Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California
Vertical Relationships and Competition in Retail Gasoline
Markets: Empirical Evidence from Contract Changes in
Southern California
By JUSTINE S. HASTINGS*
Since the late 1990’s, West Coast cities have consistently experienced substantially higher retail gasoline prices than other regions of the country. For example, for the rst week of August 1999, the price of reformulated gasoline in
California was 39.6 cents higher than the average price in Gulf Coast States (about 10 cents of this difference can be attributed to higher taxes in California).1 In addition gasoline prices vary greatly between West Coast cities. Residents in
San Diego have paid a consistent 5 to 15 cents more per gallon, on average, than Los Angeles residents. These recent price phenomena have sparked intense political debate over the causes of persistent price disparities. Much of the debate is centered around the effect of vertical contracts between re ners and retail stations on retail competition and price levels.2
Industry trade organizations, politicians, and consumer groups have noted corresponding increases in the number of fully vertically integrated gasoline stations in cities experiencing higher citywide average prices. Many have drawn a causal inference from this correlation,
arguing that a larger market share of vertically integrated stations lessens retail competition since re ners, not residual claimants, directly set the retail price. As a result, many state and local legislatures have considered regulating vertical contracts between re ners and their retail stations in an effort to increase competition and lower gasoline prices.3
However, the increases in vertically integrated (company-op) stations in cities experiencing higher citywide average prices have come from a decrease in independent retailers.
Integrated re ners have purchased independent retailers, converting the stations to both integrated company-op and franchise stations.4 The
Markets: Empirical Evidence from Contract Changes in
Southern California
By JUSTINE S. HASTINGS*
Since the late 1990’s, West Coast cities have consistently experienced substantially higher retail gasoline prices than other regions of the country. For example, for the rst week of August 1999, the price of reformulated gasoline in
California was 39.6 cents higher than the average price in Gulf Coast States (about 10 cents of this difference can be attributed to higher taxes in California).1 In addition gasoline prices vary greatly between West Coast cities. Residents in
San Diego have paid a consistent 5 to 15 cents more per gallon, on average, than Los Angeles residents. These recent price phenomena have sparked intense political debate over the causes of persistent price disparities. Much of the debate is centered around the effect of vertical contracts between re ners and retail stations on retail competition and price levels.2
Industry trade organizations, politicians, and consumer groups have noted corresponding increases in the number of fully vertically integrated gasoline stations in cities experiencing higher citywide average prices. Many have drawn a causal inference from this correlation,
arguing that a larger market share of vertically integrated stations lessens retail competition since re ners, not residual claimants, directly set the retail price. As a result, many state and local legislatures have considered regulating vertical contracts between re ners and their retail stations in an effort to increase competition and lower gasoline prices.3
However, the increases in vertically integrated (company-op) stations in cities experiencing higher citywide average prices have come from a decrease in independent retailers.
Integrated re ners have purchased independent retailers, converting the stations to both integrated company-op and franchise stations.4 The
References: product differentiation. Cambridge, MA: MIT Press, 1992.