On the Economics of Branded Open Supply
Branded open supply regulations permit gasoline dealers to incur transportation costs to arbitrage price differences among terminal locations. This arbitrage increases the overall cost of transporting gasoline from refinery to consumer by substituting high-cost truck transport for cheap bulk transportation. This paper provides a simple model of how arbitrage can lead either to a less dense terminal network or, in some instances, to a less dense network of dealers than refiners would prefer. Enforceable exclusive supply agreements can increase inventory holding, provide protection against excessive price volatility, and reduce transportation costs. An end to such agreements will likely impair the ability of branded dealers to differentiate themselves from unbranded rivals.
Volume (Year): 10 (2003)
Issue (Month): 2 ()
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019, Ohio State University, Department of Economics.
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