Boutique Fuels and Market Power
The U.S. Clean Air Act allows individual states to implement their own clean fuel programs to address local or regional air quality concerns. These regulations have led to a proliferation of fuel blends known as "boutique fuels." For each of the three grades of gasoline, more than 15 types of boutique fuels are currently in use, leading to about 45 different fuel blends in use nationally. These fuels are costly to produce, but they also segment the market and increase the market power of refiners. Using measures that differentiate gasoline regulation in a given state from those in neighboring states, we find that both cost and market segmentation significantly affect wholesale gasoline prices. In particular, the greater the regulatory "distance" between a state and its neighboring states, the higher the wholesale price in that state. Simulations suggest that for some states regulating a single boutique fuel nationally may lead to a counter-intuitive outcome: gasoline prices may decline even though a larger share of their market will be under regulation.
|Date of creation:||Feb 2005|
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