Gasoline Price Changes - Federal Trade Commission

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GASOLINE PRICE CHANGES: Company A wids Company A widgets Figure 5-10 Company C wids $10 $10 Company B widgets Under some circumstances if Company A were to acquire Company C, Company A might have an incentive to increase the price of wids to its widget competitor, Company B. This would increase Company B’s costs and might cause Company B to reduce its output of widgets. As a result, some widget demand would shift to Company A. Company A in turn may find it profitable to increase its prices, everything else equal. Note, however, if Company A’s costs also fall as a result of acquiring Company C, Company A may also have an incentive to expand widget output, an effect which would tend to reduce widget prices, everything else equal. See Figure 5-11. 2. Evade price regulation. Figure 5-11: Raising Rivals’ Costs Company A+C wids $10 $20 Company A widgets Company B widgets A regulated firm with market power might be able to evade price regulation if it were vertically integrated with an unregulated, downstream firm and then exercised its market power by selling exclusively through that unregulated firm. 65 For example, suppose Company D sells wids, over which it has a natural monopoly. A natural monopoly may occur when it is more efficient for one firm to serve an entire market than for two or more firms to do so. 66 Wids are a required input for widgets. Company E is one of several firms that makes and sells widgets to the public. If the price of wids is regulated, but the price of widgets (Company E’s product) is not regulated, then Company D has an incentive to purchase Company E and restrict its competitors’ access to wids. The price of wids becomes an internalized transaction and evades price regulation, thus allowing Company D to gain monopoly profits by selling the widgets in the unregulated sector. 122 FEDERAL TRADE COMMISSION, JUNE 2005
THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION 3. Facilitate anticompetitive coordination. Under some circumstances, vertical integration may facilitate anticompetitive coordination. ng ly il fy than 67 In this example, suppose again that wids are a required input for maki widgets. Wids are homogeneous, and the number of manufacturers selling wids is relative limited. However, because the prices of wids are generally not known, the wid manufacturers are unable to coordinate their prices. A large number of companies sell widgets, and those reta prices are easily available. Therefore, if the wid makers want to agree to coordinate prices, they might integrate downstream into widgets, so they would have a greater ability to identify firms that deviated from an agreed-upon supracompetitive price. This integration would make monitoring an anticompetitive agreement easier, because widget prices are easier to identi wid prices. 4. Make entry more difficult. Finally, vertical integration may make entry by new competitors more costly and difficult, if a would-be entrant has to enter both the upstream and downstream markets simultaneously to be successful. get e . ple, 68 For example, suppose a firm wished to enter the wid market on a large scale, and wids are a required input. In this example, however, most of th firms in the widget industry are vertically integrated between manufacturing and marketing – that is, they make and sell both wids and widgets. Additionally, there is a limited independent supply of wids, other than from the vertically integrated firms that make both wids and widgets In this situation, a potential widget entrant might have to enter the wids industry to ensure that it has all the wids it needs to make its widgets. If such “two-level” entry is more risky, more difficult, or more time-consuming than entry into the entrant’s primary market – in this exam widgets – a merger that would further increase vertical integration could create barriers to entry. 5. Two studies suggest that vertical integration between refining and marketing were associated with higher wholesale or retail gasoline prices. 69 The 2003 report also evaluated two case studies of vertical integration between refining and marketing on the West Coast. The first study asked whether refiner Tosco’s acquisition of Unocal’s West Coast refining and marketing assets raised wholesale gasoline prices. fining, it e rices 70 According to the authors’ theory, now that Tosco participated in marketing as well as re would raise rivals’ input costs by increasing wholesale prices to its independent jobber competitors. Due to a relatively high degree of integration between wholesale and retail on th West Coast, jobbers or independent retailers may have fewer options to switch brands in response to wholesale price increases. Indeed, the study showed that Tosco’s wholesale p increased by $0.07 to $0.17 per gallon in certain areas. The study did not examine what happened to other firms’ wholesale prices or to retail prices to consumers, however. 71 The second study examined ARCO’s long-term lease of 260 retail gas stations from Thrifty, an unintegrated retailer in Southern California. ty 72 Prior to the lease agreement, Thrif CHAPTER 5: STATE & LOCAL POLICIES, & VERTICAL INTEGRATION 123
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Federal Trade Commission DEBORAH PL
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GASOLINE PRICE CHANGES: The vast ma
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GASOLINE PRICE CHANGES: $ The World
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GASOLINE PRICE CHANGES: expect incr
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GASOLINE PRICE CHANGES: Figure 3-6:
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GASOLINE PRICE CHANGES: $ Increased
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GASOLINE PRICE CHANGES: $ Since 199
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GASOLINE PRICE CHANGES: increase lo
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GASOLINE PRICE CHANGES: England and
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Table of Contents EXECUTIVE SUMMARY
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C. In 2004, the Geopolitical Outloo
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CHAPTER 4: SUPPLY, DEMAND, AND COMP
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3. Gasoline prices in the East Coas
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CHAPTER 1. SUPPLY (INFLUENCED BY OP
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To obtain the additional supply the
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THE DYNAMIC OF SUPPLY, DEMAND, AND
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Price (Cents per Gallon) 220 200 18
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words, short-run demand for gasolin
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Endnotes THE DYNAMIC OF SUPPLY, DEM
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CHAPTER 2. WORLDWIDE SUPPLY, DEMAND
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Thousand Barrels per Day 18,000 16,
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Million Barrels per Day 0.9 0.8 0.7
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such as ethane, ethylene, and propa
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CHAPTER 3. SUPPLY, DEMAND, AND COMP
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Year-over-year Percentage Change in
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Capacity (Million Barrels per Calen
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Endnotes THE DYNAMIC OF SUPPLY, DEM
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CHAPTER 4. SUPPLY, DEMAND, AND COMP
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Page 107 and 108: Millions of Barrels 1,500 1,250 1,0
Page 111 and 112: Millions of Barrels per Day 9 8 7 6
Page 131 and 132: CHAPTER 5. STATE AND LOCAL POLICIES
Page 133 and 134: Percentage of Customers Lost to 1%
Page 135 and 136: Retail Price (cents per gallon) 220
Page 137 and 138: Share (Percent) 80 70 60 50 40 30 2
Page 141 and 142: Price (Cents per Gallon) 200 190 18
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Page 157 and 158: 6. GAO, supra note 5, at 20. 7. Id.
Page 165: Herfindahl-Hirschman Index (HHI) Th
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Gasoline Price Changes - Federal Trade Commission

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