CSEM WP 132 MARKET POWER IN CALIFORNIA ’ S GASOLINE MARKET

In recent months, prices for California's special (CaRFG) gasoline have again exceeded U.S. average prices by much more than the difference in production costs. A number of observers have attributed the widening average differential to increasing scarcity of refinery capacity among plants that are equipped to manufacture CaRFG gasoline. While these arguments have generally been sound, the dismissals of market power concerns have not been well supported. We study the potential for firms in the CaRFG wholesale gasoline industry to exercise market power, examining the refining, importation and storage of the fuel. We don't dispute arguments that the elevated prices are consistent with competitive markets, but we illustrate that the data are also consistent with some firms exercising market power. We then discuss methods for, and difficulties in, distinguishing between competitive pricing and market power. Borenstein: Director, University of California Energy Institute (www.ucei.org) and E.T. Grether Professor of Business Administration and Public Policy, Haas School of Business, U.C. Berkeley, (www.haas.berkeley.edu). Email: borenste@haas.berkeley.edu. Bushnell: Research Director, UCEI, and Lecturer, Haas School of Business. Email: bushnell@haas.berkeley.edu. Lewis: Research Associate, UCEI (after August 1, 2004, Assistant Professor of Economics, Ohio State University). Email: mlewis@econ.berkeley.edu. We thank the California Energy Commission for supporting this research. The views presented here do not necessarily reflect those of the CEC or anyone else other than the authors. We thank Karen Notsund and Frank Wolak for helpful comments and discussions.