Competition in U.S. Petroleum Refining and Marketing: Part II - Review of the Economic Literature

Abstract

This paper surveys the economic literature on competitive issues in domestic petroleum refining and marketing provides in order to provide some insight into the underlying causes of gasoline price dynamics. The survey examines the four major categories of economic literature: (1) the statistical significance of asymmetry between upstream and downstream petroleum prices; (2) causes of price asymmetry; (3) effects of forced deintegration through open supply and divorcement polices; and (4) price effects of mergers. The research generally indicates that asymmetry is statistically significant, but may be attributable to multiple causes such as consumer search costs, market power, and inventory adjustment costs. Divorcement and open supply policies tend to increase costs and prices, and petroleum mergers have, on balance, increased prices. Merger studies, in particular, have attracted criticism regarding the robustness of their results to differences in estimation technique and other parameters. Even with this caveat, the survey results are useful for addressing the merits of various policy proposals for dealing with competitive concerns and "undesirable" price dynamics.