services are

438

organized and we use in this system the competitive
process to ensure that there is a gain to those who are
efficient and a cost to those who are inefficient in terms
of their place within the marketplace; and that process
has to be maintained if those signals are to mean anything
to corporations indicating to those how in (T. 286) fact
they should conduct their affairs in accordance with the
wishes, interests and demand of consumers.

Q. Dr. Berry, in your judgment as a professional
economist do Paragraphs B and C of the legislation at
issue have supporting them any rationale which could
justify them as promoting the public welfare?

(Mr. Woodstock) Objection, Your Honor. I believe that
what’s good for the public welfare and the consumer—

(Court) Well, yes, I think you’re right. If you rephrase
the question, perhaps you can—

Q. Dr. Berry, in your judgment do Paragraphs B and C
of the challenged legislation have any rationale to support
them as promoting the Maryland consuming public?

(Mr. Woodstock) Objection, Your Honor.

(Court) Overruled.

(Mr. Woodstock) I don’t understand—overruled.

A. Do you—if you mean looking at the provisions of
these two paragraphs in this statute, can I find—do I have
any form of explanation which would lead me to believe
that an enactment or making those provisions effective
could operate to the benefit of the consumers in the
State of Maryland? My answer is no. I think the effect
would be quite the opposite. I think it’s very difficult to
say that there would be an enormous and immediate
effect but the direction and the effect (T. 287) is clear. It
seems to me this is the type—this is the type of restriction
which can only operate in the direction of lessening
competition and that can only result in a lessening of the

439

regulatory impact of that device in terms of providing
what the consumer wants efficiently and that means at
low prices, I think.

* * *

(T. 287) CROSS EXAMINATION

By Mr. Woodstock:

Q. Dr. Berry? A. Yes, sir.

Q. My name is John Woodstock, Assistant Attorney
General representing the State in these proceedings.

Dr. Berry, you’ve given us a lot of testimony on the
effects of B and C. I'd like to ask you a few questions
about some of the broad concepts that you have
discussed. Can you think of any situations where vertical
integration would perhaps be anti-competitive? A. Well, I
can give you I think two situations have been (T. 288)
rather special situations where there are let’s say a very
large-single, let me make it extreme and then we’ll make a
case I think stronger where there is a firm which is a
monopolist, a single producer of a particular product,
selling that product to a monopolist, which is the sole
buyer of that product, if those two firms were to merge,
it would seem to me it would make it more difficult for
an outside firm to come in and compete within that
industry since the outside firm coming in would by its
very nature have to enter simultaneously at both levels;
and if the capital costs were high at both, we’re talking
about establishing, for example, a manufacturer of motor
car engines and a manufacturer of motor car exhausts, it
would be more difficult for an outside competitor to
come in because of the amount of capital required for
entrance would be greater as a consequence of the fact
that he would then have to come in at both levels or not
at all. So that might be an example of a barrier to entry
which would be a consequence of a vertical integration.

440

That’s one situation where one might say one would like
to keep those two firms separate because the likelihood
that the monopolist would integrate forward to avoid the
monopolist or the monopolist might prefer to integrate
backward to avoid the monopolist; and there are
situations of that sort in the- if you look at my writing,
you will see that (T. 289) I’ve considered that type of
situation.

The other situation where professional economists
would be concerned about vertical integration does not
relate to the vigor of competition. It relates to situations
where competition is absent because of the exclusive
right which is given to corporations who operate within
that particular area; and I can give you a concrete
illustration of the situation of that sort. Bell Telephone
Company is given exclusive rights to sell telephone service
in many parts of the country; and that—the price at
which it may sell this is regulated locally. If that
company were to integrate backward into the manufac-
ture of telephone equipment as in fact AT&T has done
through its ownership of Western Electric. That makes
the regulatory process more difficult because you then
have to inquire about the fairness of the price of the
manufactured equipment as well; and in that type
situation indeed one would have to raise the question of
whether one wanted integration in that context so it’s
not really related to the question of competition. So I
would say that the first illustration is really the most
applicable one to your question.

a oe

(T. 290) Q. Isn’t it true that when you speak of a
vertical acquisition, part of—as part of vertical integra-
tion, aren’t you in fact describing a system which does
not ultimately result in an increase in the number of
competitors? In fact doesn’t it, if anything, would either

441

keep the number stable or (T. 291) possibly if the vertical
acquisition was comprised of three small competitors that
way, it would reduce the number of competitors? A.
That’s correct.

Q. That’s somewhat—do you adhere to the theory that
the more the competitors the better the marketplace? A.
I adhere to the proposition that if a market is to behave
competitively, it must have many competitors.

Q. Well— A. So that if we're talking about an
acquisition of one of several hundred or several thousand,
the answer is that’s not apt to be significant. If on the
other hand, this illustration we’re talking about involved
a firm vertically integrating forward and acquiring let’s
say thirty, forty percent of the market, at the subsequent
stage, yes, one begins to worry about that. The concern is
not with the vertical integration in that context, the
concern is with the horizontal integration because in that
illustration you gave me it would be the firm which was
vertically integrated. We also had the horizontal integra-
tion at subsequent stages three independent competitors
were put together and I would be worried about the
horizontal tie, that that consolidation at a single level
began to get large relative to the market. If it’s not that
large relative to market, then the (T. 292) market is
basically competitive and then my earlier illustration
about, you know, what the effect of vertical integration
would still stand.

Q. May I ask you—do you want to say more? A. No.

Q. *** Have you ever undertaken any consumer
studies or investigations relating to specific consumer
preferences in the type of retailing in—of gasoline
products? A. None that amounted to anything.

Q. Then your testimony with regards to consumer
preferences today was based on general information from
other areas, is that correct? A. Based—based then

442

basically on my training as an economist without—I don’t
intend for one minute to tell you that I’m an expert with
respect to the —even this petroleum market or petroleum
market nationwide.
> 2 =

(T. 294) Q. In your economic—expert economic
opinion, would it be—is it necessary for the major oil
companies to have fully vert—to fully vertically integrate
into the direct operation at the retail level? A. Well, I
really feel with respect to that question as phrased that I
should say that I don’t know because I’m not an expert
in terms of what’s necessary within the industry. I don’t
know the industry from the inside out. My expectation is
that in general as Mr. Greenwald has mentioned what a
corporation of this sort will do is pursue alternative
strategy and my expectation would be that in something
like the use of the automobile one might find under those
circumstances that 1 company operating its own dealer-
ship, in other situations offering it through franchise
dealers simply because in some circumstances one form
of obtaining retail services is superior to the other. In
some cases it might be that the corporation might be able
to do the job more efficiently in selling, selling just
adjacent, for example, to its factory, it might be
convenient administratively in organi- (T. 295) zations
simply to operate it directly. You get—alternatively these
things are being retailed in some distant part of the
country where control is optive, I guess that under those
circumstances the balance would tend to go toward the
independent. Again it’s not in—It’s in the interest of the
seller of the product to find the most efficient way of
getting his product to the people who want it in the form
in which they want it and frequently that will be by using
independent dealers by selling the product to them,
letting them resell it or setting them up as independent,

443

you know, franchise dealers in some fashion. I don’t
mean to argue that under any circumstances any
prior—one can know that this or that system is the best.

(Mr. Woodstock) I have no further questions of this
witness. Your Honor.

(Court) All right, sir.

(Mr. Greenwald) No further questions, Your Honor.

(Court) All right, you can step down.

* * *

(T. 302) (Mr. Reid) We’d like to offer to the court a
photograph that was taken, we can top the one that
you've just referred to, these were taken in 1972. Price is
shown in the thirty cent range.

(Photograph Filed Herewith As Evidence As Plaintiffs’

Exhibit No. 7A through 7C)

(Mr. Reid) Secondly we’d like to offer the affidavit,
Mr. Kelvey, relates to the investment of Petroleum
Marketing Corporation in building and equipment in the
State of Maryland both as to the initial investment and as
to the current book value thereof.

(Affidavit Filed Herewith As Evidence As Plaintiffs’

Exhibit No. 8)

(Mr. Reid) We have in addition two witnesses to
testify, one briefly, Mr. Colin Carter, Commonwealth Oil
Refining Company, Inc., second, Mr. Theodore Ferguson,
Petroleum Marketing Corporation. First call Mr. Colin
Carter.

(T. 303) COLIN P. CARTER,
a witness of lawful age after being duly sworn, deposes
and says:

DIRECT EXAMINATION
By Mr. Reid:

Q. State your full name please. A. My name is Colin P.
Carter.

444

Q. What is your address? A. 51 Crawford Terrace,
Riverside, Connecticut.

Q. What is your relation to Commonwealth Oi
Refining Company, Inc.? A. I am distribution planning
manager in the head office in Park Avenue.

Q. What are your qualifications and background for
that position? A. I was educated in England. I’m a
professional chemist. I was employed in England by BP
and Esso in positions involving market research, market-
ing general economics and specifically in the last two
years in operations planning. I was hired by Common-
wealth Oil from England in 1970 to become operations
planning manager at their refinery in Penuelas, Puerto
Rico.

Q. Does Commonwealth Oil Refining Company, Inc.
have any other refineries other than the one in Puerto
Rico? A. No.

Q. Does it have any production capacity? (T. 304) A.
Production of crude oil, none.

Q. Are you familiar with the history of the relation-
ship between Commonwealth Oil Refining Co: pany, Inc.
and Petroleum Marketing Corporation? A. Reasonably,
yes.

Q. Would you explain that please? A. The negotiations
for a merger begun in 1969. They were completed in the
first quarter of 1970 and Petroleum Marketing Corpora-
tion became a subsidiary of Commonwealth Oil Refining
Company.

Q. And that is a wholly owned subsidiary? A. Became
a wholly owned subsidiary.

Q. Are you familiar with the operations of Petroleum
Marketing Corporation in the retail gasoline market? A. I
have some knowledge of their operations, yes.

Q. Where does Commonwealth obtain its crude oil? A.
Historically it’s obtained its crude oil almost entirely in

445

the Carribean. Beginning in 1971. we began to obtain our
crude oil from other parts of the world. We now obtain
approximately seventy, seventy to—about seventy per-
cent of our crude oil in the Carribean, the balance in the
rest of the world, largely Africa.

Q. What has happened to the foreign crude oil market
in recent years? (T. 305) A. From the onset of CFXC
what today seems a relatively small increase leading to
the dramatic increase that came about in the end of ’73
that—well, particularly the end of ’73 and right at the
beginning of 1974. In fact, I at your request I prepared a
chart showing crude costs and in fact showing how other
costs associated with getting gasoline through to the
public have changed since 1969.

Q. Is that the chart on the easel there? A. That is the
chart on the easel.

Q. Would you explain the chart to the court please?

* * *

(T. 305) A. This is a plot of costs. The blue is crude oil
costs in terms of dollars per barrel with this scale here.
This one is dollars per barrel. This one is the same scale
just expressed in terms of cents per gallon. Here we have
the years 1969 through °75. The orange above the blue
represents the plot of refinery operating costs. This is in
fact added to those. There’s crude costs added to this
then becoming the operating costs. The green is freight
costs from Puerto (T. 306) Rico to the east coast. The
pink represents a plot of PMC operating costs expressed
in terms of either dollars per barrel or cents per gallon.
The brown portion represents the taxes. I have shown
each of them sequentially. The implication would be that
this represents the cost of gasoline. That isn’t true. This
represents the addition of all the costs that can be
associated with it, but in fact gasoline has to bear more
than its share of the costs for the reason that if you like

446

residual fuel, which is one of the other products from
crude oil, tends not to. You cannot avoid making
basically three products from crude oil so this is in a
sense a simplification, but it does represent in sequence
the costs Commonwealth Oil has had over this period;
and I have also shown on the graph a plot of our PMC
pump price, weighted average pump price over the whole
system, this isn’t just the Maryland pump price, to
emphasize the problems specifically that Commonwealth
Oil has had because of this foreign crude.

Q. What effect has the increased in the cost of foreign
crude and other increases had with respect to the pump
price of Scot gasoline? A. The price of Scot gasoline in
competition with everybody else had to go up. However,
Scot gasoline has to be competitive and I think the graph
really makes the rest of (T. 307) that particular point.
Beginning with 1975 you can see the improvement with
the onset of the cnicie equalization program, but that gap
is still significantly less than this one.

Q. And this one being around 1971, °72? A. Yes,
going through—right througl:.

Q. Directing your attention to the block of 1974, does
the chart indicate that Scot gasoline was for a period of
time sold below cost? A. This certainly would since as I
said before, if anything, gasoline has to bear a high cost in
this one. Yes, this would show this.

Q. Some of the lines as they become vertical become
narrow which indicate—I draw your attention specifically
to taxes which get narrow in this area. Does that indicate
that the taxes were less there for instance? A. No, in fact
what you're plotting it, of course, the vertical height and
this apparent narrowness is a result of—really what you’re
plotting there if you like is a time difference, a relatively
small time difference, so it plots a rapid changeover of
small time distance. No, the thing that is significant

447

would be dropping a pump line, a vertical line right down
there where if you could imagine this push flatter, you’d
see in fact that taxes have tended to increase all along, as
virtually all those costs have. Sorry, I think I was (T. 308)
looking at operating costs, not taxes that time, but same

plot.

CROSS EXAMINATION

By Mr. Woodstock:

Q. Let me ask you with regards to that chart, what
does taxes indicate? All taxes, what taxes are—what taxes
are indicated— A. Those are all the taxes that are added
onto the pump price, the—both federal and state taxes.

Q. Does that reflect just Maryland’s or is that— A.
That is—no, those are all taxes for the whole system. That
is a plot of the whole Scot system. Obtaining the
historical data particularly just for the State of Maryland
would have been difficult, so we plotted the whole PMC
system, which is basically centered in this area.

Q. How many states is that? A. Seven states, seven
states J believe.

(Mr. Reid) We’d offer the chart as an exhibit, if the
court please.

(Court) All right, sir.

(Cost factor changes chart filed herewith as Plaintiffs’

(T. 309) Exhibit No. 9 as evidence)

THEODORE E. FERGUSON,
a witness of lawful age after being duly sworn, deposes
and says:
(Clerk) State your full name and address.

(Witness) Theodore E. Ferguson. 1703 Hicks Drive,
Vienna, Virginia.

448

DIRECT EXAMINATION

By Mr. Reid:

Q. Mr. Ferguson, what is your position with Petro-
leum Marketing Corporation? A. I’m executive vice
president.

Q. How long—in what areas of the operation are under
your supervision? A. I’m chief executive officer of the
company and that’s inclusive of retail and wholesale
marketing, going down through the organizational chart
covering real estate, operations, accounting groups report
to my office, the entire organization of Petroleum
Marketing.

Q. How long have you held that position? A. For
approximately—approximately four and a half (T. 310)
years.

Q. Incidentally, where is your office? A. It’s 7900
West Park Drive in McLean, Virginia.

Q. Is that the main office of Petroleum Marketing
Corporation? A. That’s our corporate headquarters, yes.

Q. What are your qualifications for the position you
hold with the Petroleum Marketing Corporation? A. Well,
I’ve attended school at the University of Florida, I was
two years with Tidewater Oil Company, which is
presently known as Getty Oil Company, even prior to
that I was a Cities Service dealer and, of course, I've been
with the company for fifteen years. I have come through
the ranks so to speak from a retail service station
supervisor, servicing anywhere from twelve to seven-
teen or to even seven stations in the beginning through
retail sales manager, vice president of retail sales and
holding within the company supply and distribution
functions, overall marketing functions and then executive
vice president.

449

Q. Have you been with the company since its
inception? A. No, I’ve not. I came with the company in
1960. That’s approximately four years after it was
formed. When I came with it, we were very small. We had
approximately six stations, primarily in Maryland and
about six under construction, (T. 311) some of those
being in Maryland and some in Virginia. In fact our
corporate headquarters were in Pasadena in the rear of a
service station prior to my coming to it, and then about
six months before I came, they were in the process of
moving and moved to the Investment Building in
Washington; and that was the beginning of the company.

Q. Who was he founder of the company? A. Norman
C. Keith. The company was, as I say, founded on a
Delaware corporation, but was founded here in Maryland
with the first two stations opening, one in Towson, one
in Pasadena and then growing from there from two
stations to when I came with the company, we'll call it
about thirteen and now we’re up to a hundred and forty
some stations and property.

Q. How many of those are in Maryland? A. Twenty-
one stations in Maryland.

Q. How does Petroleum Marketing Corporation parti-
cipate in the retail markets for the sale of gasoline? A.
We're a what we would call a high volume outlet. Some
people would call them cut rate, some would call them
highly competitive. We think of ourselves as an independ-
ent marketer. We are highly competitive in the market.
We operate on the basis of the public, what we think they
need to gain their patronage, which has been as large a
property as we could find; and as competitive prices as
we could find. We have (T. 312) what we think is a
somewhat of a different image and I think that the
gentleman prior to me emphasized that each company
has its own marketing method or motif, and I think he

450

called it market retail force o: something; and I think
that this is what we have developed. We have developed
our own. It might vary by degrees but I think it is the
entire package that makes for a successful high volume
stations which is what we have done.

Q. Specifically do you participate through dealership
operations or are your stations company operated? A.
We’re one hundred percent company operated. We have
in the past and from our conception experimented as we
have had the right to do and we have done this and found
that the company operation was the best method for us
to obtain objectives and to maximize the profits.

Q. What are the various factors which you sec that go
into the particular type of company operation as Scot
runs or the PMC runs through the Scot stations? A. Well,
I think being somewhat redundant, I think that one, I
think our competitive approach is the most important to
us in obtaining the volume that we need to justify our
investments and then following along we need control of
that operation which sometimes is constri ed to be nasty
but I’m using this in the sense of controlling that price to
be competitive (T. 313) and then it doesn’t miss one
thing in the operation, it goes on to your uniforms, it
goes on to your hours of operation, how your station is
maintained, how your people are trained, how you
approach, what sort of advertising you permit, what type
of advertising you don’t like, do you—what do you
permit on that station, what —it’s an overall image I think
is what I’m really trying to say; and we have developed
that with policies, with training and so forth to obtain
these volumes where we think it-—we think it’s us and we
think it’s successful and basically we’ve proven that not
just by making dollars because we’re losing a few on your
chart there, but throughout the years we have been
successful, and we have done it by taking our ups and

451

downs in the marketplace relative to profit making to
maintain this image.

Q. Incidentally could a dealer take these ups and
downs that you're talking about? A. In the last few years
he’d have pretty hard time of it. Even in my period of
time with the company, we have had and we felt it was
an advantage by being company operated in that we have
many periods of time and it might stretch for four and
five months at a time where we will break even with
slight losses. Call that—call it changing dollars. I think
that if you go back in the dealer operations in the period
of time that I’m talking about coming up with company
dealer (T. 314) turmmover was just one of the biggest jobs
that anybody in the oil company had to do was
replacement of dealers. I think even the federal govern-
ment has reflected in four and five years ago the most
vulnerable business in the country for bankruptcy was
the service station. I think all our ends of operation have
avoided that from our standpoint; and I really don’t
think that generally this—in our position relative to our
crude costs that a dealer could have sustained it. I don’t
feel I could have personally.

=

(T. 314) Q. All right, may I start again? I’m going to
ask you about each of the factors that you just testified
to with respect to the overall image necessary to be a high
volume, low cost operation and ask you how Petroleum
Marketing Corporation controls the price of the gasoline
that is offered to sale to the public and included in that
answer please tell us how your price relates to the price
of the major oil companies. A. Well, I'll start with the
latter. We're approximately two cents below major brand
competition. This varies, of course, (T. 315) from station
to station, but I think on an average we're probably two
cents to two two. It might be one seven for the moment

452

and I think that pricing in marketing is the thing of the
moment, but to be fair on the average I would say we’re
from one to two cents below major competition and I
mean to say those offering full service, bays, tire repairs,
batteries and so forth. Since we don’t off this type of
thing, we're gas, easy in, easy out type of operation.

Q. Why is that differential necessary in order to sell
Scot gasoline? A. Well, we need the volume because our
operation, our—I think what I’m trying to say is that
particularly with our manufacturing costs we've got to
maximize the profit. Since we became associated with the
refiner, I think this has even become more apparent and,
of course, the world situation hasn’t helped us; and I
think that particularly at this time we have to maximize
them, which I think the chart even bears out to just stay
alive.

Q. Do you think Scot gasoline would have appeal to
the motoring public if it was priced at the same price as
the major brands? A. Well, from my experience, I would
probably estimate, which is very presumptuous, but I'd
probably lose seventy percent of my volume if I tried to
market at major brand prices. (T. 316) We’ve had some
experience where we've tried it. Going back four or five
years ago, we tried this, we've experimented with it.
We—to show you we even trie experimenting with the
service. We probably were one of the pioneers in this area
with what these fellas call a—earlier car care center. I had
three of them. It didn’t work. Our image just didn’t lend
itself to this. We finally ended up closing these and going
back to our traditional company operated stations, high
volume, easy in, easy out, personnel type operation.

Q. The second thing I think you mentioned was hours
of operation. What is the policy of Petroleum Marketing
Corporation with respect to the hours the stations
operate? A. We generally like to after taking field surveys

453

of what competition has established per hour of
operation, we try to stay open, open an how earlier,
close an hour later. Also as a rule of thumb policy, after
evaluating the traffic, the market conditions and the
volume and our experience at that location, our basic aim
is to operate on a twenty-four hour basis. We found that
this lends itself to control, helps us establish the volumes
that we need and become a more efficient operation.

Q. How do you control the method of Operation at a
Scot station? A. We have a management team, consists of
vice president (T. 317) of retail, he in turn has district
managers and supervisors report to the district managers.
Generally our people will supervise on the basis of six to
cight stations. Because of the nature of our operations,
because we are a cash business primarily, it’s necessary
that we control the money, we control these things that
we think are necessary to keep our image, that being the
hours, checking that the station is open, training the
personnel, keeping good looking equipment, having—
making sure the stations are washed down and going
through what we think is general maintenance and
upkeep necessary for operation, therefore, we back it up
with personnel that might sound like a lot of people but
it’s actually minimum.

Q. Do you provide uniforms, for instance, for your
attendants? A. Yes, we do, we have a company color, red
pants and white shirts and red jackets and red caps; and
when possible black bowties and so forth; and this is one
of their jobs to try to maintain this image.

Q. How do you assure that these people will present a
good appearance at all times as far as having clean
clothes, things like that? A. We do their laundrySfor
them.

Q. You pay for the cost of cleaning the clothes? A.

454

Yes, we do; we pay the costgand we provide the men (T.
$18) with a change of uniform daily,

Q. Do you have any service facilities whatsoever at
any of your twenty-one stations in Maryland? A. No,
we're-where we have taken over stations with bays, we
have removed the lifts and I believe that there were only
about seven of those and blocked up the bays and have
used these bays for the storage of our oil and
merchandising signs and so forth; more in our mainte.
nance area than for anything else, We just don’t offer
facilities,

Q. Do you sell tires, batteries or other accessories at
your stations? A, No, we don’t.

Q. Why don't you provide maintenance services and
TBA sales? A. Well, we-we have-we have a philosophy
that we think and I believe it's beared itself out that this
may be an age of specialties. | think that if you're going
to wait on people aad we have found that about forty
percent of our customers are women, we feel that it takes
a clean type of personnel, clean appearing, we didn't feel
that we could it with mechanical work, There are some
other reasons which are basic and possibly important, To
develop the company to the size that we have, quite a
few of the zoning ordinances and at the hearings where
we presented our case, (T, $19) they prohibited us from
doing mechanical work, storing tow trucks and in a
couple instances, it is in our zoning that we will not do
any mechanical work, we will not wash cars, and many
attempts have even been to regulate our hours of
operation, But some thinking has changed since the
embargo, but I haven't been in for zoning since then,

Q. Couldn't you enter into an arrangement with a
dealer whereby he would agree to these same factors that
you've just mentioned a certain price, a certain hours of
operation, wearing the company uniform, things of that

455

nature? A. Well, under the present regulations as I've
been advised by several attorneys that it would be
impossible to put a man into the station and require
that—of this independent businessman that he maintain
hours or even wear a uniform and in many cases I think
it's not even—I'm not sure that whether he'd have .o buy
our product or not, So I don't feel along with some other
problems that we're faced with and that I don’t believe
that I could offer him a price for gasoline that he could
live with, I think it would be absolutely impossible for
Scot to go to a dealer operation and anywhere near get a
return on investment that would allow us to stay alive or
to grow,

Q. Does Petroleum Marketing Corporation require its
gasoline from Commonwealth Oil Refining Company,
Inc.? (T. $20) A. Yes, we do.

Q. How is that delivered in the State of Maryland? A.
It's delivered by ships in the Baltimore harbor and
unloaded and placed into our storage tanks and then
redistributed to the stations by either common carrier or
our own leased trucks directly to the stations, It's one of
our methods of operation, We've worked, | think, from
the beginning to cut costs so that we could stay
competitive in the market by acquiring this terminal |
think that it—we felt at the time that it was one of our
cost-cutting mechanisms; and again through our own
trucking arrangement, we felt we kept our costs at a
liveable level so that we could stay again competitive, and
in addition to that to couple that supply cycle in our
stations we have probably the largest storage tanks, the
most—at least average wise that I know of in the entire
country. We average throughout the entire country
forty-three gallons—forty-three thousand gallons a sta-
tion; and generally the new stations have eighty thousand
gailons. This way it is economical for us. We do not have

456

to have deliveries day to day into that station, We can live
for whatever our business cycle is. It's another method,
Again going back to the dealer, we're-we couldn't
require the dealer to buy under this franchising laws and
so forth in the quantities; and could say send us a
hundred gallons or whatever commercially rea- (). 321)
sonable | guess; but we deliver in full tanker loads. Again
maximizing our—

Q. Incidentally, how was PMC affected and how did it
react during the so-called gasoline shortages of the early
months of 1974? A. Obviously it’s the embargo period
you're talking about. We kept our stations open as long as
we could, We were very fortunate to have supply and we
only closed them down when it became unfashionable
and almost immoral to stay open because they were
saying turn down the lights and at first received criticism;
and at that time I went along with the atmosphere of the
country, and I did close some of the stations early, Also
we went along with the President's proposal to alternate,
for the closing of Sundays and then finally as the public
and as supervisors of different counties because aware of
what was really happening, we were one of the first to
cooperate with them and I had personally received calls
from Prince George's County, Montgomery County to
keep stations open specifically on Sunday, which we did.
We also gave preference to fire and police and I think we
reacted rather well,

Q. How did that compare to most dealerships that
were (T. 322) operating during that period of time? A.
During that particular time | think that the dealer by
being the individual in this, | think he was very conscious
of his economics. He found an opportunity to close early,
which he did, He also found that he could probably lay
off some of his part-time or full-time people; and he
worked through his allocation, | think as 4 company

457

| could be called and say yes, we'll do that even
though it’s not economical. | would have loved to operate
those reduced hours, I could have sold the same amount
of gasoline or more under reduced hours, but I think we
did have a conscience and I think there is some advantage
to be able to pick up a phone and say to the various parts
of your operations we should do this to cooperate with
the counties and so forth,

Q. You, of course, are familiar with the legislation
that’s the basis of this case. What would happen if to
Petroleum Marketing Corporation if the legislation were
enforced which would prohibit the operations by
Petroleum Marketing Corporation of the Scot retail
gasoline stations in the State of Maryland? A. Well, I
think other than—I guess the growth would be com-
pletely out of the picture; and I believe that we would
probably have to abandon our operations because I don't
see-I've spent a:lot of time pondering this and also
working (T. 323) with Colin trying to develop what we
had within our financial structure that would permit a
dealership and basically just starting with the economic
picture that we could not offer a tank wagon price that
would be competitive. I'd say that Petroleum Marketing
would end up out of the State of Maryland.

Q. And would you summarize then the reasons why
Petroleum Marketing Corporation could not be converted
to a dealership operation? A. In summary I would say the
economics of a high—of the gallon of gasoline related to
our high costs and our distribution system, remembering
that our gasoline comes from Puerto Rico, which
certainly adds close to two cents to it, another being the
volume that it takes to support the economics of our
entire operation, We require, I'd say, high volumes. In
order to retain the high volume, we certainly have to be
competitive and it could be construed to be super:

458

competitive, but competition is competition, Also the
image that we need to project to obtain this not that
always—price does not always do it alone; and I think
these gentlemen this morning pointed this out; but we've
tried to couple it; and I think we would lose that part of
our image that would help us or damage us in our volume
but at least towards our economic maximization of
profits. I think, too, we would probably and I think
without a doubt lose the economics of efficiency of (T.
$24) running that station; and our outside sources of
income are limited and majority of the properties are
probably limited to the conversion to other restaurants or
what have you. So there's no question we would be
damaged; but restricting it to why we couldn't, I think
that generally I have summarized it. 1 don't believe that
we could—most any other circumstances than company
operation maximize the profits in order to stay alive in
the state.

Q. Looking at it from the other side of the coin, from
the potential dealer, do you think that the—a dealer—a
potential dealer would find appealing the operation of a
Scot station as a dealership operation? A, Well, I think
the typical dealer as we know the dealer, I don’t know
why he'd want it. As I say, we don't have any facilities.
We have a small air compressor. We have no lifts, Just
being redundant I'm afraid.

Q. No, go ahead, that's all right. Go ahead, A. But I
don't believe the dealer could stay alive in there. He'd
have to be relying particularly, strictly on a hundred
percent gasoline and prohibited from doing any outside
work, TBA et cetera that would be extra profits; and
with a high dealer tank wagon, I think he would—he'd
have to surrender very quickly.

Q. Do you think that he could sell gasoline to the (T.
$25) motoring public at the differential that PMC has

| 459

been able to sell it, that is, two cents below the majors?
A. At a loss? I wouldn't hardly think so,

Q. What about the initial investment a dealer would
have in a station like Petroleum Marketing's Scot station?
A. Well, the-I think the highest investment and this is
somewhat conjecture, | guess, because I haven't found a
way to do it to offer him this on an economic basis just
from the purchase of the gasoline but to go behind that
and say what does he purchase from me, well, does he
purchase the gas. Fine. This would probably today | ask
him to fill the tank, might run up to thirty-eight to forty
ee dollars, depending on the tax, how we handle
that.

Q. Your taxes are larger than the average service
station, A. Well, we have quite a few with eighty
thousand gallons.

Q. And he'd have to make an investment in the
gasoline in the tank, A. In the tanks.

Q. To begin with, A. That's cer— | would assume this
because I haven't been able to develop this method that I
would put a dealer in on, So I'm dealing in hypothetical
structure here. If we (T. 326) adapted a few methods of
operation that other companies have, we might sell him
the pumps; and he would maintain them. That's why I
say I'm really dealing in a fog to try and tell the court
how I would structure this in that I've been unable to;
but some companies have—the dealers do own the pumps.
The pumps today are twelve hundred dollars a piece. We
have eight of them. Some of ours are dual pumps. Some
stations have twelve pumps so where do I stop with this
economics. I'm not just saying I'm making up what |
would want to sell him, but what method of operation I
would come up to put a dealer in I've been unable to
satisfactorily come up with it. So you're—my answer is
very difficult, but it would be a considerable investment

460

on his part and I'm not too sure that he could make a
return on it, He might do better in a savings and loan.

CROSS EXAMINATION

By Mr. Woodstock:

* * *

(T. 326) Q. I think I agree with almost all your
statements as it regards the period of time °74 and
perhaps early ‘75 when you obviously operating at a cost.
If | understand this (T, 327) chart right, the price of the
gasoline you would be supplying to a dealer, he would
already be behind. A. True.

Q. Let me ask you if the same would be true the
period of 1969, when your crude oil cost was signifi-
cantly lower. A, If the same—your question is would the
same thing—would he be losing-—-could he have done it in
1969?

Q. Yes. A. In general, | would say no. | might tell you
what has happened and maybe a reason why. There
were~back in "69, ‘70, even up into ‘71 if you made
twenty-five points, this is one twenty-fifths of a penny on
a gallon of gas when wage and hours were a dollar an
hour, everything was small, your profits were small and
you get it in volume; and I would say that that dealer
would not have had the volume back then unless he had
everything that we had, I don't believe he could have
done it because that's where the period of time when the
most dealers went out of business.

Q. Are you aware of any companies that made it
during that period of time? A. Independents.

Q. Yes. (T. 328) A. On a dealer basis?

Q. On a dealer basis. A. I'm not aware of any.

Q. How about today in Maryland? A. Companies
comparable to us? I don't know of any on a dealer basis.

Q. Are you familiar with the Crown operation? A. |

461

understand that Crown has—I thought that was a
commission arrangement so I can’t direct myself to
their—

Q. How about Hess? A. I think Hess as I know it is
a—defined by me as a commission agreement, defined by
you and the government as a dealer.

Q. Well, no it’s not. It’s not defined by me at all. It’s
defined by the law. A. By the law.

Q. To your knowledge are they operating at a profit
right now? A. I don’t know that.

Q. You don’t know that. Is Commonwealth Oil
Company operating at a profit on the total aspects of all
its refining operations? A. Not at present.

Q. It’s operating at a loss? (T. 329) A. That’s correct.

Q. If your crude costs were significantly lower and the
way I read that chart everything else has remained
relatively constant, the exception of your crude costs,
would PMC or—well, PMC turn the same profit or the
same rate of profit as it did in ’68, 69 and ’71? A. Very
difficult to answer. All I can say is that there is a
possibility.

Q. I’m basically asking you is if you did not incur
those increased crude costs, wouldn’t you—your profit
picture absolutely without question be better. A. I think
it would be down because—well, of course, the crude
costs today are affecting utility bills and everything, so if
you were—if you say that nothing in the economy went
up, inflation didn’t go, then everything remained the
same, then I could probably answer yes. The cost of
living, wages and so forth are eating into profits
constantly whether crude goes or not.

Q. To the best of your knowledge I don’t—to the best
of my knowledge I don’t believe you answered one
question on direct. I believe you answered the second
part of it but not the first part of it and I believe you

462
never did answer how does PMC control the price and set
the price at its retail service stations. I believe you
answered for the hours but you (T. 330) didn’t answer
for price. A. Okay, we survey the market; and I guess I
should define that. We'll take the competition up and
down the street, all of the gas stations in the area that
would affect the buying habits of the motoring public in
a particular area.
x * *

(T. 330) A. This is surveyed by our service station
supervisors and district managers; and the information Is
passed along to our home office, vice president of retail
discusses it with the either the field or the district passes
the information along to me and we establish for that
station that we feel to be a competitive price taking in all
of the factors. Those factors being a mix of whatever we
had surveyed from se'f service to full service to where we
feel our relative position is to maintain the volume
retaining our customers that are significant to our profit.

Q. Was Petroleum Marketing Corporation a profitable
corporation prior to the time it was absorbed by
Commonwealth? A. We were a—we were a viable entity,

es.
Q. Successful? (T. 331) A. I would say so, expanding.

Q. Growing? A. Yes.

Q. Growing. A. We found a need for crude. We were
getting big enough that we needed supply.

Q. To the best of your knowledge when you set the
price in the market, are you the lowest? A. No, I’m
matching competition. I don’t think that we would be
called the lowest in the area. When we spot that price, we
will match that price if it’s significant to that station.

Q. If you decided—Maryland law B and C were upheld
and you decided to convert to dealer leased operations, I
believe you said you might do certain things. One of

463

them was what I believe was to the exclusion of other
things, wouldn’t you possibly consider extending credit
to the gasoline in the ground as other major oil
companies do to certain dealers?

* * &*

(T. 332) A. I think this is certainly a factor that would
have to be considered, in order for a company to do this,
he would have to make cash arrangements to finance a
dealer.

Q. How about renting him the equipment instead of
selling it, including the pumps? A. These are all
possibilities. This is done in a variety of companies today.

Q. Has Scot or I’m sorry, has PMC adopted the official
corporate policy by a vote of their board of directors or
by whatever means that if this law is upheld they will
absolutely close up shop in the State of Maryland and not
do business in the State of Maryland at retail? A. We have
had no reason to this point to take it to our board.

Q. Does PMC also market petroleum at a wholesale
level? A. Yes, we do.

Q. If B and C were upheld, wouldn’t it be possible or
would it be possible that PMC would continue to do
business on that level? A. Well, we’d have to—we’d be
faced with a very (T. 333) serious decision in that
approximately sixty to seventy-five percent of our
product that goes through the Baltimore terminal is
destined for retail. I think that it would require an
economic study to find if we should even remain in the
harbor.

Q. Do you know— A. We have quite a few million
dollars invested there.

Q. Do you make a profit selling it wholesale? A. On
occasions.

Q. You actually do sell and not make a profit? A.
That’s correct. It’s as competitive as the retail.

464

Q. What is the average monthly volume for the
twenty-one Scot stations in Maryland? A. I would say
approximaicly a hundred and ninety thousand. I'll have
to use my company average. I haven’t worked it out for
the month. A hundred and ninety thousand gallons per
station.

Q. Do you recall what it was in about 1969, 1970 and
well, 1971? A. Without the record as to either one of the
years, it was somewhere between ‘69 and ‘71 we had
some averages that were ninety-eight to a hundred and
two.

Q. At that time do you have any idea and I don’t
know whether you know this or not what your cost
factors were as compared to other independent marketers
similar to your (T. 334) operation? Are they same? A.
What do you mean the same costs? Are you saying — :

Q. The costs identified on that board. A. Well, in
'71—’74, independents similar to us I would assume that
our costs were slightly greater in that we're bringing the
product from Puerto Rico. Others in similar situations
probably were domestic oriented and did not have the
freight included. |

(Mr. Woodstock) I don’t have any further questions,

Your Honor.
a a =x

(T. 336) OCTOBER 16, 1975
(Letter filed herewith as Plaintiffs’ Exhibit No. 10A as
evidence) (Affidavit and Exhibit filed herewith as
Plaintiffs’ Exhibit No. 10B as evidence). | “
(Original Affidavit filed herewith as Plaintiffs’ Exhibit
No. 10C as evidence).

(Court) All right, sir. :
(Mr. Abrams) Your Honor, my name Is Robert Abrams

465

—

and I’m an attorney for Shell Oil Company in this
litigation.

The thrust, we believe, Your Honor, as the court has
heard Plaintiffs’ contentions concerning Paragraphs B and
C of the Maryland Act, Shell’s position is similar to that
of other Plaintiffs in that it is Shell’s belief that
Paragraphs B and C are contrary to the interest of the
petroleum products consumer and that they constitute an
invalid exercise of the police power of this state. Insofar
as Shell’s legal contentions are concerned, Shell for the
sake of brevity and this court’s time will rely upon the
joint brief filed in this action and adopt Mr. Noonberg’s
legal arguments presented with the opening of this case.

In terms of Shell’s factual presentation, it is essentially
divided into two parts, Your Honor, one part dealing
with factual matters presented through the testimony (T.
337) of the company witness and I am happy in this
regard to tell the court that the State through Mr.
Woodstock and Shell have been able to reach an
agreement in terms of an affidavit. The second part of
Shell’s case will be the expert testimony of, economic
testimony of Dr. Matityahu Marcus. At this time, Your
Honor, I’m going to offer into evidence the affidavit that
I previously referred to and read to the court one
paragraph of the cover letter to that affidavit.

(Court) All right, sir.

(Mr. Abrams) And that provides—and the letter is
addressed to you, Your Honor.

“The affidavit and attached exhibits of Mr. Naughton,
area manager for the southeast area of Shell Oil Company
are being offered into evidence in Shell’s case in chief in
this action. The enclosed affidavit and exhibits were filed
in lieu of either direct or cross examination pursuant to
an agreement reached between counsel for Shelli, counsel

466

for defendants as result of Your Honor’s endorsement of

such a procedure on August 22, 1975.”
At this time, Your Honor, I would like to call Dr.

Marcus to the stand.

(T. 338) DR. MATITYAHU MARCUS,
a witness of lawful age after being duly sworn, deposes
and says:

DIRECT EXAMINATION

By Mr. Abrams:

Q. Dr. Marcus, please state your full name and
address. A. My name is Matityahu Marcus, spelled
MATITYAHU, Marcus, MARCUS. I live, at 771
Cranford Avenue, Westfield, New Jersey.

Q. Dr. Marcus, what is your present employment? A.l
am a professor of economics at Rutgers University.

Q. Have you held any other positions at Rutgers

University? A. Yes. Over the period 1970 to 19751 have
served as the chairman of the Department of Economics,
as the director of graduate studies in economics and as
the director of the Bureau of Economic Research at
Rutgers University. os
- Q. Have you held any other teaching positions? A.
Yes, I have been teaching before management groups at
Rutgers, Rutgers has a program known as the Rutgers
Advance Management Program and over the last several
years I’ve been a regular speaker on the economics of
business and regulation. .

Q. What courses have you taught at Rutgers? A. I’ve
taught quite a number of courses, but primarily in the
area of pricing, in the area of industrial organization,
financial theory and advanced seminars in the economics
of (T. 339) regulation. I might add that the courses in

467

industrial organization which I’ve offered for a good
number of years have been offered within our PhD
program for graduate students.

Q. What does industrial organization cover? A. Indus-
trial organization is that part of economics which ‘is
concerned with the relationship of the structure of
industry by structure I mean the size of firms, the market
share and its relation to the behavior of firms in terms of
pricing and similar characteristics and ultimately tracing
back through to its effect upon the performance of the
industry from the vantage point of the economic interests
of consumers.

Q. Dr. Marcus, would you state your educational
background please? A. I hold a BA degree in economics
which I obtained in 1959 and I hold a PhD degree in
economics from Brown University which I obtained in
1963.

Q. Have you been a recipient of any honors or
fellowships? A. I guess some. I graduated Phi Beta Kappa
and magna cum laude. I have held post doctoral National
Science Foundation fellowship and two years ago I was
made an honorary professor by the university—the major
university of Bolivia.

Q. What works, if any, have you published? A. Well,
let me try and mention some of the publications in which
my works have appeared, The Review of Economics and
(I. 340) Statistics, The Journal of Industrial Economics,
The Anti-Trust Bulletin, The Southern Economic Jour-
nal, The Canadian Economic Journal, Land Economics,
Journai - -*e American Institute Planners, Public
Utilities ughtiy The Oxford Bulletin of Statistics,
and probably a few o.: ers which I can’t—

Q. What kinds of subjects have you written about in
these publications? A. I have written on diverse subjects,

468

but many of my works have dealt with the areas in which
I have done the research over the years, in the area of
industrial organization; and the kind of topics with which
I've dealt include profitability and size of firm, market
concentration in advertising, issues relating to the exit of
firms, that is, mortality of firms, the determinants of
growth of firms and the like.

Q. Dr. Marcus, have you given testimony regarding the
economic effects of state legislation? A. Yes, I have.

Q. When did you give such testimony? A. I appeared
before an assembly committee of the New Jersey
Legislature about a year—over a year ago, September of
‘74 1 believe; and at that time I presented my views on
the desirability of a statute which sought to restructure
the retail part of the gasoline marketing industry.

Q. On whose behalf did you appear? (T. 341) A. Well,
I'd like to believe that I've appeared completely
independently, I've appeared at the invitation of the
chairman of the committee, Mr. Baer, the same person
who has requested Professor Berry to appear before him.

Q. What were the circumstances surrounding Mr,
Baer’s contact with you? A. Well, actually I was
contacted by a legislative aide of the committee. I believe
it was in June or May and was asked whether I would
come and give my views on that bill, At that time I was
told that the committee was going to hold hearings
within a period of two or three weeks; and I stated that I
just couldn't do any sufficient study to present my views
and I declined the invitation at that time.

Q. What happened subsequent to that? A. I was
subsequently approached and was told that the hearings
were delayed until September; and that gave me
somewhat more time and I felt that I could present my
opinions on the bill in September; and | agreed to appear.

469

Q. Were you compensated for that appearance in that
state? A. No, I received no payment for this—for my
time.

Q. Have you ever testified as to the economic effects
or consequences of other government industry related
actions? A. Yes, I have done so on several occasions.

(T. 342) Q. What were the areas of that testimony? A,
I have testified on areas relating to pricing and areas
relating to what is a fair and equitable rate of return on
investments and on the area of future market demands.
Q. Where did you give such testimony? A. Here again
I'm not sure I would be able to remember all of these
appearances but probably most of them. I've appeared in
the State of Virginia and at that time I was retained by
the Attorney General of the Commonwealth of Virginia.
| appeared in Alabama. At that time I was retained by the
government of Alabama on behalf of the State of
Alabama. I appeared in New York State on behalf of a
group of large corporations. I appeared in Massachusetts
on behalf of the Attorney General of Massachusetts. |
appeared in New Jersey on several occasions on behalf of
or that is I was retained by Rate Counsel which is division
of the Public Advocate in New Jersey, division of the
New Jersey State Government representing the public.

Q. Professor Marcus, have you ever engaged in private
consulting? A. Yes, I have.

Q. In what areas? A. Again in order not to take too
much time, let me just concentrate on what might be the
more representative areas (T. 343) of my work. Prior to
1969, no, about 1967 or so, I was retained as a
consultant by Mathematica, which is a Princeton-based
consulting firm, to do a study for the Department of
Agriculture. That study was concerned with market
acceptance of—a market competition of man-made fibers

470

and cotton; and my assignment was to looking to the
determinants which influence this acceptance and make
some projections.

Subsequently to that I was a special consultant to
National Economic Research Associates, which is a New
York based consulting firm, for a number of years. | have
worked on an assortment of problems, usually relating to
the question of structure of industry and its relationship
to behavior, performance in competition. In that connec:
tion I've dealt with marketing competition, marketing
penetrations. I've dealt with a question of structure of
the television supply indus: y, that was a study that was
done for the Office of Telecommunications Policy with a
view of exploring policy options for that office.

Q. Thank you. Dr. Marcus, could you describe the
circumstances surrounding your initial relationship with
Shell which has culminated in your appearance here
today? A. Yes. I believe I was contacted by you
sometime in the fall of 1974 and I was informed that I
would be subpoenaed to present the statement which |
had earlier presented to the (T. 344) New Jersey
Legislature. | was deposed subsequently to that; and after
the deposition I was asked whether I would undertake a
study to form a basis for an opinion concerning the
Maryland statute. | agreed to do so. . .

Q. Did you know the context within which that
deposition was taken? A. Yes, I understood that the
Florida Legislature had passed an act which sought again
to restructure the retailing segment of petroleum market
ing and in that context I understood that my statement
was going to be used. is

Q. Were you compensated for this deposition? A. I
think I got six dollars from somebody,

Q. Prior to your retention by Shell for purposes of

471

this litigation, had you ever been retained by a petroleum
company? A. No, sir.

Q. Dr. Marcus, are you familiar with Chapter 854 of
the Laws of Maryland? A. Yes, I am.

Q. Have you had sufficient time to study Chapter 854
of the Laws of Maryland in order to form a definite
opinion as to its economic effects? A. Yes, I have given it
quite a bit of time.

Q. Is your opinion based on a study? A. Yes, it is.

(T. 345) Q. What constituted the basis of your study?
A. Well, broadly speaking, of course, my study has begun
with days of graduate work and subsequent research on
industrial organization, These are precisely the issucs that
the study of industrial organization is concerned with.
Entry, pricing and the like, but I sought to gain some
more specific familiarity with gasoline marketing and
retailing in order to be absolutely certain about my
position on this matter and the rationale for it. So | have
over the good many months now and I would dare say
that actually my first study began in preparation for the
New Jersey statement, however, at that time I told the
committee that my study was ongoing, it was a kind of
preliminary and still somewhat hasty statement. I have
proceeded from that day on to study the industry. I've
done it through giving it more emphasis in my graduate

courses in industrial organization; and subsequent to
being retained by Shell Oil I have systematically reviewed
the literature including the academic literature as well as
Congressional committee reports that have dealt with
various facets of gasoline retailing. I'm not quite sure I've
been able to cover them all, but I had a pretty heavy
stack of books in front of me. I have followed the trade
literatures. I have received a continuous stream of
documents and manuscripts from your office which |

472

have endeavored to review, some of them with greater (T.
846) core and others more casually, | have also visited
with Shell people in Houston trying to understand in
greater detail the operations; and | was also very curious
to see some of the different operations that they told me
they had in Houston and just about one day I was driven
around to see various stations which have not yet been
introduced throughout the country,

Q. Now, Dr. Marcus, would you as an economist
describe the frame of reference within which you
approached your study? A. Well, the frame of reference
here I think the same frame of reference of Professor
Levitt and Professor Berry is the kind of reference that
economists do employ and that is is it in the interest of
the market as a whole, not is it in the interest of a
particular segment, particular participant, but will consu-
mers, will the public be better off next year, five years
from now or ten years from now. This was the frame of
reference on my study.

Q. Assuming Paragraph C, Chapter 854, becomes
effective how will it in your opinion as an economist
affect retail competition within the petroleum market:
place? A. It will tend to affect it adversely. It will tend to
lessen competition and competition is the means, the
only means I dare say, that we know through which in
the long run consumers will benefit. I, therefore,
conclude that it will tend to adversely affect consumer
interests in the area of (T. $47) pricing, in the area of
product development, in the area of innovation, in the
area of service variety. I'd like to emphasize that this is
not a statement of idealogy. Competition may appear to
be a simple term, but it is through competition that all
these elements are enhanced and this is why I've noted

that.

473

Q. Since it is your opinion that competition is a
fundamental consideration in terms of your analysis,
would you state whether you believe gasoline retailing to
be competitive generally? A. I'd like to relate it first to
retailing as a wh ie because gasoline retailing is a segment
of retailing. It's not a unique area; and retailing is
considered to be one of the more competitive segments in
American industry; and the reasons for it are fairly
simple, Retailing is characterized by a large number of
competing firms. Second, entry into retailing is relatively
easy, relatively compared with manufacturing, public
utilities and the like, that makes it more competitive.
These factors characterize gasoline retailing as well, but it
so happens that there are additional factors which make
gasoline retailing even more competitive than retailing as
a whole,

Q. What are these factors? A. Well, competition will
tend to become more intense, (T. 348) the more
substitutable are the products. Now gasoline brands while
they are not perfect substitutes in the mind of the public
are fairly close substitutes and that renders competition
more viable. Second, in order to—for consumers to take
advantage of competition, in order for them to behave
competitively they must have price information, they
must know which seller is selling less and in the gasoline
industry it is almost a unique industry where price
information is distributed in the most efficient way. All
you have to do is down drive—drive down, excuse me,
and you don't even have to do it on purpose, on the way
to work you get a very quick assessment of what are the
prices which the market quotes for you. This is a second
very important consideration. Third, in order for consu-
mers to take advantage of the different prices, they have
to be able to act quickly without much restraint, without

I

474

a great deal of burden, Here again it's almost a unique
industry because the consumer in his car he can do the
purchase while in his car, he doesn't have to park his car,
go up to the fourth floor, find out what's the price and
then act on it. For all these reasons gasoline retailing is
indeed highly competitive. Yr

Q. What are the benefits, if any, of this competition to
gasoline consumers? A, Well, I think I've mentioned that
before already. (T. 349) With competition there comes
the benefits of lower prices, greater product variety,
better service quality, service innovations, product inno-
vations because all these things become tools in the
competitive contest.

Q. Now I'd like you to take each one of those tools
and state in your opinion as an economist how each
would be affected by Paragraph C of the Maryland Act.
First what will be the effect, if any, of Paragraph C on
the price of gasoline? A. Well, the effect will tend to

duce the price because you will be affecting, you will
be impinging upon the number of stations and more
importantly upon or as importantly upon ;,

(The Court) You say reduce? A. I'm sorry, I'm sorry,
Your Honor, | misspoke. It would tend to reduce
price—competition and increase overall the level of prices.
This is a predictable result any time we preclude
competitors from the marketplace.

Q. What type of competitor would be precluded from
the marketplace? A. Well, according to the statute
producer-refiners would be precluded from the marke
“— Who are these producers-refiners comprised of? A.
Well, there's been evidence presented before this court
that this group encompasses very large producer-refiners
(T. 350) and some very small price competitors, price

f

475

marketers. This group of producer-refiners would have to
terminate operations under this statute.

Q. What is the importance of having this type of
competitor in the marketplace? A. Well, here again I
think we have to think about the meaning of competi-
tion. Competition again depends on the participants,
depends upon what they bring to bear. If you’re going to
have more types of participants in it, you’re going to
bring to bear more variety in managerial points of view,
in attitude to product development, in strategy and as
you bring these to bear, you allow consumers to choose
more and this process of choice is really competition.

Q. Dr. Marcus, do you have an opinion as to whether
Paragraphs B and C will affect market entry? A. Well,
there’s been extensive testimony before this court and I
will be very, very brief. It is going to influence—to bar
rather the entry of producer-refiners, it would bar the
entry of producer-refiners who might ultimately choose
to operate through dealers if they feel that in order to
establish themselves they must first operate through
company operated stations; and it will bar the forward
integration of companies who are currently in refining
from moving into marketing and I am sure there are
marketing firms which may (T. 351) at some point or
another be in danger or which may feel that economically
they should move into refining and under this statute as I
understand it, they would be prohibited from doing so.
The net effect of these influences is to reduce potential
entry into retailing—of the retailing industry.

Q. Returning now to the factors you previously
mentioned, how would type or the quality of service be
affected by Paragraph C? A. Again to have variety, you've
got to have variety in the types of participants. You have
to have as many diverse participants. If you're going to

476

limit, you're going to cut off some types. You're going to
influence it adversely.

Q. You’ve also previously mentioned innovations.
What is the importance of innovations to the consumer in
your opinion? A. Here again I think innovations
sometimes may be thought of as a kind of gadget, new
packaging and sometimes it is that; but economists have
established in numerous studics that over the history of
the United States innovations have been the so—I think
the most important source of productivity gains and
productivity improvements; and productivity is the
vehicle through which cost cutting gets effectuated and
cost cutting is the foundation for lower prices. So
innovations are of extreme importance.

Q. Now then would the prohibition against company
operated (T. 352) stations affect innovations? A. Well,
innovations do not just spring by somebody sitting on a
chair. Sometimes it happens but I guess companies just
can’t be—assume that this is a safe strategy. The—it has
been established that companies which seek innovations
have to engage in research and development activity,
known as R and D. Some of this research and
development activity becomes fruitful and gets translated
into usable and useful innovations. I believe that both the
R and D activity, research and development activity and
the ultimate adduction of innovations will be adversely
affected if one were to preclude a major participant from
operating in the market.

Q. Would you be more specific at how research and
development in your opinion would be adversely af-
fected? A. Research and development is a gamble just like
many other facets of business are. If it is a gamble, you
undertake it if you have profit incentives. If this segment
of the marketplace will no longer have the incentive in

477

the form of being able to use these innovations directly,
it’s only reasonable that they will curtail some of the R
and D activities. Second, some of the innovations—some
of the R and D work is inspired by realizing what the
needs of the consumers are and if you’re in direct contact
with consumers through company operated stations. I
think you get—you get the pulse of the (T. 353)
consumer and you may direct your R and D staff to try
and deal with these needs in the form of appropriate
innovations.

Q. You mentioned adoption of these innovations.
How will the adoption be affected by Paragraph C? A.
Well, here again I think an innovation by itself is not
sufficient because an innovation conceivably could sit on
the shelf someplace. We want the innovations to put
forth to be implemented, to be adopted and put to use;
and I believe that by excluding a segment from the
market the adoption of some innovations will be
adversely affected; and the reason for it is plain. The
frame of reference within which some innovations might
be viewed is completely different as viewed by an
established dealer who looks at it from the point of view
of his local, specific market and as viewed by a marketer,
and integrated producer-marketer who is concerned with
a large number of stations. That particular firm is maybe
more receptive to the risks that is involved in innovation
because when you adopt an innovation, by the way, it
doesn’t mean it’s going to be a success. It could be a
failure; and then in another words an Edse!. Now who is
going to make an experiment with something that could
prove an Edsel or a Mustang; and I’m suggesting to you
that if you are going to be preclude this segment of the
market, we may be paying for it very, very dearly.

(T. 354) Q. Dr. Marcus, based on your study and as an
economist do you believe that in the absence of this type

+78

of legislation dealer operated stations will be largely
replaced by company operated outlets? A. Not at all. I
believe that dealer operated stations and the so-called
conventional stations, neighborhoods, have very signifi-
cant managerial and operational advantages; and | think
the fact is that the bulk of service stations that are
operated under major brands are indeed operated by
independent dealers. These are the facts. The case of
Shell, the number ot company operated stations is well
under five percent. Now they were free to make these
conversions and as Professor Berry very, very clearly
demonstrated, they would have done it if it were in their
interest. Now it’s not in their interest to do it as long as
the dealer is performing efficiently and the economics of
retailing are such that dealers have a very significant
place; so I consequently do not foresee this happening in
totality in gasoline retailing. | |

Q. Are you suggesting that no company will switch
from dealer to company operated stations? A. No, I'm
not suggesting that either. The marketplace is a dynamic
arena. At any one time some firms are going to do well
and some firms are going to do poorly. Yesterday we
heard testimony from Commonwealth that they are
presently (T. 355) operating at a loss. Now this is really
competition. It’s not a race where everybody ends up in
the same place. Now if you start with understanding of
the marketplace in these terms, I think it becomes clear
that at some point some participant who is doing poorly
in this particular area and using this particular mode of
operations is going to try and do something else; and he
may very well try and move in one direction of another,
but this should not be construed to mean that this is
where we are all heading. I think it’s a kind of ongoing
jockeying, if you will, experimentation that a dynamic
market must have.

479

Q. Dr. Marcus, as an economist, do you believe it
desirable to protect or shield any segment of the market
from competiton? A. Again I think I’ve answered that
implicitly in what I’ve said. If you’re going to offer
protection, you are essentially working against the
concept of competition. You cannot have competition,
that is you don’t have economic competitive pressures of
participants if they know that they’re going to be
protected. So I think we’ve got to accept the notion that
under competition there cannot be protection to the
participants.

Q. Briefly concentrating on the use of company
operated outlets in the gasoline industry, do you know
whether or not company operated outlets are also used in
other industries (T. 356) that also utilize dealers?

(Mr. Woodstock) Objection, Your Honor. I believe the
witness has already testified that there are certain unique
qualities about the competition within the retail market-
ing of petroleum products so I fail to see the relevancy
between other areas of competition. He’s already
designated it as a special area with special qualities.

(Court) Well, he says a certain unique qualifications.
He doesn’t say it is unique. Unique as I understand it is
the pluperfect and permits it no other. He said certain
unique qualities. So I'll let him answer.

Q. You may answer the question. A. Actually when I
undertook the study, this is one of the things I wanted to
see because is this kind of provision going to render
gasoline retailing to be entirely unusual in American
industrial experience; and I found out a publication that
is issued annually by the Department of Commerce of the
United States. That publication reports on the major
franchising industries. In fact they say they cover all the
franchising industries of any consequences; and it then

480

reports the breakdown between company operated
outlets and dealer operated outlets; and it is significant
that in each and every one of the industries which are
included in this survey, there are company operated
stations (T. 357) alongside dealer operated stations.

Q. What is the significance in your opinion of your
testimony with respect to the utilization of company
operated outlets? A. I think the significance is that there
is something about the economics of retailing and it is
probably the diversity of conditions in the marketplace in
retailing which requires that there be both company
operated stations and dealer operated stations; and the
proof for that is that each of these industries has in fact
resorted to them. If gasoline retailing were to be
precluded from it, it would be the only exception among
this list of industries covered ty the Department of
Commerce.

Q. Would you please summarize briefly your opinion
with regard to the prohibition of company operated
stations set forth in Paragraph C? A. Well, in order not to
take time of the court, let me not really summarize but
just express my overriding concern here. My concern is
that this Act seeks to restructure an industry. I’ve already
pointed out as have the other expert witnesses, Professor
Berry and Professor Levitt, the immediate areas of
concern, the immediate costs that may be born by the
consumers, but I think more broadly a restructuring of an
industry has—can have very, very far-reaching conse-
quences (T. 358) because we do not have information
that used to be supplied to us by the marketplace; and let
me illustrate that that we had a couple decades ago in one
way or another frozen the retail structure say of tire
distribution, would we have known today the consumers
prefer to obtain their tires at department stores, variety

(

48i

stores, mail order houses, dealers, new car dealers, a
whole variety of areas which keep on expanding or
shrinking depending upon consumer preferences; and I
submit to you that we might not have known because
there would not have been any options for the consumer
to express his preferences. So my overriding concern is
that we might be just doing that. We might be phasing
out at enormous potential costs a segment of this
industry.

Q. Would you be less opposed to this type of
legislation if told that the Legislature can repeal the Act
if it doesn’t work out? A. Well, in theory that sounds all
right and if legislation and social and economic activity
could be carried out in a laboratory, I suppose this would
be nice to observe and we could then, you know, turn
back the experiment and bring the temperature down to
the level where we started. I’m afraid that in economic
and social organizations realities change and as they
change, you may never be able to come back exactly to
the point where you started. We've heard testimony (T.
359) here that some participants in the marketplace do
intend to discontinue operations if the bill becomes
effective. So this will be an economic fact which will have
all kinds of consequences on employment, on property.
Could we at some point in time restore them? They will
have made other plans. We've heard testimony that Gulf
has already modified its plans and is not at the moment
entering into the market. This is again a consequence so
what I'm suggesting here is that on the one side in my
view we have the bill which offers no benefits to the
public, very, very grave costs may be coming through that
bill and consequences that based on accepted economic
theory, accepted practices in American industry are
entirely undesirable. .

(Mr. Abrams) Thank you very much, sir.

482

CROSS EXAMINATION,
By Mr. Woodstock:
Q. Dr. Marcus, good morning, my name is John
Woodstock, representing the State of Maryland.
I believe you said on—you testified on direct that you
appeared for the State of Virginia, the Attorney General's
office. Was that Attorney General Miller, Andrew Miller?
A. 1-his assistant is Walter Marston, Jr. and I believe yes,
I met Mr. Miller, I was introduced to him.
Q. In what connection or what capacity did you assist
him? (T. 360) A. That was on the fair and reasonable rate
of return to the Chesapeake and Potomac Telephone
Company in the State of Virginia,
Q. Approximately when was that? A, That was |
believe in April of this year,
Q. I was sort of interested in your first connection
with testifying with regard to the oil industry, I think
you said in the fall of '74 you were first contacted by
Shell. Is that correct? A. I believe so.
Q. And I believe you said that or maybe you can
refresh my memory here. What was the nature of that
contact? A. It was sometime September, October,
November, December of '74 and I was told that I was
going to be subpoenaed to present the statement.
Q. Did they serve you with a summons? A. Yes, there
was.
Q. Where was that summons issued from? A. New
Brunswick, I believe.

Q. And your deposition was taken, is that correct? A,
Yes, sir.

Q. Who was present at that deposition? A. Mr.
Abrams, a court stenographer.

Q. Was anyone present from the State of Florida? (T.

$61) A, No, sir.

483

Q. And you were requested at that time to perform a
study, is that correct? A. No, sir.

Q. No? A. I said that I subsequently was requested to
perform a study,

Q. At what time frame if you can give me some idea?
A. Oh, I don't think it was until February that I was
really retained and maybe a couple weeks before that |
was approached on it.

Q. So your testimony has been a deposition was taken
either September, October, November or December and
that you were subsequently requested to do a study
which commenced perhaps February— A. That is—

Q. So it could have possibly been two months or six
weeks after the deposition, A. It could have been.

Q. Did you appear in the Florida case to testify? A,
No, sir.

Q. When did Shell retain you for this litigation? A. I
believe at about February of ‘75,

Q. February of '75. (T. 362) A. Yes, sir.

Q. Which was immediately following your deposition
in the Florida proceeding, is that correct?

(Mr. Abrams) Objection, Your Honor.

(Court) What's the objection?

(Mr. Abrams) The witness testified that it was not
immediately following. It was six weeks to two months
after that deposition.

(Mr. Woodstock) All right, I'll rephrase the question,
| Q. That was within two months after your deposition
in the Florida case? A. Approximately.

Q. And did they retain you as a private consultant for
them in this litigation? A. I believe that I was retained as
a consultant,

Q. And at a fee, sir? A. Yes, sir,

Q. What's the amount of that fee? A. It's four
hundred and fifty dollars a day for an eight hour day,

484

Q. How many days have you logged in preparation for
this case? A. My study to date approximately twenty-
five, thirty days. ;

(T. 3638) Q. And that was a study that wasn't
introduced, | believe. Is this the study you're speaking
about? May I hand you that? A, No, sir, this is not the
study that I've done for the-over the year. Is that your
question, Mr. Woodstock?

Q. I'm asking you about the study that you were
requested to do by Shell. Is that in printed form
anywhere? A. No, this is one of the work sheets that I'vc
had and I've had several of them; and this was prepared
with a possibility that it might be introduced.

Q Have you prepared any other reports for Shell on
the preparation of this trial? A. Mr. Woodstock, this is
not a report.

Q. Well, I'm asking if you have prepared any reports
for Shell. A. Oh, I'm sorry. I thought you said any other,
Any reports? No, I've prepared no reports.

Q. Did you provide them with any statements? A. No,

r,

: Q. I believe you testified that in seeking to get more
familiar with the gasoline industry for a good many
months that as part of your preparation for this case you
went down to Houston, is that correct? A. Yes, sir.

(T. 364) Q. Where did you go in Houston, just Shell
Oil Company Headquarters? A. We met at the Shell
headquarters, yes. |

Q. And I believe you said part of that was traveling
around Houston and viewing various types of stations? A.
Yes, sir.

Q. Was there anything unique about these stations or
any other reason why Shell might wanted to have shown

you them? A. Yes.

485

Q. Would you tell me what the unique quality or
characteristics of those stations were? A. The stations |
had seen I have never seen before anywhere in the
country. That doesn't mean that I have travelled
throughout the country, but I saw self repair stations and
1 saw them in operation. I was talking to the supervisor in
charge of this and it was quite a very interesting concept
where individuals will be coming, renting space in the
station and performing their own repairs. | saw equip-
ment designed to allow consumers to replace their oil in
the car without their constant attendance. I would have
loved to be able to use that in New Jersey. I understand
this may be one of the innovations that may or may not
work out, but I saw it working in an experimental
station. | saw various considerations of (T. 365) self
service stations. I saw some of them trying to sell some
groceries on the side, film. I really got the feeling of the
ongoing attempts on the part of Shell to make it true
offering a better product makes better service range to
consumers,

Q. Vis a vis, would you characterize that as research
and development? Is that a part of Shell? A. This is the
laboratory equivalent of research and development that
you find in manufacturing companies.

Q. Anything prohibit Shell Oil Company or any other
similarly situated major oil company from putting that
type of operation or these innovative concepts into
existing dealer operated service stations? A. Some of
these could undoubtedly be put in dealer operated
stations.

Q. Let me ask you about some. How about partial self
service? A. Now that I can't answer because the partial
self service I don’t know the economics of this.

Q. Are you familiar with the market in Maryland of

486

retail service stations? A. | have studied a great many of
the facts. 3 |

Q. Does Shell have any partial self service stations in
the State of Maryland? (T. 366) A. I'm not certain,

Q. They do. I believe it's also in the pretrial order. Are
you familiar with the contents of the pretrial order? A.
Your term familiar is—I'm afraid of it, I have reviewed
some parts of it. I don't know what familiarity means
here. |

Q. Do you know the particular facts of your client? A.
Facts of—were important but please remember, Mr.
Woodstock, that my assignment was not to study the
operations of Shell. My assignment was what is my view
of that particular Act. |

Q. Would it be possible for them to put into
conventional service station to make a bay available for a
consumer to come in and fix and repair his own car? A, It
may not be possible either. May or may not and some of
the reasons why it may not be possible is that some of
these operations may not be attractive to dealers. Some
other innovations that may be coming upstream which
are not yet known may not be manageable by dealers for
various reasons so my answer to this is some of them
could and some of them couldn't. | certainly don’t want
to see those that couldn't be shut out by these service
stations. |

Q. You say it may not be attractive to a particular
dealer, is that correct? Isn't that what you said? (T. 367)
A. May not be.

Q. Well, whose decision should it be whether or not it
goes into that particular location if that individual dealer
who finds it unattractive has been at that location and is
there under an existing lease agreement? A. I'm afraid the
question is not very clear to me.

487

Q. It's very simple. Should Shell have the final
decision to implement that innovation at that station or
should the independent businessman who is operating it?
A. Depending upon what innovation and what are the
terms. I think an innovation is a broad term. It goes all
the way from a new jet engine, a new aircraft to
something that the stores have described as the brakes.

Q. Sir, I have given you a very specific exxample and
I'm talking about opening an existing bay with equip-
ment and tools there for a consumer to fix or repair his
own car or to provide a area in there to unscrew his own
nut and change his own oil, A. And what is your
question?

Q. Who should have the final decision as to whether or
not that new innovation should be implemented in a
Shell leased dealer service station? A. Mr. Woodstock, to
the best of my knowledge dealers are free right now to
set aside a bay to tun—to cons mers and (T. 368) the
reason they probably don’t want to do it is that they can
make much more money by performing the services in
their own way.

Q. So the consideration as to whether or not it's
particularly attractive to any dealer doesn't really mean
anything? A. It's his decision then. Some of these
innovations could be adopted by dealers with no problem
at all. They're on the market.

Q. How about a gas only station? A. What about it?

Q. Could in your expert opinion— A. What is your
question? I’m sorry, I don't—

Q. In your opinion could that be operated by a dealer
lessee as opposed to direct company operation? A. If it is
economically desirable for him to operate, but a
dealer—but a gas only operation as I’ve heard here from
president of Kayo and as I've heard from yesterday from

488

PMC they maintain—these are the people who run these
operations. These are the people who sweat it out and
they maintain that they can't do it with dealers.

Q. Again I ask you your familiarity with the Maryland
market. Are you familiar with a company such as Crown
Central Petroleum in Maryland? (T. 369) A. I'm aware of
their existence in the Maryland market.

Q. Are you familiar with their percentage of sales over
the last five years in the State of Maryland? A. Yes.

Q. What does that reflect to you, sir? A. It reflects to
me that the marketplace is big enough, yet diverse
enough to allow some operators to do it one way and
some other operators to do it in another way. It’s the
only conclusion that I would draw from that.

Q. You're familiar with Hess Oil Company, too? A.
Yes.

Q. Are you familiar with their operations in Mary-
land? A. I believe so. I have an idea.

Q. Do they operate through dealers? A. Well, there
was a legal squabble the other day when this question was
raised and if I'm—one thing I’m not is a lawyer and
somebody said that the underlying terms they are very—I
heard all kinds of terms like commission agent, but let me
try to answer it as an economist. Here again what you're
doing here is you're selecting participants whem you say
hey, he’s operating this way. Can't everybody operate

this way? If everybody tried to operate this way, then he
couldn't and the only reason one person can do it this
way is the others are doing it in a different way. This is
the essence of the (T. 370) diversity in the marketplace.
* ° *

(T. 375) Q. Dr. Marcus, as an expert, what advantages
do you see to direct owned, company owned and
operated station by the major oil companies \apon price

489

competition in the State of Maryland? A. Here I
don’t—this is one area where I do not believe that there
are considerable advantages, that is, if you talk about
direct owned by the major brands; and the reasons for
this have been stated in my testimony in Jersey. I believe
that the major oil companies are not going to use (T.
376) their company operated stations in a cut-throat
competition with established dealers and consequently I
do not believe that the thrusts of price competition to
company operated stations will take piace from the major
owned, company operated stations, but I think the
producer-refiner category includes other participants,
very important participants which have been identified
for this court and they are a very important factor in
price competition.

Q. To what extent have you examined all the actors in
the universe, if you will, of mar—petroleum marketing to
distinguish various characteristics about their price
marketing activities? A. I have done my best to become
sufficiently familiar with the groups and categories of
participants to form the opinion which I’ve just
expressed.

Q. Do you find there are different sub-classes amongst
the producer-refiner category as to their competitive
behavior on price? A. I—even I was able to Ubserve that
Hess station traditionally sells under the major brands.
Crown sells under the major brand. They are producer-
refiners. There is no question that you're dealing here
with different types of retailers. The Crown, the Scots,
the Kayo have made it clear that they do not try and
compete over the (T. 377) entire range of services. It
would be suicidal for them to do so; so why would they
mention the competition that they choose to emphasize

or may be forced to emphasis under market conditions is
price.

+90

Q. Are you familiar with any non-producing refiners
independent retail service stations dealers in the State of
Maryland or in the State of New Jersey or in your travels
around the United States? A. They're all listed in the
pretrial order and I—

Q. Are you particularly familiar with them? A. I have
seen them, yes.

Q. How about are you familiar with their pricing
pattern? A. Again I think it is clear that they constitute
an important factor in pricing competition.

Q. Are you familiar with their pricing patterns, sir? A.
I am familiar with the fact that they are a competitive
force in the gasoline retailing. Pattern is a term which—do
you mean a historical product pattern, a regional pattern.
I’m a little bit uncomfortable with it.

Q. We'll start with an historical pricing pattern. A.
Well, again as an economist it is very, very clear that these
marketers had to continuously compete in the market-
place. They had to emphasize another dimension, perhaps
(T. 378) they had to emphasize price more because they
weren't giving other services. The point of the matter is
that in the marketplace there was a segment for them and
they had some bad years I understand and some good
years.

Q. You see a difference between the way they
marketed and emphasis on price as opposed to perhaps
other qualities of marketing demonstrated by the major
integrated oil companies? Historically? A. I’m afraid I've
not studied the broad question which groups all
marketers in one category and relates to the entire
history and ask me to summarize the entire history.
There have been various periods, various regions, various
marketers. I’m just unable to answer the question the
way it has been posed.

Q. You were here yester

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_2147%3A04. Public record. Not legal advice.