Vertical Disintegration: The Effect of Refiner Exit from Gasoline Retailing on Retail Gasoline Pricing

Abstract

The net effect of vertical integration on consumer welfare depends on the magnitude of the price reductions resulting from the elimination of double marginalization at the integrated firm and the price increases resulting from higher input prices charged to un-integrated competitors. In this paper, we estimate both of these effects in the U.S. gasoline industry by examining the change in relative retail gasoline prices after refiners exited gasoline retailing beginning in the mid-2000s. Using station-level price data from Florida and New Jersey, we find that double marginalization caused retail prices to increase by about 1.2 cents-per-gallon. Our estimates of the raising rival’s cost effect, while sensitive to the choice of control group, are of a similar magnitude. On net, we find that the average retail price of gasoline was effectively unchanged as the result of vertical separation.