The Costs of Regulation: Branded Open Supply and Uniform Pricing of Gasoline

This paper examines recent proposals to alter distribution arrangements for gasoline within California. Specifically, these proposals would permit a company's branded dealer to obtain supplies from any point in its affiliated refiner's distribution network. Furthermore, the prices charged by refiners at each distribution point would be the same for dealers and distributors alike. In this analysis, we consider how the major oil companies would likely react to such changes, and how their expected reactions would affect the prices that California drivers pay for gasoline. For this purpose, we construct an economic model of a hypothetical distribution system that might arise if these proposals were enacted. The primary finding of this study is that imposing uniform prices on the leading refiners in California would lead to higher delivered prices of gasoline, on average, than those found currently. This result follows from the presence of competitive markets in some local markets that would not otherwise exist. By eliminating geographic price discrimination, these proposals would suppress competitive pressures and promote higher prices.