Reformulating competition? Gasoline content regulation and wholesale gasoline prices

The 1990 Clean Air Act Amendments stipulated gasoline content requirements for metropolitan areas with air pollution levels above predetermined federal thresholds. The legislation led to exogenous changes in the type of gasoline required for sale across US metropolitan areas. This paper uses a panel of detailed wholesale gasoline price data to estimate the effect of gasoline content regulation on wholesale prices and price volatility. We investigate the extent to which the estimated price effects are driven by changes in the number of suppliers versus geographic segmentation resulting from regulation. We find that prices in regulated metropolitan areas increase significantly, relative to a control group, by an average of 3 cents/gal. The price effect, however, varies by 8 cents/gal across regulated markets and the heterogeneity across markets is correlated with the degree of geographic isolation generated by the discontinuous regulatory requirements. (c) 2007 Elsevier Inc. All rights reserved.