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entitled 'Energy Markets: Estimates of the Effects of Mergers and 
Market Concentration on Wholesale Gasoline Prices' which was released 
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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

June 2009: 

Energy Markets: 

Estimates of the Effects of Mergers and Market Concentration on 
Wholesale Gasoline Prices: 

Energy Markets: 

GAO-09-659: 

GAO Highlights: 

Highlights of GAO-09-659, a report to congressional requesters. 

Why GAO Did This Study: 

In 2008, GAO reported that 1,088 oil industry mergers occurred between 
2000 and 2007. Given the potential for price effects, GAO recommended 
that the Federal Trade Commission (FTC), the agency with the authority 
to maintain petroleum industry competition, undertake more regular 
retrospective reviews of past petroleum industry mergers, and FTC said 
it would consider this recommendation. GAO was asked to conduct such a 
review of its own to determine how mergers and market concentration—a 
measure of the number and market shares of firms in a market—affected 
wholesale gasoline prices since 2000. 

GAO examined the effects of mergers and market concentration using an 
economic model that ruled out the effects of many other factors. GAO 
consulted with a number of experts and used both public and private 
data in developing the model. GAO tested the model under a variety of 
assumptions to address some of its limitations. GAO also interviewed 
petroleum market participants. 

What GAO Found: 

GAO examined seven mergers that occurred since 2000—ranging in value 
and geography and for which there was available gasoline pricing data 
(see table)—and found three that were associated with statistically 
significant increases or decreases in wholesale gasoline prices. 
Specifically, GAO found that the mergers of Valero Energy with Ultramar 
Diamond Shamrock and Valero Energy with Premcor, which both involved 
the acquisition of refineries, were associated with estimated average 
price increases of about 1 cent per gallon each. In addition, GAO found 
that the merger of Phillips Petroleum with Conoco, which primarily 
involved the acquisition of oil exploration and production assets, was 
associated with an estimated average decrease in wholesale gasoline 
prices across cities affected by the merger of nearly 2 cents per 
gallon. This analysis provides an indicator of the impact that 
petroleum industry mergers can have on wholesale gasoline prices. 
Additional analysis would be needed to explain the price effects that 
GAO estimated. 

Table: Seven Mergers That GAO Studied, and the Estimated Wholesale 
Gasoline Price Effects: 

Merger: Chevron/Texaco; 
Date: 10/16/2000; 
Value (Dollars in millions): $44,838; 
Cities affected: 37; 
Estimated price effect: Not statistically significant. 

Merger: Phillips/Tosco; 
Date: 2/4/2001; 
Value (Dollars in millions): $9,828;
Cities affected: 8; 
Estimated price effect: Not statistically significant. 

Merger: Valero/Ultramar Diamond Shamrock; 
Date: 5/7/2001; 
Value (Dollars in millions): $6,442; 
Cities affected: 26; 
Estimated price effect: +1.06 cents per gallon. 

Merger: Shell/Texaco; 
Date: 10/9/2001; 
Value (Dollars in millions): $3,860; 
Cities affected: 35; 
Estimated price effect: Not statistically significant. 

Merger: Phillips/Conoco; 
Date: 11/19/2001; 
Value (Dollars in millions): $31,282; 
Cities affected: 47; 
Estimated price effect: -1.64 cents per gallon. 

Merger: Premcor/Williams; 
Date: 11/26/2002; 
Value (Dollars in millions): $367; 
Cities affected: 2; 
Estimated price effect: Not statistically significant. 

Merger: Valero/Premcor; 
Date: 4/25/2005; 
Value (Dollars in millions): $7,588; 
Cities affected: 20; 
Estimated price effect: +1.13 cents per gallon. 

Source: GAO analysis of information from IHS Herold and Oil Price 
Information Service. 

[End of table] 

GAO used two separate measures of market concentration, one which 
measured the number of sellers at wholesale gasoline terminals and 
another which measured the market share of refiners supplying gasoline 
to those sellers, and found that less concentrated markets were 
statistically significantly associated with lower gasoline prices. For 
example, for wholesale terminals with more sellers—i.e., terminals that 
were less concentrated—GAO estimated that prices were about 8 cents per 
gallon lower at terminals with 14 sellers than at terminals that had 
only 9 sellers. This result is consistent with the idea that markets 
with more sellers are likely to be more competitive, resulting in lower 
prices. Using the second measure of concentration, GAO similarly found 
a statistically significant association between prices and the level of 
refinery concentration, with less concentrated groups of refineries 
associated with lower prices. 

What GAO Recommends: 

This study reinforces the need to review past petroleum industry 
mergers, and GAO continues to recommend that FTC conduct such reviews 
more regularly and develop risk-based guidelines to determine when to 
conduct them. FTC reviewed a draft of this report and supports GAO’s 
recommendation to conduct more reviews of past petroleum industry 
mergers. 

View [hyperlink, http://www.gao.gov/products/GAO-09-659] or key 
components. For more information, contact Mark Gaffigan at 
gaffiganm@gao.gov, (202) 512-3841 or Tom McCool at mccoolt@gao.gov, 
(202) 512-2700. 

[End of section] 

Contents: 

Letter: 

Background: 

Some Petroleum Industry Mergers Were Associated with Small Increases 
and Decreases in Wholesale Gasoline Prices: 

Analysis Suggests Less Concentrated Markets Were Associated with Lower 
Wholesale Gasoline Prices: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendix I: Technical Discussion of Objectives, Scope, and Methodology: 

Appendix II: Comments from the Federal Trade Commission: 

Appendix III: Summary Information on the Seven Mergers Reviewed in 
GAO's Econometric Model: 

Appendix IV: Additional Market Concentration Information: 

Appendix V: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Summary Information for Mergers Reviewed in Model: 

Table 2: Effects of the Number of Sellers on Unbranded Wholesale 
Gasoline Prices at the Terminals in the 78 Cities We Studied: 

Table 3: Effects of Market Concentration on Unbranded Wholesale 
Gasoline Prices at Terminals Supplied by Seven Spot Markets: 

Table 4: Data Used in Our Econometric Model: 

Table 5: Regression Results for Mergers' Effect on Unbranded Gasoline 
Prices--Dependent Variable Is the Logarithm of Unbranded Gasoline 
Price: 

Table 6: Regression Results for Mergers' Effect on Branded Gasoline 
Prices--Dependent Variable Is the Logarithm of Branded Gasoline Price: 

Table 7: Regression Results for Effect of Spot Market HHI on Unbranded 
Gasoline Prices--Dependent Variable Is the Logarithm of Unbranded 
Gasoline Price: 

Table 8: Regression Results for Effect of Spot Market HHI on Branded 
Gasoline Prices--Dependent Variable Is the Logarithm of Branded 
Gasoline Price: 

Table 9: Regression Results for Effect of the Number of Sellers at the 
City Terminal on Unbranded Gasoline Prices--Dependent Variable Is the 
Logarithm of Unbranded Gasoline Price: 

Table 10: Regression Results for Effect of the Number of Sellers at the 
City Terminal on Branded Gasoline Prices--Dependent Variable is the 
Logarithm of Branded Gasoline Price: 

Table 11: Effects of the Number of Sellers on Branded Wholesale 
Gasoline Prices at the Terminals in the 82 Cities We Studied: 

Table 12: Effects of Market Concentration on Branded Wholesale Gasoline 
Prices at Terminals Supplied by Seven Spot Markets: 

Table 13: Number of Sellers at Wholesale Terminals in 2008: 

Figures: 

Figure 1: Example of a Gasoline Supply Chain: 

Figure 2: Number of Wholesale Gasoline Sellers at Terminals in 2008: 

Figure 3: Cities Affected by Chevron/Texaco Merger: 

Figure 4: Cities Affected by Phillips/Tosco Merger: 

Figure 5: Cities Affected by Valero/UDS Merger: 

Figure 6: Cities Affected by Shell/Texaco Merger: 

Figure 7: Cities Affected by Phillips/Conoco Merger: 

Figure 8: Cities Affected by Premcor/Williams Merger: 

Figure 9: Cities Affected by Valero/Premcor Merger: 

Figure 10: Yearly Concentration Levels in the Seven Spot Markets That 
We Analyzed: 

Abbreviations: 

CARB: California Air Resources Board: 

CBG: Cleaner Burning Gasoline: 

DOJ: Department of Justice: 

EIA: Energy Information Administration: 

FTC: Federal Trade Commission: 

HHI: Herfindahl-Hirschman Index: 

MTBE: Methyl tertiary-butyl ether: 

OPIS: Oil Price Information Service: 

PADD: Petroleum Administration for Defense Districts: 

RFG: reformulated gasoline: 

RVP: Reid vapor pressure: 

UDS: Ultramar Diamond Shamrock Corporation: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

June 12, 2009: 

The Honorable Charles E. Schumer: 
Vice Chairman: 
Joint Economic Committee: 
United States Congress: 

The Honorable Herb Kohl: 
Chairman: 
Subcommittee on Antitrust, Competition Policy and Consumer Rights: 
Committee on the Judiciary: 
United States Senate: 

The Honorable Henry A. Waxman: 
Chairman: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Dianne Feinstein: 
United States Senate: 

In 2008, GAO reported that more than 1,000 mergers occurred in the 
petroleum industry between 2000 and 2007.[Footnote 1] These mergers 
were mostly between firms involved in crude oil exploration and 
production, and were generally driven by the challenges associated with 
producing oil in extreme physical environments such as offshore in deep 
water and increasing concerns about competition with large national oil 
companies. Other mergers took place in the segment of the petroleum 
industry that refines and sells petroleum products. These mergers were 
generally driven by the desire for greater operational efficiencies and 
cost savings. We reported that while mergers could help oil companies 
overcome some of these challenges, they also have the potential to 
increase firms' market power--allowing them to raise gasoline prices 
without being undercut by other firms.[Footnote 2] 

The Federal Trade Commission (FTC) has lead responsibility for federal 
reviews of petroleum industry mergers. In evaluating mergers, FTC staff 
try to predict the impact of a merger on gasoline prices by reviewing 
factors that affect competition, including the market concentration. 
Market areas with a number of small firms are considered to be 
unconcentrated or moderately concentrated, while areas with fewer, 
larger firms are highly concentrated. Mergers that lead to a more 
concentrated market might also improve efficiency and reduce costs, and 
firms may pass these savings on to consumers in the form of lower 
prices. At the same time, mergers that cause a market area to become 
highly concentrated potentially allow one firm, or a small group of 
firms, to increase consumer prices above competitive levels. However, 
our 2008 review was limited to FTC's efforts to maintain competition in 
the petroleum industry; it did not address the impacts mergers or 
subsequent changes in market concentration may have had on prices. In 
this context, we were asked to study how (1) selected mergers, and (2) 
market concentration, have affected wholesale gasoline prices since 
2000. 

To study the impacts of selected mergers and market concentration on 
wholesale gasoline prices, we developed and extensively tested an 
econometric model that examined the statistical relationship between 
mergers, market concentration, and gasoline prices. We limited our 
analysis to mergers (1) that occurred between 2000 and 2007, (2) that 
had transaction values of $200 million or greater, and (3) for which we 
had useful and complete gasoline price data where each merger occurred. 
These criteria provided seven mergers for our analysis. To provide 
context on petroleum industry mergers, we interviewed a number of 
petroleum industry representatives and FTC staff. In developing our 
model, we consulted with a number of economists in industry and 
academia who had completed similar studies, as well as with economists 
at FTC. We also varied the design of our model to ensure that our 
results were not highly dependent on any single assumption. Our model 
required data on mergers and wholesale gasoline prices, as well as 
other factors that might have affected gasoline markets, so that we 
could control for them and isolate the effects of mergers and 
concentration. 

We purchased data from IHS Herold on the nature and size of petroleum 
industry mergers between 2000 and 2007.[Footnote 3] We also purchased 
data from the Oil Price Information Service (OPIS) on historical 
gasoline prices at wholesale gasoline terminals located across the 
United States.[Footnote 4] The price data provided by OPIS reflect 60 
percent of the gasoline sold at these wholesale terminals.[Footnote 5] 
We looked at prices at one terminal in each of 78 cities. We also used 
additional data from OPIS to control for the effects of special 
gasoline types that varied across cities in our analysis. Further, we 
used a number of data sets from the Energy Information Administration 
(EIA), including historical data on crude oil prices, refinery 
utilization rates, and gasoline sales. We assessed the reliability of 
the data and found them sufficiently reliable for the purposes of this 
report. 

Despite our efforts to carefully design our analysis, there were 
limitations. For example, we were not able to fully account for all the 
conceivable factors that affect gasoline markets, including disruptions 
to local gasoline supply markets from weather-related events, 
interruptions in refinery or pipeline operations, or other changes in 
local gasoline supply. As such, the price impacts we present from our 
model are estimates. In addition, because some cities were affected by 
multiple mergers, may have had changes in market concentration, and may 
have been affected by factors for which we did not have data, we cannot 
describe how wholesale prices may have changed overall in each 
location. Therefore the strength of this analysis is to provide an 
indicator of the potential impacts of mergers and market concentration 
rather than to suggest that these factors were the sole source of 
gasoline price changes in the cities we chose to study. See appendix I 
for a more detailed description of our objectives, scope, and 
methodology. 

We conducted this performance audit from October 2008 to June 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

The U.S. petroleum industry consists of firms of varying sizes that 
operate in one or more of three broad segments--the upstream, which 
consists of the exploration for and production of crude oil; the 
midstream, which consists of pipelines and other infrastructure used to 
transport crude oil and refined products; and the downstream, which 
consists of the refining and marketing of petroleum products such as 
gasoline and heating oil. While some firms operate in only one or two 
of these segments, fully vertically integrated oil companies 
participate in all of them. Chevron is an example of a fully integrated 
petroleum company, with operations in all three segments, while Wawa-- 
the convenience store chain--is an example of a firm operating in only 
one market segment as a downstream independent fuel retailer. 

Refiners produce gasoline and then arrange its delivery, usually via 
pipeline, but also via barge, truck, or rail, from their refineries to 
any of the nearly 400 wholesale terminals located throughout the 
country. Terminals can be near refineries, pipelines, or water ports, 
and can involve a wide-ranging number of wholesale gasoline sellers, 
including refiners or importers.[Footnote 6] The number of sellers at a 
wholesale terminal is not necessarily related to the number of 
refineries near the terminal; in some markets, a single refinery can 
produce gasoline for a number of sellers if they have supply 
arrangements with that refinery.[Footnote 7] At wholesale terminals, 
the majority of gasoline is purchased by marketers or distributors, for 
subsequent resale at retail gasoline stations, while the rest is sold 
directly to retailers (see figure 1). Market dynamics anywhere along 
the supply chain can influence consumer prices, beginning with upstream 
crude oil production, all the way through downstream refining and 
retailing. 

Figure 1: Example of a Gasoline Supply Chain: 

[Refer to PDF for image: illustration] 

Refiner (seller): to: 
* Seller; 
* Wholesale terminal. 

Importer (seller): to: 
* Wholesale terminal. 

Seller: to: 
* Wholesale terminal. 

Wholesale terminal: to: 
* Distributor (marketer); 
* Retail gasoline stations. 

Distributor (marketer): to: 
* Retail gasoline stations. 

Source: GAO. 

[End of figure] 

Gasoline from a wholesale terminal can also be either branded or 
unbranded. Branded gasolines are those supplied from major refiners 
selling under their trademarks, such as BP or Marathon, and often 
contain special additives, while unbranded gasolines may be supplied by 
major or independent refiners, but are not sold under a refiner's 
trademark. Branded prices include a premium reflecting the recognized 
brand name, fuel additives, and other costs, such as 
advertising.[Footnote 8] Unbranded prices, which tend to be lower than 
those for branded, are paid by distributors who deliver gasoline to 
retail locations ranging from large supermarkets to small independent 
retailers that are not affiliated with a major refiner.[Footnote 9] 

FTC's merger review process is conducted by staff in various bureaus 
and offices throughout the agency, but mainly by the Bureau of 
Economics and the Bureau of Competition. In reviewing proposed mergers, 
FTC follows guidelines that it developed jointly with the Department of 
Justice (DOJ) for predicting the effects of mergers on competition. The 
unifying theme in the guidelines is that mergers should not be 
permitted to enhance a firm's market power or to make it easier for a 
firm to exercise market power. In its review, FTC examines whether 
market conditions, including market concentration, would be conducive 
for firms to act unilaterally or to coordinate to raise prices. 
Unilateral effects occur when the merged firm profitably reduces its 
own supply and raises prices, even though other competitors may respond 
by increasing their own output. Such behavior can be profitable if the 
merged firm has a significant share of sales and the response of 
competitors is limited. Coordinated behavior occurs when each firm 
remaining in the market reduces its output, increasing prices. In their 
reviews of petroleum industry mergers, FTC staff seek to avoid the 
possibility of price increases even as small as 1 cent per gallon 
because the petroleum industry sells large volumes of fuel at thin 
margins, and price changes of this magnitude can affect industry 
decisions regarding production or sales. In addition, in some markets, 
even 1 cent per gallon price increases can lead to more than $100 
million per year in additional costs for consumers, according to FTC 
analysis. 

After reviewing a merger, FTC has three options: (1) to not challenge 
the merger; (2) to challenge the merger in court; or (3) to not 
challenge the merger as long as certain agreed upon remedial actions 
are met, such as firms selling off, or divesting, overlapping assets 
that have the greatest potential to harm competition.[Footnote 10] FTC 
also performs other activities to monitor petroleum markets, including 
monitoring fuel prices and conducting special investigations. For 
example, FTC's price-monitoring program tracks retail gasoline and 
diesel prices in 360 cities across the nation and wholesale prices in 
20 major urban areas. In addition, on April 16, 2009, FTC issued a 
Revised Notice of Proposed Rulemaking seeking public comment on a 
revised proposed rule that would prohibit market manipulation in the 
petroleum industry. The revised proposed rule would prohibit fraudulent 
and deceptive conduct that could harm wholesale petroleum markets, but 
it is not yet clear how this new rule will affect FTC's monitoring of 
petroleum industry markets. However, FTC staff indicated that because 
FTC is an enforcement agency, they focus on merger and antitrust 
enforcement, rather than ongoing monitoring of the petroleum industry, 
as a regulatory agency would likely undertake. According to FTC, during 
the latter part of 2008, approximately 125 FTC staff members-- 
attorneys, economists, paralegals, research analysts, and others-- 
worked to some extent on matters involving antitrust and pricing issues 
in the oil and natural gas sectors, and about 6 or 7 staff economists 
from the Bureau of Economics were involved in ongoing monitoring of the 
petroleum industry, although these economists also devoted a portion of 
their time to other industries. These staff economists also 
occasionally perform analysis of past mergers, and FTC has indicated 
retrospective merger reviews are a valuable part of antitrust decision 
making. If FTC finds anticompetitive behavior in retrospective reviews, 
it has the ability to conduct further in-depth investigations into the 
merger and collect substantial company-specific data in order to pursue 
corrective action to reintroduce competition into the market such as 
forced divestitures or conduct-based remedies. 

However, as we reported in 2008, FTC does not regularly look back at 
past mergers in the petroleum industry to assess their actual effects 
on prices--there had been only three such retrospective reviews, 
between 2000 and 2007.[Footnote 11] We recommended that FTC undertake 
more regular retrospective reviews of past petroleum industry mergers 
and develop risk-based guidelines to determine when to conduct them. In 
commenting on this, FTC noted that our recommendation was consistent 
with a recent self-evaluation initiative and would consider it in that 
regard. Although these reviews can be resource intensive, experts, 
industry participants, and FTC agreed that regular retrospective 
reviews would allow the agency to better inform future merger reviews 
and better measure its success in maintaining competition. In this 
regard, the National Bureau of Economic Research published a study in 
March 2009 entitled Generating Evidence to Guide Merger Enforcement, 
which noted the importance of conducting retrospective merger reviews. 
[Footnote 12] The study found that retrospective merger reviews can 
help to evaluate the impacts of past merger enforcement decisions and 
can allow antitrust agencies to develop better techniques to predict 
the effects of future mergers on competition. The study also suggested 
that it made sense to focus retrospective reviews on completed mergers 
with the greatest likelihood of anticompetitive effects, such as 
mergers in highly concentrated markets.[Footnote 13] FTC is currently 
working on a fourth retrospective review of a past petroleum industry 
merger, which is expected to be released later this year. 

Some Petroleum Industry Mergers Were Associated with Small Increases 
and Decreases in Wholesale Gasoline Prices: 

We studied the effects of seven petroleum industry mergers that 
occurred since 2000 on wholesale gasoline prices and found three that 
were associated with small changes in wholesale gasoline prices. 
Specifically, we developed an econometric model to isolate the effects 
on wholesale gasoline prices of seven mergers--(1) Chevron Corporation/ 
Texaco, (2) Phillips Petroleum Company/Tosco Corporation, (3) Valero 
Energy Corporation/Ultramar Diamond Shamrock Corporation (UDS), (4) 
Royal Dutch Shell Group/Texaco, (5) Phillips Petroleum Company/Conoco, 
(6) Premcor/Williams Companies, and (7) Valero Energy Corporation/ 
Premcor. These mergers ranged widely in the size of transaction, from 
the Chevron/Texaco merger, valued at about $45 billion, to the Premcor/ 
Williams merger, valued at $367 million. Five of the seven mergers were 
focused primarily on the downstream sector, with refining, marketing, 
or retail operations as the key assets that changed ownership, while 
the other two mergers were concentrated in the upstream exploration and 
production sector, with oil reserves as the key asset that changed 
ownership. The rationale for some of these mergers, according to 
industry officials, was generally to increase operational efficiencies 
and reduce costs through economies of scale.[Footnote 14] Summary 
information about the mergers is provided in table 1. 

Table 1: Summary Information for Mergers Reviewed in Model: 

Merger[A]: Chevron Corp./Texaco; 
Announced date: Oct. 16, 2000; 
Transaction value (U.S. dollars in millions) and key assets: $44,838; 
oil and gas reserves; 
Number of cities affected[B]: 37; 
FTC response to merger: Challenged: divestitures required in refining 
and marketing; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
Results not statistically significant. 

Merger[A]: Phillips Petroleum Company/Tosco Corp.; 
Announced date: Feb. 4, 2001; 
Transaction value (U.S. dollars in millions) and key assets: $9,828; 8 
refineries and approximately 6,400 retail stations; 
Number of cities affected[B]: 8; 
FTC response to merger: Not challenged; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
Results not statistically significant. 

Merger[A]: Valero Energy Corp./Ultramar Diamond Shamrock (UDS) Corp.; 
Announced date: May 7, 2001; 
Transaction value (U.S. dollars in millions) and key assets: $6,442; 7 
refineries and approximately 5,000 retail stations; 
Number of cities affected[B]: 26; 
FTC response to merger: Challenged: divestitures required in refining 
and retailing; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
+1.06 (branded); Unbranded results not statistically significant. 

Merger[A]: Royal Dutch Shell Group/Texaco; 
Announced date: Oct. 9, 2001; 
Transaction value (U.S. dollars in millions) and key assets: $3,860; 
Texaco's share of Motiva and Equilon downstream joint ventures[D]; 
Number of cities affected[B]: 35; 
FTC response to merger: Not challenged; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
Results not statistically significant. 

Merger[A]: Phillips Petroleum Company/Conoco; 
Announced date: Nov. 19, 2001; 
Transaction value (U.S. dollars in millions) and key assets: $31,282; 
oil and gas reserves, refining and marketing assets; 
Number of cities affected[B]: 47; 
FTC response to merger: Challenged: divestitures required in refining 
and marketing; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
-1.64 (branded); -1.14 (unbranded). 

Merger[A]: Premcor/Williams Companies; 
Announced date: Nov. 26, 2002; 
Transaction value (U.S. dollars in millions) and key assets: $367; 1 
refinery; 
Number of cities affected[B]: 2; 
FTC response to merger: Not challenged; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
Results not statistically significant. 

Merger[A]: Valero Energy Corp./Premcor; 
Announced date: Apr. 25, 2005; 
Transaction value (U.S. dollars in millions) and key assets: $7,588; 4 
refineries; 
Number of cities affected[B]: 20; 
FTC response to merger: Not challenged; 
GAO's estimated effect on wholesale gasoline prices (cents/gallon)[C]: 
Branded results not statistically significant; +1.13 (unbranded). 

Source: GAO analysis of information from IHS Herold,, FTC, and OPIS. 

[A] GAO criteria for selection of mergers included (1) mergers that 
occurred between 2000 and 2007, (2) a minimum merger transaction value 
of $200 million, and (3) the availability of useful and complete 
gasoline price data. 

[B] The cities affected include those, out of the 78 examined in GAO's 
model, with wholesale terminals where both companies operated before 
the merger. 

[C] The price effects we report were statistically significant, meaning 
that we were able to reasonably rule out the effects of chance on the 
estimated impacts on wholesale gasoline prices. 

[D] The Equilon Enterprises joint venture included approximately 4,500 
Shell-branded and 4,500 Texaco-branded gasoline service stations, four 
refineries, and 65 product terminals and ports. The Motiva Enterprises 
joint venture included approximately 4,800 Shell-branded and 8,200 
Texaco-branded stations, four refineries, seven lubricants facilities, 
and 50 product terminals. 

[End of table] 

As shown in table 1, the seven mergers we analyzed ranged widely in the 
number of cities with wholesale terminals that were affected by the 
merger. We analyzed the effects of the seven mergers at terminals in 78 
cities across the United States. The three mergers affecting terminals 
in 35 or more cities each--Chevron/Texaco, Shell/Texaco, and Phillips/ 
Conoco--reflect a wide geographic area, as each merger affected cities 
across a number of regions of the country. The Valero/Premcor and 
Valero/UDS mergers, each of which affected terminals in 20 or more 
cities, were more concentrated geographically, primarily affecting 
cities in the eastern and western United States, respectively. The two 
mergers affecting terminals in fewer than 10 cities each--Phillips/ 
Tosco and Premcor/Williams--reflect narrower geographic areas, with the 
former affecting a few cities in the Southeast and Southwest and the 
latter affecting 2 cities in the Southeast. See appendix III for more 
information on the geographic regions affected by each merger. 

Antitrust enforcement actions taken in response to the mergers varied, 
depending on the characteristics of the firms, the geographic areas 
affected, and the specifics of the transaction. As shown in table 1, 
the FTC challenged three of the mergers, as originally proposed, on the 
basis of potential threats to competition in one or more sectors of the 
industry.[Footnote 15] In response to these potential anticompetitive 
threats, FTC required the merging firms to divest key assets in the 
sectors of identified concern. In the case of the Chevron/Texaco 
merger, FTC identified potential threats to gasoline marketing in 23 
states across the western and southern United States, as well as 
potential threats to refining in California and the Pacific Northwest, 
among others. As a result, it ordered the divestiture of Texaco's 
downstream assets in marketing and refining, as well as in pipelines. 
[Footnote 16] In the case of the Valero/UDS merger, FTC identified 
potential threats to the refining and supply sectors in California and 
subsequently required the divestiture of a UDS refinery in Avon, 
California, as well as the divestiture of numerous supply contracts and 
70 retail outlets across the West. In the case of the Phillips/Conoco 
merger, FTC identified a number of potential concerns, including 
threats to gasoline refining and supply in various western and 
midwestern states. In response, FTC required divestitures in key areas 
of concern, including the sale of a Phillips refinery near Salt Lake 
City and marketing assets in northern Utah, as well as the sale of 
Conoco's Denver-area refinery and Phillips's marketing assets in 
eastern Colorado. In the case of the remaining four mergers, FTC did 
not identify competitive concerns and consequently did not require 
divestitures or other remedial actions. 

As highlighted in table 1, the results of our analysis suggest that two 
of the seven mergers were associated with small increases in wholesale 
gasoline prices, while one was associated with a small decrease in 
wholesale gasoline prices. In the case of these three mergers, the 
model results were statistically significant, meaning that we were able 
to reasonably rule out the effects of chance on the estimated impacts 
on wholesale gasoline prices. In addition, our model held constant the 
effects of a number of other key variables, including changes in 
gasoline inventory, refinery capacity utilization, and the type of 
gasoline sold, although data were unavailable on additional factors 
that may have affected prices. According to these results, the 2005 
acquisition by Valero of four refineries owned by Premcor was 
associated with an increase of 1.13 cents per gallon for unbranded 
gasoline. Similarly, the model suggests that the 2001 acquisition by 
Valero of seven refineries and approximately 5,000 retail stations 
owned by UDS was associated with an increase in branded wholesale 
gasoline prices of approximately 1.06 cents per gallon[Footnote 17]. By 
contrast, the model suggests that the 2001 merger of Phillips and 
Conoco, including oil reserves, as well as refining and marketing, was 
associated with a decrease in branded wholesale gasoline prices of 
approximately 1.64 cents per gallon and a decrease of 1.14 cents per 
gallon for unbranded gasoline. The price effects observed in these 
three cases reflect an average increase or decrease in wholesale 
gasoline prices at terminals across the cities affected by the merger 
for the period of time following the merger through September 200 
[Footnote 18]8. In the case of the remaining four mergers--Chevron/ 
Texaco, Phillips/Tosco, Shell/Texaco, and Premcor/Williams--the results 
of our model were not statistically significant. 

Given the complexities of the petroleum industry's supply chain, we 
could not provide an explanation as to why certain mergers were 
associated with changes in wholesale gasoline prices. Gasoline moves 
through an often complicated supply network, and the efficiency gains 
associated with mergers, or likewise the opportunities for market 
participants at any level of the network to exercise market power, 
could play out in any number of ways. For example, some marketers we 
spoke with indicated that mergers sometimes spurred refiners to 
renegotiate the terms of their supply agreements, making them less 
favorable and potentially indicating the exercise of market power by an 
individual refiner. On the other hand, mergers can create operational 
efficiencies and economies of scale that can allow refiners and 
marketers to pass on savings, in the form of lower prices, to 
consumers. At the terminal level, there is limited information on 
gasoline's refinery of origin, including whether it was even refined 
domestically, further adding to the difficultly in pinpointing how and 
where the impacts from a merger are felt. For example, marketers we 
spoke with indicated that they could not be sure where gasoline shipped 
via pipeline came from, since similar products are intermingled in the 
system. In addition, refiners we spoke with indicated that they were 
able to exchange gasoline with each other, enabling them to have a 
marketing presence in a city that was not very close to one of their 
refineries. These "exchange agreements" add to the efficiency of the 
supply network, because refiners can trade fuel across locations rather 
than ship it, although these agreements can also greatly add to its 
complexity. As such, our model does not provide further explanation as 
to the underlying forces that contributed to any correlation between 
the three mergers and changes in wholesale gasoline prices, nor does it 
provide conclusive evidence of unilateral or coordinated behavior to 
influence gasoline prices. To do this we would have had to conduct in- 
depth investigations into each merger and collect substantial company- 
specific data. Nonetheless, our model provides an indicator of the 
impact that petroleum industry mergers can have on wholesale gasoline 
prices. And given the substantial size of the gasoline market, even 
small increases or decreases in wholesale prices can have a significant 
impact on consumer spending.[Footnote 19] 

Analysis Suggests Less Concentrated Markets Were Associated with Lower 
Wholesale Gasoline Prices: 

We also used our model to analyze market concentration and found that 
less concentrated wholesale gasoline markets--i.e., wholesale terminals 
with more sellers--were significantly associated with lower gasoline 
prices at terminals located in 78 cities across the United States. 
[Footnote 20] For example, we estimated that prices were about 8 cents 
per gallon lower at terminals with, for example, 14 sellers compared 
with prices at terminals that had only 9 sellers. We also measured the 
concentration of groups of refineries that supplied gasoline to sellers 
at wholesale terminals in these cities and similarly found that prices 
were lower if a terminal was supplied by a less concentrated group of 
refineries. 

Measures of market concentration often take into account both the 
number of firms in a market and the market share of each firm, and one 
such measure, the Herfindahl-Hirschman Index, or HHI, gives 
proportionally greater weight to firms with larger market shares. 
[Footnote 21] According to FTC and DOJ guidelines, an unconcentrated 
market has an HHI of less than 1,000; a moderately concentrated market 
has an HHI between 1,000 and 1,800; and a highly concentrated market, 
with the greater likelihood that a firm could exercise market power, 
has an HHI over 1,800. We measured market concentration affecting 
wholesale terminals in two ways: (1) by counting the number of sellers 
at each wholesale terminal, and (2) by calculating the HHI of refinery 
groups that supplied gasoline to sellers at wholesale terminals. 

In our first approach, the number of sellers at wholesale terminals was 
inversely related to the level of concentration, with terminals with 
few sellers having high levels of concentration. Although this measure 
was not technically a measure of market concentration, it closely 
reflected supply conditions at wholesale terminals in the 78 cities we 
studied.[Footnote 22] In our second approach, we moved up the supply 
chain and measured the number and size of the refineries that were the 
original source for the gasoline delivered to the sellers at each 
terminal. We determined the production capacity of refineries in the 
seven historical U.S. refinery groups known as spot markets and then 
determined which spot market groups supplied gasoline to sellers at 
individual wholesale terminals, allowing us to estimate a refinery HHI 
for individual wholesale terminals in the 78 cities we studied. 
[Footnote 23] 

Both of our measures indicated that less concentrated markets were 
significantly associated with lower wholesale gasoline prices, as shown 
in tables 2 and 3. Although we did not observe large changes in market 
concentration over time, there was variation in market concentration 
across the wholesale terminals in our analysis. In order to demonstrate 
the size of the effect that market concentration had on wholesale 
gasoline prices, we chose to look at the expected changes in wholesale 
prices across two ranges of market concentration--one range was between 
the 25th and 75th percentiles of market concentration values in our 
analysis, and the other was between the 10th and 90th percentiles. We 
calculated the expected price differences if a terminal were to have 
moved from the higher end of either of these concentration ranges to 
the lower end. 

We found that the terminals with more sellers and therefore lower 
levels of concentration would be expected to have lower wholesale 
gasoline prices (see table 2). We estimated that if a terminal were to 
have gained 5 wholesale gasoline sellers, we would expect prices to be 
8 cents per gallon lower at that terminal. In addition, if a terminal 
were to have gained 11 sellers, we estimated that prices would be 18 
cents per gallon lower. We present the number of sellers at each of the 
terminals in the 78 cities we examined, which ranged from 3 to 21 in 
2008, with a median of 11, in appendix IV. 

Table 2: Effects of the Number of Sellers on Unbranded Wholesale 
Gasoline Prices at the Terminals in the 78 Cities We Studied: 

Change in number of sellers at the wholesale terminal: Change in 
unbranded wholesale gasoline price in cents per gallon[A]; 
Gain of 5 sellers (9 sellers to 14 sellers): -8; 
Gain of 11 sellers (6 sellers to 17 sellers): -18. 

Source: GAO analysis of OPIS data. 

Note: We present the results for branded gasoline in appendix IV. These 
results were similar and also statistically significant. 

[A] These results were statistically significant at the 1 percent 
level. The 9 to 14 seller range represents the 25th to the 75th 
percentile of values that we observed at terminals in our analysis. The 
6 to 17 seller range represents the 10th to the 90th percentile. 

[End of table] 

We also found that terminals supplied by the refinery spot markets with 
the lower HHIs would be expected to have lower wholesale gasoline 
prices (see table 3). We estimated that if a spot market supplying 
gasoline to a terminal were to have become less concentrated by moving 
from an HHI of 930 to 790, we would expect prices to be about 2 cents 
per gallon lower at that terminal. In addition, if a spot market 
supplying gasoline to a terminal were to have become less concentrated 
by moving from an HHI of 1470 to 700, we estimated that prices would be 
about 13 cents per gallon lower at that terminal. In general, our 
findings were consistent with the idea that markets with more sellers 
or more refiners supplying those sellers are likely to be more 
competitive, resulting in lower prices. We present trends in spot 
market concentration in appendix IV that ranged from 666 to 3,729. The 
median HHI across all markets was 906. 

Table 3: Effects of Market Concentration on Unbranded Wholesale 
Gasoline Prices at Terminals Supplied by Seven Spot Markets: 

Refinery spot market HHI: Change in unbranded wholesale gasoline price 
in cents per gallon[A]; 
Decrease in HHI from 930 to 790: -2; 
Decrease in HHI from 1,470 to 700: -13. 

Source: GAO analysis of OPIS data. 

Note: We present the results for branded gasoline in appendix IV. These 
results were similar and also statistically significant. 

[A] These results were statistically significant at the 1 percent 
level. The 790 to 930 range represents the 25th to the 75th percentile 
of values that we observed at terminals in our branded analysis. The 
700 to 1,470 range represents the 10th to the 90th percentile. 

[End of table] 

In estimating these results, we treated market concentration as 
endogenous--meaning that changes in wholesale gasoline prices could 
affect market concentration in addition to changes in concentration 
affecting prices. For example, this could occur if high prices at one 
terminal spur new sellers to enter the market, thus decreasing 
concentration. This assumption was supported by statistical tests that 
we conducted, although because this assumption was likely to have a 
noticeable impact on our results, we also analyzed our data without it 
and found that the impact on prices of our concentration measures was 
statistically significant but smaller. For example, for unbranded 
prices, in the case of the refinery spot market HHI, the impact on 
wholesale prices was about half the size without this assumption. For 
the number of sellers at the terminal, the impact was about one-sixth 
of the size without this assumption. 

As noted above, we did not observe a trend of increasing market 
concentration nationwide between 2000 and 2008, either in the number of 
sellers at wholesale terminals or in our HHI numbers calculated for 
refinery spot market groups. For example, the average number of sellers 
at terminals across the country remained almost the same since 2000, 
with terminals averaging 11 sellers by 2008 and most having between 7 
and 11 sellers during that year (see figure 2). However, of the 
terminals located in the 78 cities we studied, we did find that 8 
terminals lost 5 or more sellers and 39 lost between 1 and 4--the 
remainder had no change or actually gained sellers since 2000. 

Figure 2: Number of Wholesale Gasoline Sellers at Terminals in 2008: 

[Refer to PDF for image: vertical bar graph] 

Number of sellers: 2-6; 
Number of terminals: 11. 

Number of sellers: 7-11; 
Number of terminals: 36. 

Number of sellers: 12-16; 
Number of terminals: 22. 

Number of sellers: 17-21; 
Number of terminals: 9. 

Source: GAO analysis of OPIS data. 

[End of figure] 

Most of our refinery spot market HHI numbers remained moderately 
concentrated or unconcentrated during the span of our analysis, and 
this was consistent with the findings in our 2008 report, where we 
indicated that concentration was generally moderate and changed little 
in spot markets throughout the United States since 2000, except in the 
case of the New York Harbor spot market, which became more 
concentrated. However, as we reported, the New York Harbor trend may 
not be completely reflective of actual market conditions because 
foreign refineries ship a significant amount of gasoline into the East 
Coast (around 60 percent of consumption). Because we were unable to 
account for this fuel, the high measure of concentration probably 
overstates the actual concentration for the market.[Footnote 24] 
However, in this current analysis we also found that refinery market 
concentration in Alaska was very high because of the isolated nature of 
that state. 

Concluding Observations: 

Because of the complexity of the U.S. petroleum industry, it can be 
difficult to predict the impact of mergers before they are completed. 
Refined products move through a complicated supply network, where it 
can be difficult to identify the origin of fuel supplied to wholesale 
markets, making it challenging to anticipate the actual impacts of 
petroleum industry mergers on gasoline prices before the deals are 
completed. In light of these difficulties, reviewing the effects of 
past mergers on fuel prices could allow FTC to determine whether the 
actual effects of a merger reflect the anticipated effects. Although 
there are some limitations to the analytical approaches used in 
isolating the effects of past mergers and market concentration on 
prices, we believe the approach we used in our analysis provides a 
starting point for potential further studies of these impacts. 
Conducting retrospective reviews of past mergers could also allow FTC 
to better understand the impacts of assumptions it makes during merger 
reviews and to identify the types of mergers that are potentially 
problematic, allowing it to improve its approach to future merger 
reviews. 

As the authors of the recent study published by the National Bureau of 
Economic Research noted, it makes sense for an antitrust agency to 
focus retrospective reviews on completed mergers with the greatest 
likelihood of having reduced competition, such as mergers in highly 
concentrated markets, and in doing so the agency can focus its limited 
resources on the mergers with the greatest risk of having adversely 
affected prices.[Footnote 25] Given the significant relationship 
between wholesale gasoline prices and market concentration that we 
found, we also conclude that it may be useful to focus retrospective 
merger reviews on highly concentrated market regions. Such 
retrospective reviews would provide FTC greater assurance that its 
efforts result in consumer prices that are determined in a fair and 
competitive marketplace. This study reinforces the need to review past 
petroleum industry mergers, and we continue to recommend that FTC 
conduct such reviews more regularly and develop risk-based guidelines 
to determine when to conduct them. 

Agency Comments and Our Evaluation: 

We provided a copy of our draft report to FTC for its review and 
comment. FTC's Chairman provided written comments, which are reproduced 
in appendix II, along with our responses. In general, the Chairman 
agreed with our recommendation that FTC conduct more reviews of past 
petroleum industry mergers and that FTC focus those retrospective 
efforts on mergers that present the greatest likelihood of 
anticompetitive effects. The Chairman also noted some of the 
limitations and an apparent inaccuracy in our presentation of the 
effects of market concentration on wholesale gasoline prices, which we 
addressed in appendix II. Nonetheless, the Chairman said that FTC will 
continue to use risk-based criteria for identifying past mergers for 
review and will direct its staff to evaluate more fully GAO's 
contributions as it moves forward with its merger retrospectives and 
enforcement programs. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 14 days 
from the report date. At that time, we will send copies to the 
Chairman, Federal Trade Commission; appropriate congressional 
committees; and other interested parties. In addition, the report will 
be available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact us at (202) 512-3841, gaffiganm@gao.gov, or (202) 512-2700, 
mccoolt@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in appendix V. 

Signed by: 

Mark E. Gaffigan: 
Director, Natural Resources and Environment: 

Signed by: 

Thomas McCool: 
Director, Center for Economics Applied Research and Methods: 

[End of section] 

Appendix I: Technical Discussion of Objectives, Scope, and Methodology: 

Introduction: 

The objectives of this study were to examine the impacts of selected 
mergers and market concentration on wholesale gasoline prices between 
2000 and 2008. 

We developed an econometric model to explain the impact of mergers and 
market concentration, while controlling for other important factors 
that may also affect gasoline prices. Our model examined how wholesale 
gasoline city terminal (rack) prices were affected by mergers and 
variation in market competition. 

Econometric Model Specifications and Methodology: 

Our model examined how wholesale gasoline city terminal prices were 
affected by mergers and two measures of market competition. We used 
data from 78 (and in some cases 82) wholesale city terminals from 
January 2000 through September 2008.[Footnote 26] We used monthly 
average data on wholesale city terminal gasoline prices. We believe 
that the increased information from higher-frequency data, for example, 
from using weekly data, would be outweighed by the extra noise 
generated by such relatively high-frequency data. Further, in general, 
the control variables are available only at monthly intervals, and some 
only at quarterly intervals. In developing our model, we consulted with 
a number of economists in industry and academia who had completed 
similar studies, as well as with economists at the Federal Trade 
Commission (FTC). We incorporated their suggestions when possible and 
where we thought appropriate. In addition, a number of economists also 
provided us with feedback on our preliminary results. 

The Dependent Variable: Wholesale Gasoline Price: 

* Our dependent variable was the logarithm of the wholesale terminal 
price of gasoline. We used an Augmented-Dickey-Fuller test designed for 
panel data to test for stationarity in levels of our dependent 
variables, in the case of both unbranded and branded prices.[Footnote 
27] Our tests showed that our unbranded and branded dependent variable 
was stationary in levels. 

* We estimated separate models for unbranded and branded products to 
test for the consistency of our results. 

* There may be multiple gasoline prices reported for a given city 
terminal on a given date; in general, we used the wholesale terminal 
price of gasoline that is required in that specific locale. We believe 
that such a focus allows us to address the issue of what is happening 
in the market for gasoline in that city. 

* Our model specification controls for the effects of changes in the 
average price level and changes in the price of crude oil over time. We 
controlled for this and other time-varying effects in our regressions 
by including a complete set of time dummy variables--one for each 
month's observation in the data. 

Explanatory Variables That Measure the Impact of Mergers and Market 
Concentration on Gasoline Prices: 

Our primary interest was to identify the impact of (1) oil company 
mergers, and (2) market concentration on gasoline prices. 

* We limited our analysis to mergers (1) that occurred between 2000 and 
2007, (2) that had transaction values of $200 million or greater, and 
(3) for which we had useful and complete gasoline price data where each 
merger occurred. There were seven mergers that met these criteria. We 
used data from IHS Herold and the Oil Price Information Service (OPIS) 
to identify these mergers and then had FTC review the list. 

* Our analysis used two measures of market concentration: 

1. The number of sellers that sold products during that month--we used 
OPIS data to acquire the list of sellers. Our hypothesis is that a 
larger number of sellers is likely to result in a more competitive 
market environment, in contrast to a situation where a small or a 
single seller might be able to engage in price setting, and hence 
charge higher prices. We recognize that this measure has drawbacks; in 
particular, it does not, in general, measure market share but rather 
weights each seller equally. However, it has the advantage that it is 
measured at the city level, namely, at the same level as our price 
data. Further, this measure has been used by other investigators to 
capture variation in local market structure.[Footnote 28] 

2. Spot market Herfindahl-Hirschman Index (HHI) was measured for groups 
of refineries that supply wholesale terminals. We used spot markets as 
the basis for defining these refinery groups geographically, which 
reflect the historical grouping of U.S. refineries into seven refining 
centers. Energy traders consider gasoline available for delivery at 
these refining spot markets in order to price gasoline that is bought 
and sold at wholesale terminals, and gasoline production in these 
refining groups drives prices on the spot markets. The seven spot 
markets in the United States are in Los Angeles, San Francisco, the 
Gulf Coast, New York Harbor, Chicago, Tulsa (or Midcontinent), and the 
Pacific Northwest. In addition, we defined Alaska as a separate market. 
To define these, we collaborated with staff from OPIS, Energy 
Information Administration (EIA), and FTC who had expertise on 
petroleum product markets and who helped us to assign individual 
refineries to spot markets based on the regions in which they sold most 
of their fuel. In some cases, a refinery operated in more than one 
region, so its capacity was included in both regions' HHI calculation. 
Experts from EIA, FTC, and OPIS mentioned that refineries in states 
like Alaska and Hawaii primarily supply their local regions. Our study 
does not include any cities from Hawaii, and in the case of Alaska, as 
mentioned above, we treated these refineries as a separate group and 
created its own HHI.[Footnote 29] We then used EIA-810 data on refinery 
operable capacity in order to make the HHI calculations.[Footnote 30] 
Finally, we used OPIS data to match each of our cities to the spot 
market in which it was located. 

Other Explanatory Variables: 

In addition to the impact of mergers and market concentration, our 
model includes other important variables that may influence the price 
of gasoline. 

* Volume of inventory of gasoline relative to the volume of sales of 
gasoline. This could affect the availability of gasoline at the 
wholesale level and hence affect prices. All other things equal, 
gasoline prices should decrease when inventories are high relative to 
sales and conversely when inventories are low relative to sales. 
Further, inventories may themselves respond to changes in wholesale 
gasoline prices, so this variable may be endogenous. 

* Refinery capacity utilization rate--this could affect the wholesale 
price of gasoline through changes in the availability of gasoline 
product. One possibility is that when utilization rates are high, 
supply would be increased, resulting in lower prices, and conversely if 
utilization rates are low. However, it is possible that as utilization 
rates approach very high levels, there would be significant increases 
in the cost of production, which could then result in higher prices. As 
with the inventory-sales ratio, the capacity utilization rate may 
itself be affected by gasoline prices; for example, if gasoline prices 
are high, refineries may operate at higher capacity, so this variable 
may be endogenous. 

* Lagged dependent variable--lagged values of the left-hand side 
variable. Gasoline price data are sometimes autocorrelated, and it is 
reasonable to include the effect of past gasoline prices on current 
gasoline prices.[Footnote 31] 

* Time fixed effects (dummy variable for each time period in the 
analysis)--January 2000 through September 2008 is 105 months of data. 
City fixed effects (dummy variables for each city in the analysis)-- 
our analysis uses between 78 and 82 cities' data (we included a fixed 
effect for each city). These city fixed effects assist in controlling 
for unobserved heterogeneity. 

* Product specification dummy variables for the different types of 
gasoline used for price. There are over 30 different gasoline types 
used in our analysis, and to control for this variation, we include a 
dummy variable for each type. 

* Selection of cities to include in the model--the OPIS data contain 
393 city wholesale terminals. Some of the cities with wholesale 
terminals may be close geographically so they may not represent 
independent markets. As a result, we used a subset of either 78 or 82 
of these cities that were in the most relevant and important 
metropolitan areas needed to model refinery product flows and product 
costs. Most cities only had one terminal and we chose to examine only 
one terminal in the few cases where there was more than one. We 
determined which cities each merger affected by identifying cities 
where each firm had posted either branded or unbranded wholesale prices 
for 26 of the 52 weeks before the merger's announced date. 

We assessed the reliability of these data and found them sufficiently 
reliable for the purposes of this report. This included conducting 
tests for missing and out-of-range values and checking for completeness 
and accuracy of the data. 

Data Sources: 

Table 4: Data Used in Our Econometric Model: 

Variable: Prices; 
Description: Wholesale gasoline price in cents per gallon. Branded and 
unbranded. Monthly data; 
Source: OPIS. 

Variable: West Texas Intermediate crude oil price; 
Description: Price per gallon of West Texas Intermediate. Monthly data; 
Source: EIA. 

Variable: Spot Market HHI; 
Description: Market concentration, measured by refinery capacity of 
corporations in each spot market. Monthly data; 
Source: EIA, GAO analysis. 

Variable: Number of sellers at the city terminal; 
Description: Number of sellers that quoted prices at the city terminal 
during a given month. Monthly data; 
Source: OPIS. 

Variable: Merger dummy variables; 
Description: Dummy variable equal to 1 from the effective date of the 
merger to the end of the study in September 2008.[A] Equal to 0 before 
the effective date of the merger. We also included dummy variables for 
the period of time between the announced date and the effective date of 
the merger; 
Source: OPIS, IHS Herold. 

Variable: Inventory-sales ratio; 
Description: Ratio of gasoline inventories to gasoline sales. Monthly 
data; 
Source: EIA. 

Variable: Refinery capacity utilization rate; 
Description: Capacity utilization rate. Monthly data; 
Source: EIA. 

Variable: Fuel type dummy variables; 
Description: Set of dummy variables for the gasoline fuel type. Details 
the main fuel type, presence of additives, and Reid vapor pressure 
(RVP); 
Source: OPIS. 

Variable: Producer Price Index; 
Description: Producer Price Index. Monthly data; 
Source: Department of Labor. 

Variable: Employment growth; 
Description: Percent growth in employment at the state level. Monthly 
data; 
Source: Department of Labor. 

Variable: Unemployment rate; 
Description: Percent unemployment rate at the state level. Monthly 
data; 
Source: Department of Labor. 

Variable: Real personal income growth; 
Description: Percent growth in personal income at the state level 
deflated by the consumer price index. Quarterly data; 
Source: Bureau of Economic Analysis. 

Variable: Consumer price index; 
Description: Consumer price index. Monthly data; 
Source: Department of Labor. 

Source: GAO. 

[A] The effective dates correspond to the completion of the deal after 
announcement and are as follows: Chevron/Texaco, Oct. 9, 2001; 
Phillips/Tosco, Sept. 17, 2001; Valero/UDS, Dec. 31, 2001; 
Shell/Texaco, Dec. 31, 2001; Phillips/Conoco, Aug. 30, 2002; 
Premcor/Williams, Mar. 31, 2003; Valero/Premcor, Sept. 1, 2005. 

[End of table] 

Econometric model: 

Our fixed effects model can be written as follows: 

yit = (Xit, Wit)B+ Ci + ft + uit, i = 1,2,...N; t = 1,2,...T (1), 

where: 

yit is the logarithm of wholesale terminal gasoline price at city i in 
month t. 

Xit is a vector of predetermined variables for city i in month t that 
are assumed to be independent of the error term uit. This vector 
includes a lagged value of our dependent variable. 

Wit is a vector of possibly endogenous variables, at city i in month t. 

ci is the fixed effect or dummy variable for city i. 

ft is the fixed effect or dummy variable for month t. 

B is a vector of parameters to be estimated. 

* We used xtivreg2 in the Stata statistical software package. Our 
parameter estimates are consistent given the assumptions of our model. 
Our standard error estimates are robust to heteroskedasticity and 
autocorrelation. 

* We estimated the model using the logarithm of price as the dependent 
variable. Note that because we have time dummies, we do not need to 
control for variables that vary over time but not cities, such as the 
price of crude oil because these variables would be collinear with the 
time dummies. 

* Measures of market concentration, such as the HHI, have been shown to 
be endogenous, so we tested for endogeneity and used two-stage least 
squares when appropriate, using merger events and other measures of 
economic activity as instruments.[Footnote 32] It is also possible that 
the merger events themselves were endogenous, but in our work, we 
treated them as exogenous or predetermined, primarily because we had 
insufficient data to provide instruments for the seven separate 
mergers. 

* We estimated the model with inventory-sales ratio and the capacity 
utilization rate as endogenous. In general, our results for the effect 
of market concentration and mergers were not substantively affected by 
whether these were treated as exogenous or endogenous. 

* Some of our results for the inventory-sales ratio showed a 
significant positive relationship with respect to price, an outcome 
that was contrary to our expectations. It is possible that either the 
inventory-sales ratio is misspecified in our model or there may be a 
complex dynamic relationship that describes how inventories affect 
prices and vice versa, conditions that could negate the direction of 
this relationship. 

* We estimated separate models for unbranded prices and branded prices. 

Results: 

Table 5: Regression Results for Mergers' Effect on Unbranded Gasoline 
Prices--Dependent Variable Is the Logarithm of Unbranded Gasoline 
Price: 

Variable name: Inventory-sales ratio; 
Coefficient: 0.13805; 
Standard error: 0.07596; 
Significance: significant at the 10 percent level. 

Variable category: Capacity utilization rate; 
Coefficient: -0.00054; 
Standard error: 0.00114; 
Significance: [Empty]. 

Variable name: Log of price lagged 1 period; 
Coefficient: 0.46971; 
Standard error: 0.03118; 
Significance: significant at the 1 percent level. 

Variable category: Merger dummies; 
Variable name: Chevron-Texaco merger dummy; 
Coefficient: -0.00906; 
Standard error: 0.00862; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Phillips-Conoco merger dummy; 
Coefficient: -0.00767; 
Standard error: 0.00403; 
Significance: significant at the 10 percent level. 

Variable category: Merger dummies; 
Variable name: Phillips-Tosco merger dummy; 
Coefficient: 0.00311; 
Standard error: 0.00646; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Premcor-Williams merger dummy; 
Coefficient: 0.00648; 
Standard error: 0.00747; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Shell-Texaco merger dummy; 
Coefficient: 0.00483; 
Standard error: 0.00465; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Valero-Premcor merger dummy; 
Coefficient: 0.00752; 
Standard error: 0.00244; 
Significance: significant at the 1 percent level. 

Variable category: Merger dummies; 
Variable name: Valero-UDS merger dummy; 
Coefficient: 0.00296; 
Standard error: 0.00384; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Chevron-Texaco "mid" dummy; 
Coefficient: -0.03155; 
Standard error: 0.01420; 
Significance: significant at the 5 percent level. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Phillips-Conoco "mid" dummy; 
Coefficient: -0.01902; 
Standard error: 0.00543; 
Significance: significant at the 1 percent level. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Phillips-Tosco "mid" dummy; 
Coefficient: -0.01355; 
Standard error: 0.01116; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Premcor-Williams "mid" dummy; 
Coefficient: 0.01574; 
Standard error: 0.01017; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Shell-Texaco "mid" dummy; 
Coefficient: 0.00276; 
Standard error: 0.01616; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Valero-Premcor "mid" dummy; 
Coefficient: -0.00554; 
Standard error: 0.00442; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Valero-UDS "mid" dummy; 
Coefficient: 0.00089; 
Standard error: 0.00825; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CBG fuel dummy; 
Coefficient: 0.00104; 
Standard error: 0.01516; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CBG with 10% ethanol fuel dummy; 
Coefficient: 0.00043; 
Standard error: 0.00810; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol fuel dummy; 
Coefficient: -0.01857; 
Standard error: 0.02322; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE fuel dummy; 
Coefficient: -0.01386; 
Standard error: 0.02530; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 7.0 RVP fuel dummy; 
Coefficient: -0.01623; 
Standard error: 0.02853; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 8.2 RVP fuel dummy; 
Coefficient: 0.06125; 
Standard error: 0.03080; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with no additive fuel dummy; 
Coefficient: -0.02359; 
Standard error: 0.02343; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.0 RVP fuel dummy; 
Coefficient: 0.00642; 
Standard error: 0.01385; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.2 RVP fuel dummy; 
Coefficient: 0.00057; 
Standard error: 0.01363; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.8 RVP fuel dummy; 
Coefficient: -0.00394; 
Standard error: 0.00831; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 8.2 RVP fuel dummy; 
Coefficient: -0.02133; 
Standard error: 0.01345; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 9.0 RVP fuel dummy; 
Coefficient: 0.00000; 
Standard error: 0.00651; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 5.7% ethanol fuel dummy; 
Coefficient: 
-0.00389; 
Standard error: 0.02424; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol fuel dummy; 
Coefficient: 
-0.00367; 
Standard error: 0.01138; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.02101; 
Standard error: 0.01357; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol fuel dummy; 
Coefficient: 0.00121; 
Standard error: 0.00886; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.0 fuel dummy; 
Coefficient: 0.01349; 
Standard error: 0.01523; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.8 fuel dummy; 
Coefficient: 0.00709; 
Standard error: 0.01108; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.00250; 
Standard error: 0.01175; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur fuel dummy; 
Coefficient: 0.02275; 
Standard error: 0.00584; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 7.0 RVP fuel dummy; 
Coefficient: 0.01268; 
Standard error: 0.01446; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol fuel dummy; 
Coefficient: 0.03312; 
Standard error: 0.01146; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol & 8.2 RVP fuel dummy; 
Coefficient: 0.05801; 
Standard error: 0.01609; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE fuel dummy; 
Coefficient: 0.03958; 
Standard error: 0.01015; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.0 RVP fuel dummy; 
Coefficient: 0.03050; 
Standard error: 0.01445; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.2 RVP fuel dummy; 
Coefficient: 0.03062; 
Standard error: 0.01317; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 8.2 RVP fuel dummy; 
Coefficient: 0.03315; 
Standard error: 0.01539; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 5.7% ethanol fuel dummy; 
Coefficient: -0.00795; 
Standard error: 0.01252; 
Significance: [Empty]. 

R-squared: 0.99; 
J-statistic P value: 0.77; 
Observations: 8112; 
Number of cities: 78. 

Source: GAO analysis of various data sources (see table 4 for a list of 
data sources). 

Abbreviations used to describe various gasoline types are as follows: 
CBG-Cleaner Burning Gasoline; CARB-California Air Resources Board; MTBE-
Methyl tertiary-butyl ether; RFG-reformulated gasoline; RVP-Reid vapor 
pressure. 

Note: the standard error estimates are robust to heteroskedasticity and 
autocorrelation. The regression model included fixed effects for the 
cities and time dummies for each month of data. The model is estimated 
using two-stage least squares, treating the inventory-sales ratio and 
the capacity utilization rate as endogenous. 

[End of table] 

Table 6: Regression Results for Mergers' Effect on Branded Gasoline 
Prices--Dependent Variable Is the Logarithm of Branded Gasoline Price: 

Variable name: Inventory-sales ratio; 
Coefficient: 0.08322; 
Standard error: 0.06111; 
Significance: [Empty]. 

Variable name: Capacity utilization rate; 
Coefficient: 0.00127; 
Standard error: 0.00079; 
Significance: [Empty]. 

Variable name: Log of price lagged 1 period; 
Coefficient: 0.53191; 
Standard error: 0.02778; 
Significance: significant at the 1 percent level. 

Variable category: Merger dummies; 
Variable name: Chevron-Texaco merger dummy; 
Coefficient: 0.00509; 
Standard error: 0.00637; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Phillips-Conoco merger dummy; 
Coefficient: -0.01098; 
Standard error: 0.00397; 
Significance: significant at the 1 percent level. 

Variable category: Merger dummies; 
Variable name: Phillips-Tosco merger dummy; 
Coefficient: 0.00372; 
Standard error: 0.00669; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Premcor-Williams merger dummy; 
Coefficient: 0.00898; 
Standard error: 0.00804; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Shell-Texaco merger dummy; 
Coefficient: 0.00309; 
Standard error: 0.00406; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Valero-Premcor merger dummy; 
Coefficient: 0.00424; 
Standard error: 0.00269; 
Significance: [Empty]. 

Variable category: Merger dummies; 
Variable name: Valero-UDS merger dummy; 
Coefficient: 0.00705; 
Standard error: 0.00327; 
Significance: significant at the 5 percent level. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Chevron-Texaco "mid" dummy; 
Coefficient: -0.01474; 
Standard error: 0.00968; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Phillips-Conoco "mid" dummy; 
Coefficient: -0.01494; 
Standard error: 0.00439; 
Significance: significant at the 1 percent level. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Phillips-Tosco "mid" dummy; 
Coefficient: -0.01190; 
Standard error: 0.00713; 
Significance: significant at the 10 percent level. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Premcor-Williams "mid" dummy; 
Coefficient: 0.01418; 
Standard error: 0.00946; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Shell-Texaco "mid" dummy; 
Coefficient: 0.01059; 
Standard error: 0.01404; 
Significance: [Empty]. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Valero-Premcor "mid" dummy; 
Coefficient: -0.01126; 
Standard error: 0.00391; 
Significance: significant at the 1 percent level. 

Variable category: Dummies for period between announced and effective 
merger dates; 
Variable name: Valero-UDS "mid" dummy; 
Coefficient: -0.00225; 
Standard error: 0.00599; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CBG fuel dummy; 
Coefficient: -0.00951; 
Standard error: 0.01344; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CBG with 10% ethanol fuel dummy; 
Coefficient: -0.02969; 
Standard error: 0.01326; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol fuel dummy; 
Coefficient: -0.06737; 
Standard error: 0.02192; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol 7.0 RVP fuel dummy; 
Coefficient: -0.05816; 
Standard error: 0.02734; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE fuel dummy; 
Coefficient: -0.03905; 
Standard error: 0.02751; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 7.0 RVP fuel dummy; 
Coefficient: -0.04107; 
Standard error: 0.02400; 
Significance: significant at the 10 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 8.2 RVP fuel dummy; 
Coefficient: -0.00534; 
Standard error: 0.01776; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with no additive fuel dummy; 
Coefficient: -0.04876; 
Standard error: 0.02465; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.0 RVP fuel dummy; 
Coefficient: 0.00547; 
Standard error: 0.01046; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.2 RVP fuel dummy; 
Coefficient: 0.01217; 
Standard error: 0.01081; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.8 RVP fuel dummy; 
Coefficient: -0.00309; 
Standard error: 0.00592; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 8.2 RVP fuel dummy; 
Coefficient: 0.00877; 
Standard error: 0.01011; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 9.0 RVP fuel dummy; 
Coefficient: 0.00156; 
Standard error: 0.00549; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 5.7% ethanol fuel dummy; 
Coefficient: 0.01944; 
Standard error: 0.02297; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol fuel dummy; 
Coefficient: -0.00723; 
Standard error: 0.00855; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.01901; 
Standard error: 0.01180; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol fuel dummy; 
Coefficient: 0.00362; 
Standard error: 0.00804; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.0 fuel dummy; 
Coefficient: 0.01143; 
Standard error: 0.01666; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.8 fuel dummy; 
Coefficient: 0.00462; 
Standard error: 0.01162; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.01221; 
Standard error: 0.00907; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur fuel dummy; 
Coefficient: 0.02723; 
Standard error: 0.00516; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 7.0 RVP fuel dummy; 
Coefficient: 0.01702; 
Standard error: 0.01180; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 9.0 RVP fuel dummy; 
Coefficient: 0.03884; 
Standard error: 0.01154; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol fuel dummy; 
Coefficient: 0.05681; 
Standard error: 0.01580; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol & 8.2 RVP fuel dummy; 
Coefficient: 0.08463; 
Standard error: 0.01839; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE fuel dummy; 
Coefficient: 0.05851; 
Standard error: 0.01404; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.0 RVP fuel dummy; 
Coefficient: 0.03412; 
Standard error: 0.01602; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.2 RVP fuel dummy; 
Coefficient: 0.06048; 
Standard error: 0.01625; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 8.2 RVP fuel dummy; 
Coefficient: 0.06052; 
Standard error: 0.01712; 
Significance: significant at the 1 percent level. 

R-squared: 0.99; 
J-statistic P value: 0.10; 
Observations: 8528; 
Number of cities: 82. 

Source: GAO analysis of various data sources (see table 4 for a list of 
data sources). 

Abbreviations used to describe various gasoline types are as follows: 
CBG-Cleaner Burning Gasoline; CARB-California Air Resources Board; MTBE-
Methyl tertiary-butyl ether; RFG-reformulated gasoline; RVP-Reid vapor 
pressure. 

Note: the standard error estimates are robust to heteroskedasticity and 
autocorrelation. The regression model included fixed effects for the 
cities and time dummies for each month of data. The model is estimated 
using two-stage least squares, treating the inventory-sales ratio and 
the capacity utilization rate as endogenous. 

[End of table] 

Table 7: Regression Results for Effect of Spot Market HHI on Unbranded 
Gasoline Prices--Dependent Variable Is the Logarithm of Unbranded 
Gasoline Price: 

Variable name: Inventory-sales ratio; 
Coefficient: 0.28754; 
Standard error: 0.12988; 
Significance: significant at the 5 percent level. 

Variable name: Capacity utilization rate; 
Coefficient: -0.00050; 
Standard error: 0.00158; 
Significance: [Empty]. 

Variable name: Log of price lagged 1 period; 
Coefficient: 0.41312; 
Standard error: 0.04668; 
Significance: significant at the 1 percent level. 

Variable name: Spot market HHI; 
Coefficient: 1.08939; 
Standard error: 0.38344; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CBG fuel dummy; 
Coefficient: 0.03871; 
Standard error: 0.03917; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CBG with 10% ethanol fuel dummy; 
Coefficient: 0.01963; 
Standard error: 0.02343; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol fuel dummy; 
Coefficient: -0.01767; 
Standard error: 0.05553; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE fuel dummy; 
Coefficient: -0.04559; 
Standard error: 0.05912; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 7.0 RVP fuel dummy; 
Coefficient: -0.03326; 
Standard error: 0.06649; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 8.2 RVP fuel dummy; 
Coefficient: 0.09736; 
Standard error: 0.07046; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with no additive fuel dummy; 
Coefficient: -0.05538; 
Standard error: 0.05364; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.0 RVP fuel dummy; 
Coefficient: -0.01360; 
Standard error: 0.02037; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.2 RVP fuel dummy; 
Coefficient: -0.03513; 
Standard error: 0.02531; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.8 RVP fuel dummy; 
Coefficient: -0.01720; 
Standard error: 0.01315; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 8.2 RVP fuel dummy; 
Coefficient: -0.05693; 
Standard error: 0.02413; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 9.0 RVP fuel dummy; 
Coefficient: -0.01234; 
Standard error: 0.01116; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 5.7% ethanol fuel dummy; 
Coefficient: -0.05425; 
Standard error: 0.04087; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol fuel dummy; 
Coefficient: -0.01808; 
Standard error: 0.01680; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.00361; 
Standard error: 0.02321; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol fuel dummy; 
Coefficient: -0.01459; 
Standard error: 0.01438; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.0 fuel dummy; 
Coefficient: -0.01429; 
Standard error: 0.02394; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.8 fuel dummy; 
Coefficient: -0.01371; 
Standard error: 0.01834; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 9.0 fuel dummy; 
Coefficient: -0.01909; 
Standard error: 0.01976; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur fuel dummy; 
Coefficient: 0.02051; 
Standard error: 0.00835; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 7.0 RVP fuel dummy; 
Coefficient: -0.01002; 
Standard error: 0.02154; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol fuel dummy; 
Coefficient: 0.01726; 
Standard error: 0.03048; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol & 8.2 RVP fuel dummy; 
Coefficient: 0.03990; 
Standard error: 0.03678; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE fuel dummy; 
Coefficient: 0.04091; 
Standard error: 0.02955; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.0 RVP fuel dummy; 
Coefficient: 0.02401; 
Standard error: 0.04173; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.2 RVP fuel dummy; 
Coefficient: 0.01629; 
Standard error: 0.03185; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 8.2 RVP fuel dummy; 
Coefficient: 0.02247; 
Standard error: 0.03317; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 5.7% ethanol fuel dummy; 
Coefficient: -0.03001; 
Standard error: 0.03247; 
Significance: [Empty]. 

R-squared: 0.98; 
J-statistic P value: 0.93; 
Observations: 8112; 
Number of cities: 78. 

Source: GAO analysis of various data sources (see table 4 for a list of 
data sources). 

Abbreviations used to describe various gasoline types are as follows: 
CBG-Cleaner Burning Gasoline; CARB-California Air Resources Board; MTBE-
Methyl tertiary-butyl ether; RFG-reformulated gasoline; RVP-Reid vapor 
pressure. 

Note: the standard error estimates are robust to heteroskedasticity and 
autocorrelation. The regression model included fixed effects for cities 
and time dummies for each month of data. The model is estimated using 
two-stage least squares, treating the inventory-sales ratio, the 
capacity utilization rate, and the spot market HHI as endogenous. 

[End of table] 

Table 8: Regression Results for Effect of Spot Market HHI on Branded 
Gasoline Prices--Dependent Variable Is the Logarithm of Branded 
Gasoline Price: 

Variable name: Inventory-sales ratio; 
Coefficient: 0.22304; 
Standard error: 0.08163; 
Significance: significant at the 1 percent level. 

Variable name: Capacity utilization rate; 
Coefficient: 0.00137; 
Standard error: 0.00098; 
Significance: [Empty]. 

Variable name: Log of price lagged 1 period; 
Coefficient: 0.47259; 
Standard error: 0.03589; 
Significance: significant at the 1 percent level. 

Variable name: Spot market HHI; 
Coefficient: 0.67462; 
Standard error: 0.35754; 
Significance: significant at the 10 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CBG fuel dummy; 
Coefficient: 0.00546; 
Standard error: 0.01316; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CBG with 10% ethanol fuel dummy; 
Coefficient: -0.03869; 
Standard error: 0.01656; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol fuel dummy; 
Coefficient: -0.10739; 
Standard error: 0.02891; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol 7.0 RVP fuel dummy; 
Coefficient: -0.12379; 
Standard error: 0.04177; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE fuel dummy; 
Coefficient: -0.10515; 
Standard error: 0.03823; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 7.0 RVP fuel dummy; 
Coefficient: -0.08938; 
Standard error: 0.03365; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 8.2 RVP fuel dummy; 
Coefficient: -0.00762; 
Standard error: 0.01859; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with no additive fuel dummy; 
Coefficient: -0.09747; 
Standard error: 0.03220; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.0 RVP fuel dummy; 
Coefficient: -0.01341; 
Standard error: 0.01455; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.2 RVP fuel dummy; 
Coefficient: -0.01588; 
Standard error: 0.01524; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.8 RVP fuel dummy; 
Coefficient: -0.01426; 
Standard error: 0.00863; 
Significance: significant at the 10 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 8.2 RVP fuel dummy; 
Coefficient: -0.01686; 
Standard error: 0.01398; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 9.0 RVP fuel dummy; 
Coefficient: -0.01031; 
Standard error: 0.00800; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 5.7% ethanol fuel dummy; 
Coefficient: -0.03183; 
Standard error: 0.02743; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol fuel dummy; 
Coefficient: -0.01807; 
Standard error: 0.01396; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.00432; 
Standard error: 0.01580; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol fuel dummy; 
Coefficient: -.01362; 
Standard error: 0.01032; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.0 fuel dummy; 
Coefficient: -0.02321; 
Standard error: 0.02243; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.8 fuel dummy; 
Coefficient: -0.02101; 
Standard error: 0.01558; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 9.0 fuel dummy; 
Coefficient: -0.00775; 
Standard error: 0.01230; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur fuel dummy; 
Coefficient: 0.02327; 
Standard error: 0.00506; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 7.0 RVP fuel dummy; 
Coefficient: -0.00468; 
Standard error: 0.01276; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 9.0 RVP fuel dummy; 
Coefficient: 0.01447; 
Standard error: 0.01231; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol fuel dummy; 
Coefficient: 0.03085; 
Standard error: 0.01638; 
Significance: significant at the 10 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol & 8.2 RVP fuel dummy; 
Coefficient: 0.05823; 
Standard error: 0.02164; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE fuel dummy; 
Coefficient: 0.04701; 
Standard error: 0.01341; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.0 RVP fuel dummy; 
Coefficient: 0.01448; 
Standard error: 0.01472; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.2 RVP fuel dummy; 
Coefficient: 0.03414; 
Standard error: 0.01730; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 8.2 RVP fuel dummy; 
Coefficient: 0.04025; 
Standard error: 0.01824; 
Significance: significant at the 5 percent level. 

R-squared: 0.99; 
J-statistic P value: 0.37; 
Observations: 8112; 
Number of cities: 78. 

Source: GAO analysis of various data sources (see table 4 for a list of 
data sources). 

Abbreviations used to describe various gasoline types are as follows: 
CBG-Cleaner Burning Gasoline; CARB-California Air Resources Board; MTBE-
Methyl tertiary-butyl ether; RFG-reformulated gasoline; RVP-Reid vapor 
pressure. 

Note: the standard error estimates are robust to heteroskedasticity and 
autocorrelation. The regression model included fixed effects for cities 
and time dummies for each month of data. The model is estimated using 
two-stage least squares, treating the inventory-sales ratio, the 
capacity utilization rate, and the spot market HHI as endogenous. 

[End of table] 

Table 9: Regression Results for Effect of the Number of Sellers at the 
City Terminal on Unbranded Gasoline Prices--Dependent Variable Is the 
Logarithm of Unbranded Gasoline Price: 

Variable name: Inventory-sales ratio; 
Coefficient: 0.15181; 
Standard error: 0.08918; 
Significance: significant at the 10 percent level. 

Variable name: Capacity utilization rate; 
Coefficient: -0.00100; 
Standard error: 0.00118; 
Significance: [Empty]. 

Variable name: Log of price lagged 1 period; 
Coefficient: 0.43843; 
Standard error: 0.03796; 
Significance: significant at the 1 percent level. 

Variable name: Number of sellers at the city terminal; 
Coefficient: -0.01165; 
Standard error: 0.00340; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CBG fuel dummy; 
Coefficient: -0.03264; 
Standard error: 0.01827; 
Significance: significant at the 10 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CBG with 10% ethanol fuel dummy; 
Coefficient: -0.03719; 
Standard error: 0.01386; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol fuel dummy; 
Coefficient: -0.01623; 
Standard error: 0.02612; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE fuel dummy; 
Coefficient: -0.03248; 
Standard error: 0.03018; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 7.0 RVP fuel dummy; 
Coefficient: -0.04034; 
Standard error: 0.03383; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 8.2 RVP fuel dummy; 
Coefficient: 0.04463; 
Standard error: 0.03589; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with no additive fuel dummy; 
Coefficient: -0.02932; 
Standard error: 0.02699; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.0 RVP fuel dummy; 
Coefficient: 0.00715; 
Standard error: 0.01527; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.2 RVP fuel dummy; 
Coefficient: -0.03138; 
Standard error: 0.02314; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.8 RVP fuel dummy; 
Coefficient: -0.00442; 
Standard error: 0.00929; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 8.2 RVP fuel dummy; 
Coefficient: -0.01883; 
Standard error: 0.01782; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 9.0 RVP fuel dummy; 
Coefficient: -0.00072; 
Standard error: 0.00792; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 5.7% ethanol fuel dummy; 
Coefficient: -0.00177; 
Standard error: 0.02786; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol fuel dummy; 
Coefficient: -0.00148; 
Standard error: 0.01368; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.01260; 
Standard error: 0.01689; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol fuel dummy; 
Coefficient: 0.00155; 
Standard error: 0.01081;
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.0 fuel dummy; 
Coefficient: 0.01456; 
Standard error: 0.01590; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.8 fuel dummy; 
Coefficient: 0.00020; 
Standard error: 0.01415; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.00641; 
Standard error: 0.01412; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur fuel dummy; 
Coefficient: 0.00574; 
Standard error: 0.01174; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 7.0 RVP fuel dummy; 
Coefficient: -0.00515; 
Standard error: 0.01756; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol fuel dummy; 
Coefficient: 0.00387; 
Standard error: 0.01598; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol & 8.2 RVP fuel dummy; 
Coefficient: 0.04506; 
Standard error: 0.02021; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE fuel dummy; 
Coefficient: 0.01437; 
Standard error: 0.01251; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.0 RVP fuel dummy; 
Coefficient: -0.01360; 
Standard error: 0.01697; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.2 RVP fuel dummy; 
Coefficient: 0.00870; 
Standard error: 0.01573; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 8.2 RVP fuel dummy; 
Coefficient: -0.00514; 
Standard error: 0.02362; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 5.7% ethanol fuel dummy; 
Coefficient: -0.02068; 
Standard error: 0.01752; 
Significance: [Empty]. 

R-squared: 0.99; 
J-statistic P value: 0.82; 
Observations: 8112; 
Number of cities: 78. 

Source: GAO analysis of various data sources (see table 4 for a list of 
data sources). 

Abbreviations used to describe various gasoline types are as follows: 
CBG-Cleaner Burning Gasoline; CARB-California Air Resources Board; MTBE-
Methyl tertiary-butyl ether; RFG-reformulated gasoline; RVP-Reid vapor 
pressure. 

Note: the standard error estimates are robust to heteroskedasticity and 
autocorrelation. The regression model included fixed effects for cities 
and time dummies for each month of data. The model is estimated using 
two-stage least squares, treating the inventory-sales ratio, the 
capacity utilization rate, and the number of sellers at the city 
terminal as endogenous. 

[End of table] 

Table 10: Regression Results for Effect of the Number of Sellers at the 
City Terminal on Branded Gasoline Prices--Dependent Variable is the 
Logarithm of Branded Gasoline Price: 

Variable name: 
Inventory-sales ratio; 
Coefficient: 0.08564; 
Standard error: 0.06035; 
Significance: [Empty]. 

Variable name: 
Capacity utilization rate; 
Coefficient: 0.00086; 
Standard error: 0.00083; 
Significance: [Empty]. 

Variable name: Log of price lagged 1 period; 
Coefficient: 0.51420; 
Standard error: 0.02868; 
Significance: significant at the 1 percent level. 

Variable name: Number of sellers at the city terminal; 
Coefficient: -0.00869; 
Standard error: 0.00240; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CBG fuel dummy; 
Coefficient: -0.03247; 
Standard error: 0.01646; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CBG with 10% ethanol fuel dummy; 
Coefficient: -0.05299; 
Standard error: 0.01589; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol fuel dummy; 
Coefficient: -0.06950; 
Standard error: 0.02312; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with 5.7% ethanol 7.0 RVP fuel dummy; 
Coefficient: -0.07087; 
Standard error: 0.03008; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE fuel dummy; 
Coefficient: -0.05644; 
Standard error: 0.03010; 
Significance: significant at the 10 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 7.0 RVP fuel dummy; 
Coefficient: -0.06272; 
Standard error: 0.02727; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with MTBE 8.2 RVP fuel dummy; 
Coefficient: -0.02308; 
Standard error: 0.01900; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: CARB with no additive fuel dummy; 
Coefficient: -0.05001; 
Standard error: 0.02466; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.0 RVP fuel dummy; 
Coefficient: 0.00439; 
Standard error: 0.01015; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.2 RVP fuel dummy; 
Coefficient: -0.00966; 
Standard error: 0.01553; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.8 RVP fuel dummy; 
Coefficient: -0.00378; 
Standard error: 0.00579; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 8.2 RVP fuel dummy; 
Coefficient: 0.01249; 
Standard error: 0.01174; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 9.0 RVP fuel dummy; 
Coefficient: 0.00134; 
Standard error: 0.00578; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 5.7% ethanol fuel dummy; 
Coefficient: 0.02627; 
Standard error: 0.02227; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol fuel dummy; 
Coefficient: -0.00632; 
Standard error: 0.00913; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 7.7% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.01576; 
Standard error: 0.01102; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol fuel dummy; 
Coefficient: 0.00211; 
Standard error: 0.00819; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.0 fuel dummy; 
Coefficient: 0.01572; 
Standard error: 0.01698; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 7.8 fuel dummy; 
Coefficient: -0.00135; 
Standard error: 0.01164; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Conventional with 10% ethanol & RVP 9.0 fuel dummy; 
Coefficient: 0.01250; 
Standard error: 0.00928; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur fuel dummy; 
Coefficient: 0.01225; 
Standard error: 0.00825; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 7.0 RVP fuel dummy; 
Coefficient: 0.00267; 
Standard error: 0.01151; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: Low sulfur 9.0 RVP fuel dummy; 
Coefficient: 0.01309; 
Standard error: 0.01183; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol fuel dummy; 
Coefficient: 0.03960; 
Standard error: 0.01807; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with 10% ethanol & 8.2 RVP fuel dummy; 
Coefficient: 0.08056; 
Standard error: 0.02043; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE fuel dummy; 
Coefficient: 0.04405; 
Standard error: 0.01613; 
Significance: significant at the 1 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.0 RVP fuel dummy; 
Coefficient: -0.00111; 
Standard error: 0.01658; 
Significance: [Empty]. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 7.2 RVP fuel dummy; 
Coefficient: 0.04595; 
Standard error: 0.01796; 
Significance: significant at the 5 percent level. 

Variable category: Gasoline specification dummies; 
Variable name: RFG with MTBE & 8.2 RVP fuel dummy; 
Coefficient: 0.03782; 
Standard error: 0.02071; 
Significance: significant at the 10 percent level. 

R-squared: 0.99; 
J-statistic P value: 0.18; 
Observations: 8528; 
Number of cities: 82. 

Source: GAO analysis of various data sources (see table 4 for a list of 
data sources). 

Abbreviations used to describe various gasoline types are as follows: 
CBG-Cleaner Burning Gasoline; CARB-California Air Resources Board; MTBE-
Methyl tertiary-butyl ether; RFG-reformulated gasoline; RVP-Reid vapor 
pressure. 

Note: the standard error estimates are robust to heteroskedasticity and 
autocorrelation. The regression model included fixed effects for cities 
and time dummies for each month of data. The model is estimated using 
two-stage least squares, treating the inventory-sales ratio, the 
capacity utilization rate, and the number of sellers at the city 
terminal as endogenous. 

[End of table] 

* We found that some mergers correspond with price effects, but these 
effects vary in direction and significance. 

* We tested for the endogeneity of our measures of market 
concentration: the spot market HHI and the number of sellers. With the 
exception of the spot market HHI in the branded price model, in both 
our unbranded price and branded price models our C-statistic test 
rejected the null hypothesis of exogeneity of our measures of market 
concentration. We treated these variables as endogenous in all our 
models, but we also estimated our model treating these variables as 
exogenous so we could compare the two sets of results. 

* We tested for whether the inventory-sales ratio and the capacity 
utilization rate were endogenous. We used a C-statistic to test for the 
joint exogeneity of these variables. In some cases, the null hypothesis 
of exogeneity was accepted and in other cases not. In order to be 
conservative in the sense of presenting estimates that are consistent, 
we modeled these variables as endogenous, although we recognize that 
this may not be the statistically efficient estimator in some cases. 

* We used Hansen's J-statistic to test for over identification of our 
instruments: namely, that they should be correlated with the regressors 
but uncorrelated with the regression errors. In every case, the J- 
statistic accepted the null hypothesis that our instruments were valid. 

* In general, the results for both measures of market concentration-- 
the number of sellers in the city and the HHI for the spot market-- 
showed a significant correspondence between higher prices and a less 
competitive market environment. 

* We used the model's results to calculate the dollar value impact on 
gasoline prices of the significant merger effects and changes in market 
concentration. 

* In many cases, our results showed the effects of gasoline 
specification dummies to be either not statistically significant or 
positive, a result we would expect given that our base-case is regular 
clear gasoline. In some of our results, the coefficient was negative, 
in particular for the CARB and CBG gasoline in the branded regressions. 
CARB is generally sold only in California, and it is possible that in 
some of our regressions, the California cities' fixed-effects are 
picking up the effect of what we would expect to be higher-priced CARB 
fuel. The presence of CBG in our data was also limited to one or two 
cities, and a similar issue may have affected our results for this 
gasoline specification. 

Limitations of Our Econometric Model and Data: 

* Our gasoline data were selected so as to generally reflect the type 
of gasoline that would be sold in a city, given the local fuel 
regulations. In most cases we were able to assign prices accordingly, 
but in some cases other types of fuel were used in the data. In our 
regression models, we control for whatever fuel type we did use. 

* We used monthly data for prices and most of our control variables. 
State-level personal income data were available only quarterly and were 
applied to the appropriate months for that quarter. 

* The inventory-sales ratio and capacity utilization rate were at the 
PADD level, so we assigned the data observation according to which PADD 
the city was located in.[Footnote 33] Similarly, we used state-level 
data for personal income growth, employment growth, and the 
unemployment rate, and we assigned the data observations according to 
the state in which the city was located. 

* Our analysis was performed at the city level, but some of our data 
were available only at more aggregated geographic levels. The capacity 
utilization rate and the inventory-sales ratio were available at the 
PADD level only. Employment growth, personal income growth rate, and 
the unemployment rate were available at the state level only. One of 
our measures of market concentration was at the spot market level. It 
is possible that in some cases these measures are too highly aggregated 
and these control variables were less precise than would be ideal. 

* We used merger events as instruments for our market concentration 
measures, which, in general, were found to be endogenous.[Footnote 34] 
It is possible that the merger events themselves are endogenous, but we 
have no further data that we could have used to instrument the merger 
variables. 

* We also estimated our model treating the concentration measures, the 
inventory-sales ratio, and the capacity utilization rate as exogenous. 
In these results, we found that the impact on prices of our 
concentration measures was statistically significant but smaller. For 
example, in the case of the spot market HHI, the price effects were 
about half the size in the case of the unbranded regressions, and for 
the number of city sellers, about one-sixth of the size in the 
unbranded regressions. While our tests for exogeneity of the 
concentration measures generally rejected their being exogenous, we 
wanted to display a range of possible results. 

* We are aware of the limitations of using a fixed effects model to 
study events such as mergers and to use dummy variables for mergers in 
such a model.[Footnote 35] Further, we are aware that our model, or any 
model, is unlikely to account for all conceivable factors affecting 
prices. With this in mind, we used fixed effects for cities and time 
dummy variables for every time period. The former accounts for special 
(possibly unobservable) effects that are constant over time, affecting 
an individual city, and the latter for effects that are constant across 
cities but vary over time, such as national supply disruptions. 
Nevertheless, we are aware that these cannot account for every factor 
that, say, may affect a group of cities for a given period of time; for 
example, a localized supply disruption, except insofar as this is 
reflected in the level of inventories or capacity utilization rate in 
the PADD. 

* The concentration measures that we used are imperfect. On the one 
hand, we used the number of sellers at the city terminal, a measure of 
concentration at the city level that does not measure market share, 
only market participation. Our other measure, the spot market HHI, is 
broader geographically than is ideal, and it is measured at the 
refinery level. The latter means that we are approximating market 
shares of the sellers at the city with shares of refineries in the spot 
market region. 

* We used a number of methods to test our model but we recognize that 
our results should be viewed carefully. In particular, we are concerned 
that a difference in the effect of mergers may depend on whether we 
used the announced or the effective merger dates. In order to address 
this issue, our model of mergers included dummy variables for the 
period of time between the announced date and the effective date of the 
merger, as well as a dummy variable for the time following the 
effective date of each merger. 

* We understand that our methodology is not a substitute for an event 
study. However, our methods could be used in conjunction with such--in 
particular, as a broad means to address issues of whether an industry 
is overly concentrated, since we recognize that it is resource- 
intensive to conduct an event study for every merger. We are aware that 
a difference-in-differences model provides an alternative methodology 
but that method has its own limitations, in particular, the matching of 
cities for treatment and controls. 

* Our analysis did not account for all gasoline that is sold at 
wholesale terminals. Our gasoline wholesale price data captured about 
60 percent of gasoline sold in the United States, according to EIA 
analysis. The remaining gasoline is sold directly to retailers, or 
through other arrangements, and price data for these sales are not 
always available. These transactions likely also affect the general 
wholesale market for a particular city. 

* Our model focused on wholesale gasoline prices, so we are unable to 
determine the extent to which the price effects that we found would be 
passed on to the retail level. 

[End of section] 

Appendix II: Comments from the Federal Trade Commission: 

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix. 

The Chairman: 
Federal Trade Commission: 
Washington, D.C. 20580: 

June 3, 2009: 

Mr. Mark E. Gaffigan: 
Director, Natural Resources and Environment: 
United States Government Accountability Office: 
Washington, D.C. 20548: 

Mr. Thomas McCool: 
Director, Center for Economics, Applied Research and Methods: 
United States Government Accountability Office: 
Washington, D.C. 20548: 

Dear Messrs. Gaffigan and McCool: 

The Federal Trade Commission ("FTC" or "Commission") appreciates the 
opportunity to comment on the draft report on Energy Markets: Estimates 
of the Effects of Mergers and Market Concentration on Wholesale 
Gasoline Prices (GAO-09-659) ("Report") that the Government 
Accountability Office ("GAO") submitted to the Commission on May 18, 
2009. The Report discusses GAO's examination of (1) the effects on 
wholesale gasoline prices of a select set of past oil industry mergers, 
and (2) the effects of market concentration on wholesale gasoline 
prices. This comment addresses each of these examinations in turn.
Commission staff have been pleased to work with GAO staff during the 
present inquiry, providing information and comments on the petroleum 
industry, the Commission's merger enforcement activities, and GAO's 
econometric methodology. GAO's draft Report provides important 
information on mergers in the petroleum industry and on the 
Commission's role in reviewing those mergers.[Footnote 39] GAO 
recommends that the FTC undertake more regular retrospective reviews of 
petroleum mergers and develop risk-based guidelines to determine when 
to conduct such retrospectives. Citing a recent National Bureau of 
Economic Research working paper co-authored by two FTC economists, 
[Footnote 40] the Report observes that the Commission might 
appropriately focus its retrospective analyses on completed mergers 
with the greatest likelihood of anticompetitive effects.[Footnote 41] 

We support GAO's recommendation that the FTC continue its regular 
reviews of past petroleum industry mergers.[Footnote 42] We also agree 
that the Commission should focus those retrospective efforts on mergers 
that present the greatest likelihood of anticompetitive effects and, in 
that regard, should pay attention (although not exclusively) to markets 
that are concentrated. Further, we believe that the criteria that the 
Commission has used to select mergers for its previous retrospective 
studies satisfy GAO's recommendation to apply "riskbased criteria."
The Commission provides below some specific comments on GAO's merger 
and concentration analyses. 

The Report's Discussion of Past Mergers: 

GAO studied seven large petroleum mergers between 2000 and 2007 to 
determine how those transactions might have affected branded and 
unbranded wholesale gasoline prices. GAO concluded that one merger was 
associated with a price increase for branded gasoline of approximately 
one cent per gallon, while a second merger was associated with about a 
one-cent-per-gallon increase for unbranded gasoline. A third merger was 
found to be associated with similarly small decreases in the prices of 
both unbranded and branded gasoline. GAO found no statistically 
significant change in either branded or unbranded wholesale prices for 
the other four mergers. Taking these findings as a whole -and in view 
of the large swings in gasoline prices over the period that GAO 
studied - the GAO analysis suggests that recent large petroleum mergers 
have had at most a minor impact on gasoline prices. 

The Commission believes that GAO's merger analysis represents an 
interesting approach to identifying the possible effects of consummated 
mergers. Indeed, although it differs in some important respects - such 
as how controls are constructed - GAO's methodology is broadly similar 
to that used by FTC economists in their own merger retrospectives. As 
the FTC moves forward with new retrospectives, our efforts will be 
informed by GAO's econometric work and, in particular, will devote 
resources to a more complete evaluation of the strengths and 
limitations of GAO's methodology.[Footnote 43] 

The Report's Price-Concentration Analyses: 

GAO reports that it did not observe any trend toward increasing market 
concentration nationwide between 2000 and 2008, either in the number of 
sellers at wholesale gasoline terminals or in refinery capacity 
concentration measures for certain "spot market groups" delineated by 
GAO.[Footnote 44] Nonetheless, there was some significant variation in 
the number of sellers at certain wholesale terminals, as well as in the 
concentration of refiners supplying one spot market group (New York 
Harbor). Based on its analysis of these variations in the number of 
wholesale sellers and in refinery capacity concentration, GAO finds 
that higher wholesale prices are associated with higher concentration 
levels. GAO's results imply that even small concentration changes in 
relatively unconcentrated markets are associated with large price
effects. 

Inasmuch as market concentration is obviously relevant to merger 
enforcement,[Footnote 45] the Commission takes great interest in GAO's 
findings. Based on its experience in petroleum markets,[Footnote 46] 
however, the FTC finds the strength of GAO's price-concentration 
results - particularly at relatively low levels of concentration - to 
be surprising. Indeed, some results set forth in the Report appear 
inaccurate.[Footnote 47] More generally, a reliable estimate of 
economic relationships between price and concentration must be premised 
on, among other things, accurate measures of market concentration. It 
appears that GAO's analyses suffer from significant measurement errors 
in their concentration variables.[Footnote 48] For example, GAO finds 
that approximately 60 percent of the gasoline consumed on the East 
Coast comes from foreign countries. If that finding is correct, then 
concentration based on a purely domestic measure of "New York Harbor" 
refining capacity is highly unlikely to reflect the true level of 
market concentration. In turn, such measurement errors would cast doubt 
on the relationship that GAO's analysis suggests exists between price 
and concentration. 

Nonetheless, despite these and other possible shortcomings, which may 
render GAO's results unreliable for purposes of formulating antitrust 
policy, the Commission will carefully consider GAO's price-
concentration results and will direct its economists to evaluate 
further the usefulness of GAO's findings. 

Conclusion: 

The Commission appreciates the opportunity to comment on the Report. 
The Commission agrees with GAO on the need for regular merger 
retrospectives in the petroleum industry. We plan to continue our 
ongoing program with appropriately targeted retrospectives, and we will 
continue to use risk-based criteria to identify past mergers for 
review. The Commission will seriously consider GAO's findings and will 
direct its staff to evaluate more fully GAO's contributions as the 
Commission moves forward with its merger retrospectives and
merger enforcement programs. 

By direction of the Commission. 

Signed by: 

Jon Leibowitz: 

The following are GAO's comments on the Federal Trade Commission's 
letter dated June 3, 2009. 

GAO Comments: 

1. Measures of market concentration are inherently difficult to develop 
because information on relevant market boundaries and sales volumes by 
gasoline sellers is not readily available. Although we made no changes 
to the report based on the Chairman's comment, we wish to emphasize 
that to improve the robustness of our concentration analysis, we used 
two measures of market concentration--first, we used the number of 
sellers at wholesale terminals, and second, we calculated the market 
concentration of refineries in seven U.S. spot markets. We acknowledge 
the limitations of our spot market measure that the Chairman noted, 
especially in the case of the New York Harbor market, and stated these 
limitations in the draft report. However, as stated above, we did not 
rely solely on this one measure of market concentration, and we found a 
qualitatively similar and statistically significant effect when we 
estimated the impact of the number of sellers at wholesale gasoline 
terminals on prices. In addition, for both of these measures, we 
estimated the price effects under another set of statistical 
assumptions, and found and reported in the draft these similar, though 
smaller, price effects.[Footnote 36] Although our two measures of 
market concentration may not be appropriate for formulating antitrust 
policy, as the Chairman noted, our findings indicate that the effects 
of market concentration on prices may occur at lower levels of 
concentration than previously anticipated, and FTC's access to more 
detailed petroleum industry data might allow them to make a more 
precise estimate of these potential impacts. 

2. Although our draft concentration results were correct, our 
presentation showed that the median value of market concentration was 
the midpoint in the range of price effects, when in fact the price 
effects were not evenly spread around the median. We changed the tables 
and text in our discussion of the market concentration results to 
better reflect these price effects. 

[End of section] 

Appendix III: Summary Information on the Seven Mergers Reviewed in 
GAO's Econometric Model: 

Additional information on the specific mergers selected for review in 
GAO's analysis, including the rationale for the merger, statements or 
remedial actions identified by the FTC in addressing potential 
anticompetitive concerns, and other relevant context surrounding the 
merger, is outlined below. 

Chevron Corporation and Texaco: 

On October 16, 2000, Chevron Corporation and Texaco announced plans to 
merge, in a transaction ultimately valued at about $45 billion. Both 
firms were large, fully integrated firms, with operations in oil 
exploration, pipeline transportation, and refining and marketing of 
gasoline products, and were considered among the largest integrated oil 
firms in the world. Chevron's stated goal in pursuing the merger was to 
become the industry leader in total stockholder returns. Following the 
merger, the newly merged firm was projected to become the world's 
fourth largest firm in oil exploration and production. FTC's review of 
the merger identified a number of antitrust concerns, including 
coordinated threats in the refining and marketing sectors in a number 
of regions across the United States, as well as threats in the 
refining, pipeline, and marketing sectors, primarily across the West. 
As a result of these threats, FTC required the divestiture of a number 
of Texaco's downstream assets, most notably its share of a joint 
venture with Royal Dutch Shell Group in the refining sector, as well as 
its share of two major pipelines. See figure 3 for the cities in our 
analysis where we identified competitive overlaps between these firms 
before they merged. 

Figure 3: Cities Affected by Chevron/Texaco Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Chevron/Texaco merger (unbranded gasoline): 

Albuquerque, N.Mexico; 
Amarillo, Texas; 
Anchorage, Alaska; 
Atlanta, Georgia; 
Baltimore, Maryland; 
Baton Rouge, Louisiana; 
Beaumont, Texas; 
Bloomfield, New Mexico; 
Boise, Idaho; 
Corpus Christi, Texas; 
Dallas/Metro Texas; 
El Paso, Texas; 
Fairbanks, Alaska
Greensboro, North Carolina; 
Houston, Texas; 
Knoxville, Tennessee; 
Lake Charles, Louisiana; 
Las Vegas, Nevada; 
Los Angeles, California; 
Memphis, Tennessee; 
Miami, Florida; 
Mobile, Alabama; 
Nashville, Tennessee; 
New Orleans, Louisiana; 
Phoenix, Arizona; 
Pittsburgh, Pennsylvania; 
Portland, Oregon; 
Richmond, Virginia; 
Sacramento, California; 
Salt Lake City, Utah; 
San Diego, California; 
San Francisco, California; 
Seattle, Washington; 
Sparks/Reno, Nevada; 
Spokane, Washington; 
Tampa, Florida; 
Tucson, Arizona. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

Phillips Petroleum Corporation and Tosco Corporation: 

On February 4, 2001, Phillips Petroleum Corporation and Tosco 
Corporation announced plans to merge, in a transaction valued at $9.8 
billion dollars. Prior to the merger, Phillips was a large firm with 
refining and retail operations in the United States, and crude oil 
production operations worldwide, while Tosco operated in the downstream 
sector, with refining and marketing operations. In the transaction, 
Phillips gained eight U.S. refineries and 6,400 retail stations in 32 
states. According to IHS Herold information, Phillips' goal was to 
increase the profitability of its downstream operations and realize 
$250 million dollars in pretax cost savings. According to the Oil and 
Gas Journal and FTC, there was actually little overlap between the 
companies' refining and marketing systems, reducing the potential for 
competitive concerns. In fact, FTC indicated that the two merging 
companies substantially operated in different parts of the country, and 
the combined sales of the two firms would not exceed 10 percent of the 
oil-refining or gasoline-marketing sales across the country. In the few 
cities where the firms' gasoline-marketing businesses would overlap 
significantly, FTC indicated that the new firm would have a relatively 
low market share, making it unlikely that the new firm would pose a 
competitive threat to those markets. See figure 4 for the cities in our 
analysis where we identified competitive overlaps between these firms 
before they merged. 

Figure 4: Cities Affected by Phillips/Tosco Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Phillips/Tosco merger (unbranded gasoline): 

Atlanta, Georgia; 
Greensboro, North Carolina; 
Knoxville, Tennessee; 
Las Vegas, Nevada; 
Nashville, Tennessee; 
Phoenix, Arizona; 
Spartanburg, South Carolina; 
Tucson, Arizona. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

Valero Energy Corporation and Ultramar Diamond Shamrock Corporation: 

On May 7, 2001, Valero Energy Corporation announced plans to acquire 
Ultramar Diamond Shamrock Corporation (UDS) in a transaction valued at 
$6.4 billion. Prior to the merger, both firms were focused on 
downstream refining and retail operations, each owning seven 
refineries. In the transaction, Valero acquired seven UDS refineries, 
approximately 2,500 company-owned retail sites, and 2,500 branded 
gasoline stations in the United States and Canada. In a press release, 
Valero indicated that the merger would help create synergies and 
strategic benefits. However, before allowing the transaction, FTC 
required the divestiture of UDS's Golden Eagle refinery, located in 
Avon, California, so as to remedy alleged anticompetitive concerns in 
the gasoline-refining and supply markets in California. Without this 
divestiture, competition would have been reduced by giving Valero 
between a 40 and 45 percent market share of gasoline refining in 
Northern California, thus enhancing its ability to unilaterally raise 
prices or to coordinate with other California refiners to raise prices. 
FTC also indicated that the claimed efficiency gains of the merger 
would have been small compared with the magnitude of the potential harm 
to consumers in California had it not required the divestiture, which 
with even a 1 cent per gallon increase, would have cost consumers an 
extra $150 million per year. See figure 5 for the cities in our 
analysis where we identified competitive overlaps between these firms 
before they merged. 

Figure 5: Cities Affected by Valero/UDS Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Valero/UDS merger (unbranded gasoline): 

Albuquerque, New Mexico; 
Amarillo, Texas; 
Fort Smith, Arkansas; 
Baton Rouge, Louisiana; 
Beaumont, Texas; 
Columbia, Missouri; 
Corpus Christi, Texas; 
Dallas/Metro, Texas; 
Denver, Colorado; 
Des Moines, Iowa; 
El Paso, Texas; 
Houston, Texas; 
Kansas City, Kansas; 
Lake Charles, Louisiana; 
Las Vegas, Nevada; 
Minneapolis, Minnesota; 
Oklahoma City, Oklahoma; 
Omaha, Nebraska; 
Phoenix, Arizona; 
Sacramento, California; 
San Francisco, California; 
Sioux Falls, South Dakota; 
Springfield, Missouri; 
Tucson, Arizona; 
Tulsa, Oklahoma; 
Tyler, Texas. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

Royal Dutch Shell Group: 

On October 9, 2001, Texaco signed a memorandum of understanding with 
Royal Dutch Shell Group and Saudi Refining to sell Texaco's shares of 
the Equilon Enterprises and Motiva Enterprises joint ventures with 
Shell and Saudi Refining.[Footnote 37] The joint ventures included the 
refining, transportation, and marketing activities of Shell and Texaco 
in the United States, as operated by Equilon Enterprises in the West 
and Midwest and Motiva Enterprises in the East. The memorandum of 
understanding came about in response to FTC's review of the proposed 
merger between Chevron Corporation and Texaco and subsequent concern 
about unilateral and coordinated threats posed by the merger in the 
refining and marketing sectors. Specifically, FTC found that, absent 
any divestitures, the Chevron/Texaco merger would violate antitrust law 
by reducing competition in markets such as the following: gasoline 
marketing in the West; refining, marketing, and bulk supply of CARB 
(California Air Resources Board) gasoline in California; and the 
terminaling and bulk supply of gasoline in a number of states in the 
West and Southwest. In response, FTC issued a decision and order 
requiring Texaco to divest all of its interests in the joint ventures, 
which included gasoline marketing in numerous western states, including 
CARB gasoline, as well as refining and bulk supply of gasoline in 
California and the Pacific Northwest, among others. Under the terms of 
the memorandum of understanding, Shell received 100 percent interest in 
Equilon, including approximately 9,000 retail stations and four 
refineries, and Shell and Saudi Refining each 50 percent interest in 
Motiva, including approximately 13,000 stations and four refineries. 
FTC approved the divestiture as proposed in the memorandum of 
understanding, subsequently allowing for the approval of the Chevron/ 
Texaco merger. See figure 6 for the cities in our analysis where we 
identified competitive overlaps between these firms before they merged. 

Figure 6: Cities Affected by Shell/Texaco Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Shell/Texaco merger (unbranded gasoline): 

Albany, New York; 
Albuquerque, New Mexico; 
Amarillo, Texas; 
Atlanta, Georgia; 
Baltimore, Maryland; 
Baton Rouge, Louisiana; 
Beaumont, Texas; 
Bloomfield, New Mexico; 
Boise, Idaho; 
Dallas/Metro, Texas; 
El Paso, Texas; 
Fort Smith, Arkansas; 
Greensboro, North Carolina; 
Harrisburg, Pennsylvania; 
Houston, Texas; 
Knoxville, Tennessee; 
Las Vegas, Nevada; 
Memphis, Tennessee; 
Miami, Florida; 
Mobile, Alabama; 
Nashville, Tennessee; 
New Orleans, Louisiana; 
Phoenix, Arizona; 
Portland, Oregon; 
Richmond, Virginia; 
Sacramento, California; 
Salt Lake City, Utah; 
San Francisco, California; 
Seattle, Washington; 
Sparks/Reno, Nevada; 
Spartanburg, South Carolina; 
Spokane, Washington; 
St. Louis, Missouri; 
Tampa, Florida; 
Tucson, Arizona. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

Phillips Petroleum Corporation and Conoco: 

On November 19, 2001, Conoco and Phillips Petroleum Corporation 
announced plans to merge in a deal worth $31 billion. Prior to the 
merger, Philips was the third largest refiner in the United States, 
with approximately 10 percent of U.S. capacity, and Conoco was 
approximately the 11th largest refiner, with 3 percent of U.S. refining 
capacity. Following the merger, the new company became the third 
largest integrated energy company in the United States. Through the 
merger, Conoco and Phillips stated that they hoped to realize major 
synergies, more capital for upstream investment, and operational 
efficiencies in the downstream sector. Prior to the completion of the 
transaction, FTC analyzed the markets and assets involved in the merger 
and identified a few areas of competitive concern. More specifically, 
FTC determined that the new firm would have had sufficient market share 
to be able to coordinate or to act unilaterally to raise gasoline 
prices in eastern Colorado; northern Utah; Spokane, Washington; and 
Wichita, Kansas. As a result, FTC required divestitures in the areas of 
concern, namely the sale of Phillips's Woods Cross refinery near Salt 
Lake City and marketing assets in northern Utah, as well as the sale of 
Conoco's Denver-area refinery and eastern Colorado marketing assets. 
FTC also required the sale of Phillips's gasoline terminal in Spokane 
and required an agreement related to the use of Phillip's gasoline 
terminal in Wichita. See figure 7 for the cities in our analysis where 
we identified competitive overlaps between these firms before they 
merged. 

Figure 7: Cities Affected by Phillips/Conoco Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Phillips/Conoco merger (unbranded gasoline): 

Albuquerque, New Mexico; 
Amarillo, Texas; 
Atlanta, Georgia; 
Baton Rouge, Louisiana; 
Beaumont, Texas; 
Bloomfield, New Mexico; 
Boise, Idaho; 
Cheyenne, Wyoming; 
Corpus Christi, Texas; 
Dallas/Metro, Texas; 
Denver, Colorado; 
Des Moines, Iowa; 
El Dorado, Arkansas; 
El Paso, Texas; 
Evansville, Indiana; 
Fort Smith, Arkansas; 
Greensboro, North Carolina; 
Houston, Texas; 
Kansas City, Kansas; 
Knoxville, Tennessee; 
Lake Charles, Louisiana; 
Las Vegas, Nevada; 
Los Angeles, California; 
Madison, Wisconsin; 
Memphis, Tennessee; 
Minneapolis, Minnesota; 
Mobile, Alabama; 
Nashville, Tennessee; 
New Orleans, Louisiana; 
Oklahoma City, Oklahoma; 
Omaha, Nebraska; 
Phoenix, Arizona; 
Portland, Oregon; 
Sacramento, California; 
Salt Lake City, Utah; 
San Diego, California; 
San Francisco, California; 
Seattle, Washington; 
Sioux Falls, South Dakota; 
Sparks/Reno, Nevada; 
Spartanburg, South Carolina; 
Spokane, Washington; 
Springfield, Missouri; 
Superior, Wisconsin; 
Tucson, Arizona; 
Tulsa, Oklahoma; 
Tyler, Texas. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

Premcor and Williams Companies: 

On November 26, 2002, Premcor announced its intention to acquire a 
refinery located in Memphis, Tennessee owned by Williams Companies, in 
a transaction valued at $367 million. Prior to the merger, both 
companies were relatively small, with Premcor operating a few 
refineries around the country and Williams a refinery in Alaska, in 
addition to the Memphis facility. As part of the transaction, Premcor 
acquired the refinery, as well as the related supply and distribution 
assets in and around Memphis owned by Williams. In an initial press 
release, Premcor noted that the Memphis refinery would help Premcor 
grow its presence in the Southeast, in addition to providing the firm 
with a strong, competitively positioned refinery, because of extensive 
upgrades and improvements to the facility in previous years by 
Williams. Furthermore, Premcor noted that, because of the refinery's 
location, it expected to benefit from synergies with Premcor's Lima, 
Ohio, refinery, as well as its midcontinent distribution system. In its 
review of the merger, FTC did not identify any potential threats to 
competition, either unilateral or coordinated. As such, the acquisition 
proceeded as planned, without any challenge from FTC. See figure 8 for 
the cities in our analysis where we identified competitive overlaps 
between these firms before they merged. 

Figure 8: Cities Affected by Premcor/Williams Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Premcor/Williams merger (unbranded gasoline): 

Richmond, Virginia; 
Spartanburg, South Carolina. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

Valero Energy Corporation and Premcor: 

On April 25, 2005, Valero Energy Corporation and Premcor announced 
plans to merge in a deal worth $7.6 billion. At the time, Valero was 
the fourth largest U.S. refiner, while Premcor was a smaller refiner 
that owned only four U.S. refineries, which were located in Port 
Arthur, Texas; Memphis, Tennessee; Lima, Ohio; and Delaware City, 
Delaware. After this merger, Valero became one of the largest refiners 
in the United States. Valero noted in a press release that the 
acquisition would allow for synergies in the two companies' refining 
operations. As we noted in our 2008 report, operational efficiencies at 
refineries were reported as the rationale for some mergers, because 
refinery operators can achieve cost savings by purchasing crude in 
bulk, among other things.[Footnote 38] According to EIA, the 
acquisition significantly increased Valero's refining presence on the 
East Coast and in the Midwest. FTC conducted a nonpublic investigation 
of this merger, which FTC staff indicated was closed with no action to 
challenge the merger. See figure 9 for the cities in our analysis where 
we identified competitive overlaps between these firms before they 
merged. 

Figure 9: Cities Affected by Valero/Premcor Merger: 

[Refer to PDF for image: U.S. map] 

Cities affected by the Valero/Premcor merger (unbranded gasoline): 

Baltimore, Maryland; 
Beaumont, Texas; 
Chicago, Illinois; 
Cleveland, Ohio; 
Columbus, Ohio; 
Detroit, Michigan; 
Evansville, Indiana; 
Harrisburg, Pennsylvania; 
Indianapolis, Indiana; 
Knoxville, Tennessee; 
Lake Charles, Louisiana; 
Lima, Ohio; 
Memphis, Tennessee; 
Nashville, Tennessee; 
Newark, New Jersey; 
New Orleans, Louisiana; 
Rockford, Illinois; 
Spartanburg, South Carolina; 
St. Louis, Missouri; 
Toledo, Ohio. 

Source: Copyright © Corel Corp. All rights reserved (map); GAO analysis 
of OPIS data. 

[End of figure] 

[End of section] 

Appendix IV: Additional Market Concentration Information: 

The estimated effects of the measures of market concentration on 
branded wholesale gasoline prices are shown below. 

Table 11: Effects of the Number of Sellers on Branded Wholesale 
Gasoline Prices at the Terminals in the 82 Cities We Studied: 

Change in number of sellers at the wholesale terminal: Change in 
branded wholesale gasoline price in cents per gallon[A]; 
Gain of 6 sellers (8 sellers to 14 sellers): -8; 
Gain of 12 sellers (5 sellers to 17 sellers): -15. 

Source: GAO analysis of OPIS data. 

[A] These results were statistically significant at the 1 percent 
level. The 8 to 14 seller range represents the 25th to the 75th 
percentile of values that we observed at terminals in our branded 
analysis. The 5 to 17 seller range represents the 10th to the 90th 
percentile. 

[End of table] 

Table 12: Effects of Market Concentration on Branded Wholesale Gasoline 
Prices at Terminals Supplied by Seven Spot Markets: 

Refinery spot market HHI: Change in branded wholesale gasoline price in 
cents per gallon[A]; 
Decrease in HHI from 930 to 790: -1; 
Decrease in HHI from 1,470 to 700: -8. 

Source: GAO analysis of OPIS data. 

[A] These results were statistically significant at the 10 percent 
level. The 790 to 930 range represents the 25th to the 75th percentile 
of values that we observed at terminals in our branded analysis. The 
700 to 1,470 range represents the 10th to the 90th percentile. 

[End of table] 

Table 13: Number of Sellers at Wholesale Terminals in 2008: 

City name: Anchorage; 
State: Alaska;
Number of sellers: 4. 
City name: Fairbanks; 
State: Alaska; 
Number of sellers: 3. 

City name: Mobile; 
State: Ala.; 
Number of sellers: 6. 

City name: El Dorado; 
State: Ark.; 
Number of sellers: 8. 

City name: Fort Smith; 
State: Ark.; 
Number of sellers: 17. 

City name: Phoenix; 
State: Ariz.; 
Number of sellers: 8. 

City name: Tucson; 
State: Ariz.; 
Number of sellers: 10. 

City name: Los Angeles; 
State: Calif.; 
Number of sellers: 7. 

City name: Sacramento; 
State: Calif.; 
Number of sellers: 10. 

City name: San Diego; 
State: Calif.; 
Number of sellers: 6. 

City name: San Francisco; 
State: Calif.; 
Number of sellers: 8. 

City name: Denver; 
State: Colo.; 
Number of sellers: 11. 

City name: Miami; 
State: Fla.; 
Number of sellers: 14. 

City name: Tampa; 
State: Fla.; 
Number of sellers: 14. 

City name: Atlanta; 
State: Ga.; 
Number of sellers: 14. 

City name: Des Moines; 
State: Iowa; 
Number of sellers: 21. 

City name: Boise; 
State: Idaho; 
Number of sellers: 12. 

City name: Champaign; 
State: Ill.; 
Number of sellers: 5. 

City name: Chicago; 
State: Ill.; 
Number of sellers: 8. 

City name: Robinson; 
State: Ill.; 
Number of sellers: 9. 

City name: Rockford; 
State: Ill.; 
Number of sellers: 10. 

City name: Evansville; 
State: Ind.; 
Number of sellers: 8. 

City name: Indianapolis; 
State: Ind.; 
Number of sellers: 13. 

City name: Kansas City; 
State: Kans.; 
Number of sellers: 19. 

City name: Louisville; 
State: Ky.; 
Number of sellers: 6. 

City name: Paducah; 
State: Ky.; 
Number of sellers: 4. 

City name: Baton Rouge; 
State: La.; 
Number of sellers: 9. 

City name: Lake Charles; 
State: La.; 
Number of sellers: 9. 

City name: New Orleans; 
State: La.; 
Number of sellers: 10. 

City name: Baltimore; 
State: Md.; 
Number of sellers: 17. 

City name: Bay City; 
State: Mich.; 
Number of sellers: 7. 

City name: Detroit; 
State: Mich.; 
Number of sellers: 11. 

City name: Minneapolis; 
State: Minn.; 
Number of sellers: 16. 

City name: Columbia; 
State: Mo.; 
Number of sellers: 16. 

City name: Springfield; 
State: Mo.; 
Number of sellers: 18. 

City name: St. Louis; 
State: Mo.; 
Number of sellers: 8. 

City name: Greensboro; 
State: N.C.; 
Number of sellers: 13. 

City name: Fargo; 
State: N.Dak.; 
Number of sellers: 14. 

City name: Omaha; 
State: Nebr.; 
Number of sellers: 21. 

City name: Newark; 
State: N.J.; 
Number of sellers: 20. 

City name: Albuquerque; 
State: N. Mex.; 
Number of sellers: 11. 

City name: Bloomfield; 
State: N. Mex.; 
Number of sellers: 11. 

City name: Las Vegas; 
State: Nev.; 
Number of sellers: 3. 

City name: Sparks/Reno; 
State: Nev.; 
Number of sellers: 8. 

City name: Albany; 
State: N.Y.; 
Number of sellers: 15. 

City name: Syracuse; 
State: N.Y.; 
Number of sellers: 15. 

City name: Cincinnati; 
State: Ohio; 
Number of sellers: 4. 

City name: Cleveland; 
State: Ohio; 
Number of sellers: 9. 

City name: Columbus; 
State: Ohio; 
Number of sellers: 9. 

City name: Lima; 
State: Ohio; 
Number of sellers: 5. 

City name: Toledo; State: 
Ohio; 
Number of sellers: 9. 

City name: Oklahoma City; 
State: Okla.; 
Number of sellers: 17. 

City name: Tulsa; 
State: Okla.; 
Number of sellers: 13. 

City name: Portland; 
State: Ore.; 
Number of sellers: 12. 

City name: Harrisburg; 
State: Pa.; 
Number of sellers: 15. 

City name: Philadelphia; 
State: Pa.; 
Number of sellers: 14. 

City name: Pittsburgh; 
State: Pa.; 
Number of sellers: 12. 

City name: Spartanburg; 
State: S.C.; 
Number of sellers: 14. 

City name: Sioux Falls; 
State: S.D.; 
Number of sellers: 17. 

City name: Knoxville; 
State: Tenn.; 
Number of sellers: 14. 

City name: Memphis; 
State: Tenn.; 
Number of sellers: 11. 

City name: Nashville; 
State: Tenn.; 
Number of sellers: 13. 

City name: Amarillo; 
State: Tex.; 
Number of sellers: 8. 

City name: Beaumont; 
State: Tex.; 
Number of sellers: 11. 

City name: Corpus Christi; 
State: Tex.; 
Number of sellers: 10. 

City name: Dallas; 
State: Tex.; 
Number of sellers: 9. 

City name: El Paso; 
State: Tex.; 
Number of sellers: 10. 

City name: Houston; 
State: Tex.; 
Number of sellers: 12. 

City name: Tyler; 
State: Tex.; 
Number of sellers: 7. 

City name: Salt Lake City; 
State: Utah; 
Number of sellers: 9. 

City name: Richmond; 
State: Va.; 
Number of sellers: 14. 

City name: Seattle; 
State: Wash.; 
Number of sellers: 10. 

City name: Spokane; 
State: Wash.; 
Number of sellers: 7. 

City name: Green Bay; 
State: Wis.; 
Number of sellers: 11. 

City name: Madison; 
State: Wis.; 
Number of sellers: 12. 

City name: Milwaukee; 
State: Wis.; 
Number of sellers: 9. 

City name: Superior; 
State: Wis.; 
Number of sellers: 6. 

City name: Cheyenne; 
State: Wyo.; 
Number of sellers: 9. 

Source: GAO analysis of OPIS data. 

Note: We studied the price relationship to the number of sellers at 
wholesale terminals in 78 cities throughout the United States. These 
cities reflect a broad geographic range of locations where gasoline is 
sold out of our data's nearly 400 wholesale terminal locations in the 
United States. Most cities had only 1 terminal, and we chose to examine 
only 1 terminal in the few cases where there was more than 1. The 82 
cities we used in our analysis of branded gasoline were the same as for 
unbranded, but included Great Falls, Mont.; Bismarck/Mandan N.Dak.; 
Casper Wyo.; and Sinclair, Wyo. 

[End of table] 

As shown in figure 10, trends in refinery spot market concentration 
were fairly stable over time, and most markets remained either 
unconcentrated (below 1,000) or moderately concentrated (below 1,800), 
with the exception of New York Harbor and Alaska, which were both 
highly concentrated. 

Figure 10: Yearly Concentration Levels in the Seven Spot Markets That 
We Analyzed: 

[Refer to PDF for image: multiple line graph] 

Year: 2000; 
Alaska HHI: 3729; 
Tulsa (midcontinent) HHI: 911; 
Gulf Coast HHI: 688; 
Los Angeles HHI: 1472; 
New York Harbor HHI: 2224; 
Pacific Northwest HHI: 1401; 
San Francisco HHI: 1657. 

Year: 2001; 
Alaska HHI: 3675; 
Tulsa (midcontinent) HHI: 853; 
Gulf Coast HHI: 666; 
Los Angeles HHI: 1471; 
New York Harbor HHI: 2218; 
Pacific Northwest HHI: 1414; 
San Francisco HHI: 1536. 

Year: 2002; 
Alaska HHI: 3639; 
Tulsa (midcontinent) HHI: 940; 
Gulf Coast HHI: 743; 
Los Angeles HHI: 1472; 
New York Harbor HHI: 2183; 
Pacific Northwest HHI: 1407; 
San Francisco HHI: 1817. 

Year: 2003; 
Alaska HHI: 3643; 
Tulsa (midcontinent) HHI: 959; 
Gulf Coast HHI: 797; 
Los Angeles HHI: 1459; 
New York Harbor HHI: 2193; 
Pacific Northwest HHI: 1446; 
San Francisco HHI: 1795. 

Year: 2004; 
Alaska HHI: 3651; 
Tulsa (midcontinent) HHI: 942; 
Gulf Coast HHI: 802; 
Los Angeles HHI: 1439; 
New York Harbor HHI: 2756; 
Pacific Northwest HHI: 1416; 
San Francisco HHI: 1798. 

Year: 2005; 
Alaska HHI: 3651; 
Tulsa (midcontinent) HHI: 935; 
Gulf Coast HHI: 834; 
Los Angeles HHI: 1361; 
New York Harbor HHI: 2889; 
Pacific Northwest HHI: 1419; 
San Francisco HHI: 1683. 

Year: 2006; 
Alaska HHI: 3651; 
Tulsa (midcontinent) HHI: 926; 
Gulf Coast HHI: 907; 
Los Angeles HHI: 1345; 
New York Harbor HHI: 3036; 
Pacific Northwest HHI: 1417; 
San Francisco HHI: 1657. 

Year: 2007; 
Alaska HHI: 3651; 
Tulsa (midcontinent) HHI: 926; 
Gulf Coast HHI: 906; 
Los Angeles HHI: 1345; 
New York Harbor HHI: 3036; 
Pacific Northwest HHI: 1417; 
San Francisco HHI: 1657. 

Year: 2008; 
Alaska HHI: 3651; 
Tulsa (midcontinent) HHI: 926; 
Gulf Coast HHI: 906; 
Los Angeles HHI: 1345; 
New York Harbor HHI: 3036; 
Pacific Northwest HHI: 1417; 
San Francisco HHI: 1657. 

Source: GAO analysis of EIA data. 

Note: We had data on market concentration up to 2006 and we 
extrapolated them to 2008. In addition, none of the terminals we 
studied were primarily served by the Chicago spot market, and we did 
not calculate concentration for this spot market. 

[End of figure] 

[End of section] 

Appendix V:GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Mark Gaffigan, (202) 512-3841 or gaffiganm@gao.gov Thomas McCool, (202) 
512-2700 or mccoolt@gao.gov: 

Staff Acknowledgments: 

In addition to the individuals named above, Daniel Haas (Assistant 
Director), Shea Bader, Divya Bali, Frank Cook, Michael Kendix, Robert 
Marek, Michelle Munn, Alison O'Neill, Susan Offutt, Frank Rusco, 
Rebecca Sandulli, and Barbara Timmerman made important contributions to 
this report. 

[End of section] 

Footnotes: 

[1] GAO, Energy Markets: Analysis of More Past Mergers Could Enhance 
Federal Trade Commission's Efforts to Maintain Competition in the 
Petroleum Industry, [hyperlink, 
http://www.gao.gov/products/GAO-08-1082] (Washington, D.C.: Sept. 25, 
2008.) 

[2] A merger, as defined in this analysis, involves the sale of either 
all or part of the stock or assets of a company to another. 

[3] IHS Herold is an independent research firm specializing in the 
energy sector that provides financial and operational data for, as well 
as analyses of, more than 400 oil and gas companies. 

[4] OPIS is a private company that is a leading provider of gasoline 
price information. 

[5] The remaining gasoline is sold directly to retailers, or through 
other arrangements, and price data for these sales are not always 
available. 

[6] Major oil companies own most of the terminals, although according 
to OPIS, some are owned by pipeline operators or dedicated terminal 
companies. 

[7] These additional sellers include oil companies wishing to sell 
gasoline in areas where they do not have refineries. 

[8] In addition, when refiners sell branded gasoline to distributors 
and retailers, the contracts tend to be less flexible than contracts 
for unbranded gasoline but guarantee a more secure supply. Thus, 
branded prices may also include a premium for this additional security. 

[9] Buyers of unbranded gasoline may or may not have a binding 
contractual arrangement with a refiner. Therefore, a buyer of unbranded 
gasoline may not be guaranteed a secure supply or lower prices, 
particularly during market shocks that reduce the gasoline supply. 
Thus, when there is a disruption in the supply system, such as those 
caused by pipeline or refinery breakdowns, unbranded prices at 
wholesale terminals can be higher than those of branded. 

[10] FTC can also challenge completed mergers if they violate antitrust 
laws. 

[11] None of the studies found that the mergers had any adverse effects 
on gasoline prices. 

[12] The National Bureau of Economic Research is a private, nonprofit, 
nonpartisan research organization that disseminates unbiased economic 
research among public policymakers, business professionals, and the 
academic community. 

[13] Orley C. Ashenfelter, Daniel Hosken, Matthew Weinberg, National 
Bureau of Economic Research, Generating Evidence to Guide Merger 
Enforcement; NBER Working Paper 14798, (Cambridge Mass., March 2009). 

[14] See appendix III for more detailed information on each merger 
transaction. 

[15] Potential threats identified by the FTC can include both 
unilateral and coordinated threats to competition. 

[16] These assets included shares of two refining and marketing joint 
ventures with Royal Dutch/Shell Group and Saudi Refining, as managed by 
Motiva Enterprises and Equilon Enterprises. Subsequent to this order, 
Shell became the sole owner of Equilon, and Shell and Saudi Refining 
became the owners of Motiva. 

[17] As noted earlier, these estimates may have been affected by the 
effects of localized disruptions or changes to gasoline supply. In the 
case of the Valero/Premcor merger, this could include potential 
disruptions due to events surrounding Hurricane Katrina in 2005. In the 
case of the Valero/UDS merger, this could include potential disruptions 
due to new specifications for California gasoline beginning in December 
2003. To address these issues, we would have to had made judgments 
about the timing and regional impacts of these events without adequate 
data. 

[18] Our model included price data that we purchased from the OPIS for 
gasoline sold at wholesale terminals, or racks, located in cities 
throughout the United States. The remaining gasoline is sold directly 
to retailers, or through other arrangements, and price data for these 
sales are not always available. 

[19] In its ruling on the Valero/UDS merger, FTC indicated that even a 
1 cent per gallon increase in gasoline prices would cost California 
consumers an extra $150 million per year. 

[20] We examined prices at 1 terminal per city. 

[21] For example, if there are two firms that sell products in a market 
with market shares of 60 percent and 40 percent, respectively, the 
calculation of HHI would be 602+ 402 = 5,200 

[22] This approach did not allow us to capture whether there was one 
large seller and a number of smaller sellers or whether all the sellers 
sold relatively similar volumes of gasoline. 

[23] Most of the nation's gasoline supply comes from one of seven 
groups of refineries throughout the United States, which experts refer 
to as spot markets. Energy traders use spot markets to price gasoline 
that is bought and sold at the wholesale level. These spot markets are 
defined by the refineries in and around San Francisco, Los Angeles, the 
Pacific Northwest, the Gulf Coast, Tulsa (Midcontinent), Chicago, and 
New York Harbor. None of the terminals in our analysis were served 
primarily by the Chicago market, although we considered the refineries 
in Alaska as a separate market. We used industry data to link these 
spot markets to individual wholesale gasoline terminals in the 78 
cities we studied. However, we were not able to account for gasoline 
imported into the United States because we only had data on U.S 
refinery production capacity. See appendix I for more information. 

[24] GAO, Energy Markets: Analysis of More Past Mergers Could Enhance 
Federal Trade Commission's Efforts to Maintain Competition in the 
Petroleum Industry, [hyperlink, 
http://www.gao.gov/products/GAO-08-1082] (Washington D.C.: Sept. 25, 
2008). 

[25] Orley C. Ashenfelter, Daniel Hosken, Matthew Weinberg, National 
Bureau of Economic Research, Generating Evidence to Guide Merger 
Enforcement. 

[26] See appendix IV for a list of the cities in our analysis. 

[27] See Kyong So Im, M. Hashem Pesaran, and Yongcheol Shin. "Testing 
for Unit Roots in Heterogeneous Panels," Journal of Econometrics, 115, 
53-74 (2003). 

[28] Joris Pinkse, Margaret E. Slade, and Craig Brett. "Spatial Price 
Competition: A Semiparametric Approach," Econometrica, Vol. 70, No. 3. 
May 2002, 1111-1153. 

[29] Our OPIS data did not contain gasoline prices from Hawaii. In 
addition, none of the terminals in our analysis were served primarily 
by the Chicago spot market. 

[30] We dropped the non-gasoline-producing refineries (i.e., producers 
of asphalt etc.) from these calculations by identifying refineries that 
lacked gasoline-producing equipment. These data included only U.S. 
refiners until 2006. We extrapolated the data to 2008. 

[31] In commenting on GAO's prior work on oil companies, Energy 
Markets: Effects of Mergers and Market Concentration in the U.S. 
Petroleum Industry, [hyperlink, http://www.gao.gov/products/GAO-04-96] 
(Washington, D.C.: May 17, 2004), Professor Halbert White of the 
University of California at San Diego suggested that rather than impose 
a specific error formulation such as an AR(1), it would be preferable 
to explicitly include lags of various variables in the model directly. 
We included a lagged dependent variable as a regressor but did not go 
beyond that in including lags of other variables in the model. 

[32] See, for example, W. N. Evans et al. "Endogeneity in the 
Concentration-Price Relationship: Causes, Consequences, and Cures." The 
Journal of Industrial Economics, vol. XLI, no. 4, Dec. 1993, 431- 438. 

[33] There are five Petroleum Administration for Defense Districts 
(PADD) in the United States. EIA collects much of its data according to 
these regions. 

[34] The tests rejected exogeneity in all cases except for the spot 
market HHI in the branded gasoline prices model. 

[35] For example, see Halbert White, "Time-Series Estimation of the 
Effects of Natural Experiments," Journal of Econometrics, 135, 2006, 
527-566. 

[36] As noted on page 16, we treated market concentration as 
endogenous--meaning that changes in wholesale gasoline prices could 
affect market concentration in addition to changes in concentration 
affecting prices. For example, this could occur if high prices at one 
terminal spur new sellers to enter the market, thus decreasing 
concentration. This assumption was supported by statistical tests that 
we conducted, although because this assumption was likely to have a 
noticeable impact on our results, we also analyzed our data without it 
and found that the impact on prices of our concentration measures was 
statistically significant but smaller. For example, for unbranded 
prices, in the case of the refinery spot market HHI, the impact on 
wholesale prices was about half the size without this assumption. For 
the number of sellers at the terminal, the impact was about one-sixth 
of the size without this assumption. 

[37] Saudi Refining was only a partner, and subsequent buyer, in the 
joint venture with Motiva Enterprises. 

[38] GAO, Energy Markets: Analysis of More Past Mergers Could Enhance 
Federal Trade Commission's Efforts to Maintain Competition in the 
Petroleum Industry, [hyperlink, 
http://www.gao.gov/products/GAO-08-1082] (Washington D.C.: Sept. 25, 
2008). 

[39] The Commission commented extensively on GAO's merger review 
analysis in response to your 2008 report on Energy Markets: Analysis of 
More Past Mergers Could Enhance Federal Trade Commission's Efforts to 
Maintain Competition in the Petroleum Industry (GAO08-1082) (Sept. 
2008), at 54-60 ("GAO 2008 Report"). The instant comments should be 
read in combination with the FTC comments appended to the GAO 2008 
Report. 

[40] Orley C. Ashenfelter, Daniel Hosken & Matthew Weinberg, Generating 
Evidence to Guide Merger Enforcement, NBER Working Paper No. 14798 
(Mar. 2009), available at [hyperlink, 
http://www.nber.org/papers/w14798.pdf?new_window=1]. 

[41] Report at 8. 

[42] The Commission staff, which conducts merger retrospectives across 
a number of industries, is working on a fourth retrospective review of 
a petroleum industry merger. That retrospective is expected to be 
released later this year. 

[43] GAO appropriately notes the limitations of its analyses. For 
example, the Report states that GAO did not control for all factors 
affecting gasoline markets, including "disruptions to local gasoline 
supply markets from weather-related events, interruptions in refinery 
or pipeline operations, or other changes in local gasoline supply." 
Report at 3. The Report also states that "because some cities were 
affected by multiple mergers, may have had changes in market 
concentration, and may have been affected by factors for which [GAO] 
did not have data," the study cannot be certain whether, or how, 
wholesale prices in each location were affected by
particular mergers. Id. 

[44] Id. at 17. 

[45] See, e.g., Federal Trade Commission And U.S. Department Of 
Justice, Commentary On The Horizontal Merger Guidelines 20 (2006) 
("Market shares and concentration nevertheless are important in the 
Agencies' evaluation of the likely competitive effects of a merger. 
Investigations are almost always closed when concentration levels are 
below the thresholds set forth in section 1.51 of the Guidelines. In 
addition, the larger the market shares of the merging firms, and the 
higher the market concentration after the merger, the
more disposed are the Agencies to concluding that significant 
anticompetitive effects are likely"). 

[46] The central element of the Commission's role in the petroleum 
sector is an ongoing and vigorous law enforcement presence. The 
Commission maintains a program of investigating and, where appropriate, 
taking enforcement action against potentially anticompetitive mergers 
and acquisitions, as well as non-merger conduct violations, in this 
industry. For example, in 2007 the Commission applied for a preliminary 
injunction in the United States District Court in New Mexico, seeking 
to block Western Refining's acquisition of Giant Industries - a 
transaction that the Commission alleged threatened to harm competition 
in the bulk supply of light petroleum products in northern New Mexico. 
(The District Court disagreed and declined to grant the injunction.) In 
addition, the Commission currently is engaged in a proceeding, pursuant 
to Section 811 of the Energy Independence and Security Act of 2007, to 
determine whether to promulgate a rule prohibiting market manipulation 
in wholesale petroleum markets. See [hyperlink, 
http://www.ftc.gov/opa/2009/04/rnprm.shtm]. 

[47] For example, GAO's findings (Report at 16, Table 3) suggest that 
an increase in concentration of 90 points in an unconcentrated market 
(a Herfindahl-Hirschman Index increase from 700 to 790) is associated 
with a 5.4-cent-per-gallon increase in wholesale prices. But the 
analysis also suggests that an identical increase of 5.4 cents per 
gallon is associated with a concentration increase of 540 points, 
beginning from a more concentrated level (from 930 to 1470). These 
findings would suggest, for example, that mergers with smaller 
structural impact (as measured by concentration changes) - and 
occurring at lower levels of premerger market concentration - could 
have adverse effects on prices equal to the effects produced by mergers 
yielding larger concentration changes and occurring at higher levels of 
premerger concentration. We find this result difficult to reconcile 
with economic theory and with our own antitrust
experience. 

[48] Report at 15, 23, 41. 

[End of section] 

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