Center for the Study of Energy Markets

We explore issues relating to the vertical structure of ownership and control in gasoline distribution and retailing. Some have argued that refiner control of the retail sector has increased California gasoline prices, prompting proposals for legislation to restrict refiner participation in gasoline retailing. We study the arguments for and against government intervention in gasoline distribution and retailing, and describe the conditions under which such intervention could be justified. In theory, vertical controls in the gasoline industry can produce both positive and negative effects. Many vertical controls can increase efficiency, both operations and in the transactions between refiners and retail outlet. Some controls, however, could also influence the structure or incentives of refiners in a way that increases their market power (reduces competition) and could therefore prove costly to consumers. In general, the positive aspects of vertical controls impact the pricing and operations of retail outlets, and are passed through to consumers in the form of lower retail mark-ups over wholesale prices. The negative consequences primarily impact wholesale prices through the influence of vertical structure on the incentives of refiners to reduce competition at the wholesale level. We conclude that in order to make a case that public intervention could be justified as a basis for reducing consumer prices, one must establish both that intervention could indirectly reduce the wholesale margins of refiners and that these wholesale benefits are not offset by increased costs and market power at the retail level.