Pipes, Trains and Automobiles: Explaining British Columbia’s High Wholesale Gasoline Prices

Abstract

I modify a coumot oligopoly model to examine the effect of pipeline capacity constraints on regional wholesale gasoline prices. The model includes a discontinuous supply function for a common input (transportation) with a constrained low-cost mode (pipelines) and an unconstrained higher cost mode (rail, truck or barge). The equilibrium outcome demonstrates a piecewise linear relationship between the low-cost capacity constraint and the equilibrium price. The shape of the transportation supply curve is also shown to affect the relationship between firm average marginal costs and the equilibrium price. I also present a test of the model’s implications, demonstrating that it is able to explain a recent pronounced increase in wholesale gasoline prices for cities in British Columbia Canada. While the exercise is motivated by a specific market, the model and its implications apply to a broad set of discussions on inter-regional arbitrage in the context of imperfect competition.