Since the 1990s, the U.S. petroleum industry has experienced a wave of mergers, acquisitions, and joint ventures, several of them between large petroleum companies that were previously competitors for the sale of petroleum products. For example, in 1998 British Petroleum (BP) and Amoco merged to form BP-Amoco, which then acquired ARCO in 2000. Exxon, the largest U.S. petroleum company, acquired Mobil, the second largest, in 1999, thus forming Exxon-Mobil. Although mergers may have cost savings and efficiency effects, some policy makers and consumer groups have expressed concerns about potential anticompetitive effects of these mergers that can ultimately contribute to higher gasoline prices.
Several of the petroleum industry consolidations that took place in the second half of the 1990s involved large and partially or fully vertically integrated companies with potential impacts on wholesale gasoline markets. Such transactions are generally referred to as mergers because they lead to consolidation of assets, although some of the transactions in this case were similar to joint ventures. Several of the mergers had the potential to reduce competition in wholesale gasoline markets because the merging companies operated in overlapping wholesale gasoline markets. For instance, the U.S. Federal Trade Commission (FTC) identified the BP-Amoco merger as having potential anticompetitive effects on wholesale gasoline markets in 30 cities or metropolitan areas in the Eastern part of the United States. Moreover, mergers that reduce competition in the downstream segment of the petroleum industry--such as refining or retail--can reduce competition indirectly in wholesale markets if one of the merging companies is partially or fully vertically integrated. For instance, the Exxon-Mobil merger, which had the potential to reduce competition in refining in the West Coast and in retail markets on the East Coast, could have had competitive implications in the relevant wholesale markets. To preserve competition, the FTC often requires the merging parties to divest assets to a third party. (A divestiture requires that one or both of the merging parties sell some of their assets to restore or maintain competition where it might be harmed).
The effect of these mergers on gasoline prices depends on two opposing forces: the combined market power that tends to increase prices and efficiency gains that tend to decrease prices. Which of the two is the dominating force in recent mergers is an empirical issue. This study examines how the wave of mergers in the U.S. petroleum industry in the second half of the 1990s has affected U.S. gasoline prices at the wholesale level. The analysis focuses on wholesale gasoline markets because trends in gasoline prices are usually observed first in wholesale markets and subsequently in retail markets. Also, more comprehensive data are available at the wholesale level. The authors examined eight major mergers in the U.S. petroleum industry that occurred between 1997 and 2000. These mergers combined affected every one of the five regional gasoline areas (referred to as Petroleum Administration for Defense Districts, PADDs); see Table 1.
To analyze how mergers in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level, the authors build on previous studies of gasoline pricing. See, for example, U.S. General Accounting Office (GAO) (1986, 2004), Borenstein and Shepard (1996a, 1996b), Spiller and Huang (1986), Hastings and Gilbert (2000), Vita (2000), Chouinard and Perloff (2001), FTC (2001), Pinkse et al. (2002), Taylor and Fischer (2002), U.S. Senate (2002), Geweke (2003), and Hastings (2004). Despite some similarities in insights and approaches, the models the authors estimate differ from earlier studies in several ways. First, this is a comprehensive study of wholesale gasoline markets that uses a single conceptual framework to examine the effects of several major mergers in the 1990s. …