Experimental Gasoline Markets

Abstract

Zone pricing in wholesale gasoline markets is a contentious topic in the public policy debate. Refiners contend that they use zone pricing to be competitive with local rivals. Critics claim that zone pricing benefits the oil industry and harms consumers. With a controlled experiment, we investigate the competitive effects of zone pricing on consumers, retail stations, and refiners vis-a-vis the proposed policy prescription of uniform wholesale pricing to retailers. We also examine the issue of divorcement and the rockets and feathers phenomenon. The former is the legal restriction that refiners and retailers cannot be vertically integrated, and the latter is the perception that retail gasoline prices rise faster than they fall in response to random walk movements in the world price for oil.

Keywords: gasoline industry, zone pricing, vertical integration, asymmetric price adjustment, experimental economics

JEL Classification: C9, D4, L2, L4, L9