Vertical Disintegration: The Effect of Refiners’ Exit from Gasoline Retailing on Retail Gasoline Pricing

Abstract

The net effect of vertical integration on consumer welfare depends on the magnitude of the price reductions resulting from the elimination of double marginalization at the integrated firm and the price increases resulting from higher input prices charged to unintegrated competitors. In this paper, we estimate both of these effects in the US gasoline industry by examining the change in relative retail gasoline prices following the vertical separation caused by refiners’ decision to exit gasoline retailing beginning in the mid-2000s. Using station-level price data from Florida and New Jersey, we find that double marginalization caused retail prices to increase by about 1.2 cents per gallon. Estimates of the effect of raising rivals’ costs, while sensitive to the choice of control group, are of a similar magnitude. On net, we find that the average retail price of gasoline was effectively unchanged as the result of vertical separation.