Reformulating competition? Gasoline content regulation and wholesale gasoline prices

Abstract

The 1990 Clean Air Act Amendments stipulated gasoline content requirements for metropolitan areas with air pollution levels above predetermined federal thresholds. The legislation led to exogenous changes in the type of gasoline required for sale across US metropolitan areas. This paper uses a panel of detailed wholesale gasoline price data to estimate the effect of gasoline content regulation on wholesale prices and price volatility. We investigate the extent to which the estimated price effects are driven by changes in the number of suppliers versus geographic segmentation resulting from regulation. We find that prices in regulated metropolitan areas increase significantly, relative to a control group, by an average of 3 cents/gal. The price effect, however, varies by 8 cents/gal across regulated markets and the heterogeneity across markets is correlated with the degree of geographic isolation generated by the discontinuous regulatory requirements. r 2007 Elsevier Inc. All rights reserved.JEL classification: L13; L51; Q50

Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality

“…Given US non-California 2008 summer gasoline consumption of 47 billion gallons and a $0.01-$0.015 per gallon price effect estimated in Brown et al (2008), the VOC standards imposed by these regulations increase US annual gasoline expenditures by $524-$784 million.…”

“…The resulting "patchwork" of regulation prevents gasoline transporters from arbitraging price differences across areas with different gasoline standards. Several recent papers-Jennifer Brown et al (2008), Ujjayant Chakravorty, Céline Nauges, and Alban Thomas (2008), and Erich Muehlegger (2006)-have found that this market segmentation significantly increases both gasoline price levels (beyond the increase in production cost) and price volatility. The US Congress, concerned about the price effects of segmented gasoline markets, inserted language into the Energy Policy Act of 2005 (section 1541(b)) that constrained the ability of the EPA to enact or approve new gasoline standards that could exacerbate segmentation.…”

“…RVP is directed solely at reducing VOC emissions. 37 The $0.01-$0.015 per gallon effect estimated in Brown et al (2008) applies specifically to the price differential between RVP 7.8 psi gasoline and RVP 9.0 psi gasoline. The above calculation assumes that relaxing the summer VOC emission standards of RFG and relaxing the federal "baseline" 9.0 psi standard would have similar price effects.…”

On the dynamics of gasoline market integration in the United States: Evidence from a pair-wise approach

“…Chouinard and Perloff (2007) note that retail and wholesale gasoline prices vary over time and across geographic locations due to differences in government policies and other factors that affect demand, costs, and market power. Brown et al (2008) examine wholesale gasoline market integration in the presence of changes in the number of competitors contrasted with geographic market segmentation induced by regulation. Further valuable insights are provided by Deltas (2008), Alm et al (2009), Kendix and Walls (2010), Marion and Muehlegger (2011) among others.…”

Competition in a Spatial Retail Petroleum Market

“…Two studies that focus on this effect are Brown, Hastings, Masur & Villa-Boas (2008) and Chakravorty, Naughes & Thomas (2008). Although each uses different methods, they both find that prices rise when environmental standards isolate markets.…”