The issues raised in House Resolution No. 174, H.D. 2, cover
a wide range of topics relating to the petroleum industry--from
divorcement to exchange agreements to the establishment of a
petroleum regulatory commission.  While seemingly unrelated,
many of these issues are connected in a broader sense to
proposals for increased government intervention in the
activities of vertically integrated oil companies in the
operation of their downstream (retail) facilities.  In essence,
these proposals seek to impose limitations on the major oil
companies doing business in Hawaii through increased
governmental regulation of these facilities, ostensibly to
ensure the viability of small independent stations while at the
same time maintaining lower gasoline prices for Hawaii's
consumers.
	
	This chapter reviews relevant literature on the oil industry
in terms of this broader perspective in order to give an
overview of some of the underlying issues raised in the
Resolution.  This report, however, is not intended to be a
comprehensive analysis of these issues; for a more thorough
examination, the reader is referred to the sources cited in the
endnotes to this chapter and the bibliography in Appendix L.  In
particular, this chapter briefly reviews vertical integration,
oligopolies, gasoline retailing, oil and gasoline prices
generally, and relevant federal legislation.
	
	
	Vertical Integration
	
	The oil industry in the United States is composed of nearly
seventeen thousand firms ranging from small open dealers to
large corporations.  While most companies operate within one
level of the oil industry, i.e., exploration and production,
refining, transportation, or marketing, many oil companies are
integrated to some extent into other upstream or downstream
businesses, for example, from small dealers owning several
service stations and a fuel truck to large multinational
corporations that are integrated in all levels.51  Despite the
longstanding coexistence of both large and small oil industry
operators, however, critics frequently cite the degree of
vertical integration of the larger oil companies as evidence of
"intolerable market concentration and power".52
	
	Historically, the degree of animosity directed at vertically
integrated oil companies has been significant:

          Vertical integration in the petroleum industry has
     ... become a malignant force for harnessing monopoly
     power and for transmitting it to markets which would
     otherwise be workably competitive.  So long as the
     present structural arrangement persists, workable
     competition in refining and marketing will always be
     frustrated.  Many of the independents as well as
     integrated oil companies having a low degree of crude-
     oil self-sufficiency have been squeezed out of
     existence.  Furthermore, the future for many of the
     remaining independents does not look bright.  The
     petroleum industry is becoming more concentrated in the
     hands of those vertically integrated oil companies
     having strong crude-oil positions.  If the petroleum
     industry is permitted to continue to administer
     artificially high crude-oil prices, competition in the
     industry will become still more limited.53 

     Antitrust policy has also been traditionally hostile toward
vertical integration (especially when one of the market levels
involved is subject to monopoly), as well as toward vertical
mergers, despite their "extraordinary potential for creating
efficiency and limited threat of economic harm...".54  The state
of Tennessee, in enacting legislation regulating petroleum
products, specifically cited vertical integration in the
petroleum industry as inhibiting competition and tending to
result in higher prices for those products:

     The purpose of this part is to regulate vertical
     integration of the petroleum industry in Tennessee, it
     being the conclusion of the general assembly that
     vertical integration tends to operate in restraint of
     free trade and inhibits full and free competition and
     therefore tends to increase the price of petroleum and
     related products and services....55 

	What is vertical integration?  Do vertically integrated oil
companies contribute, directly or indirectly, to lower or higher
prices at the gasoline pump?  Vertical integration is the
ownership or control of the network of production and
distribution of goods from raw materials to sale to the ultimate
consumer.56  A firm may be viewed as vertically integrated
whenever it performs some function for itself (within that
industry) that could otherwise be purchased on the market.57
With respect to oil companies, vertical integration may be
defined as the ownership or control of all phases of the
production of petroleum products, including the drilling,
pumping, refining, distribution, and resale of petroleum
products, from the well to the gasoline pump.58  A fully
integrated oil company would be involved in oil exploration and
production, transportation of crude oil and petroleum products,
refining crude oil, and marketing refined products.  Horizontal
integration, in contrast, involves increasing degrees of market
concentration within a market segment, such as the merger of two
firms in the same business.59
	
	A firm may integrate vertically in one of three different ways:  by
entering a new market on its own (e.g., a refiner opening a new retail
service station), by acquiring another firm that is already operating in
the secondary market (e.g., a refiner acquiring an existing service
station), or by entering into a long-term contract with another firm,
under which the two firms coordinate certain aspects of their behavior
(e.g., a refiner entering into an exclusive dealing contract with a
retailer, who agrees to purchase all of the retailer's gasoline from that
refiner).  In addition, a firm can integrate vertically in two different
directions:  "forward" integration occurs when a firm integrates in the
direction of the end-use consumer, as when an oil refiner acquires its
own retail service station; "backward" integration occurs when a firm
integrates into a market from which it would otherwise obtain some needed
raw material or service, for example, a retail service station acquiring
a refinery.60
	
	Generally, vertical integration by contract may involve "interbrand"
or "intrabrand" restraints:61

     Interbrand distribution restraints limit the way downstream
     firms can use brands made by someone other than the firm
     imposing the restraint, usually by tying arrangements and
     exclusive dealing.  A tie-in or tying arrangement is a sale
     or lease of a product or service on the condition that the
     buyer will take a second product or service as well.62  An
     exclusive dealing arrangement is a contract pursuant to
     which a buyer promises to buy its requirements of one or
     more products exclusively from a particular seller.63 

     Intrabrand distribution restraints regulate a dealer's sales
     of a single brand without creating limitations on its sales
     of brands made by other suppliers.  One broad category of
     intrabrand restraints is vertical price fixing, or resale
     price maintenance (RPM), under which the manufacturer or
     supplier regulates the price at which a product is resold by
     independent dealers.  The second category is vertical
     nonprice restraints.  The most common of these are vertical
     territorial division, under which a supplier regulates the
     location or sales territories of its distributors or
     retailers; another vertical nonprice restraint is the
     customer restriction, which limits the classes of buyers
     with whom a distributor or other reseller may deal.

	A supplier may use a combination of both interbrand and intrabrand
restraints.  Intrabrand distribution restraints are governed by section 1
of the Sherman Act; interbrand distribution restraints are covered under
section 3 of the Clayton Act as well.
	
	Generally, firms integrate vertically not in order to become
monopolists and earn monopoly profits, but to reduce costs, which, in
competitive markets, are passed on to the consumer. In essence,
vertically integrated firms are efficient, it may be argued, and enable
firms to save money in a variety of ways. Under this analysis, most
instances of vertical integration should be legal under the antitrust
laws.64  The following efficiency arguments have been advanced in favor
of vertical integration:65
	
	(1)  Production cost savings.  Vertically integrated firms are able
to take advantage of technologies unavailable to firms that are not
vertically integrated, thereby resulting in savings in production costs.
	
	(2)  Transaction cost savings.  Integrating vertically also
potentially reduces transaction costs, i.e., the costs of relying on the
marketplace; the costs of negotiating, drafting contracts, and planning
for sufficient supplies in a market containing many self-interested
actors can be riskier and more expensive than arranging transactions
internally.66
	
	(3)  Market power held by other firms.  A firm that is forced to deal
with a monopolist or cartel may save money by integrating vertically into
the market level in which the monopolist or cartel is located.  A
vertically integrated firm always obtains integrated inputs at the
marginal cost of producing them, as it would in perfect competition.  If
forced to deal with a monopolist, however, a non-integrated firm must pay
production costs plus any additional markup the monopolist might add
because of its monopoly position.  Vertically integrating allows a firm
to avoid dealing with the monopolist or cartel.
	
	(4)  Optimum product distribution.  Vertical integration can also
facilitate other efficiency savings by ensuring that the firm's product
will receive sufficient promotion, distribution, and sales services:
	
     For example, a refiner of gasoline might increase sales
     by assuring retail customers that the quality of its
     product and of the service given by retailers is
     uniformly high across the country.  The refiner can
     make such an assurance, however, only if it has
     substantial control over the gasoline retailers
     themselves.  One way the refiner can obtain such
     control is by building and operating its own retail
     stations.  Another very common way is by means of
     elaborate franchise contracts that permit the retailers
     to retain their identity as separate firms while being
     substantially controlled by their larger supplier.67 

     However, some instances of vertical integration may be seen
as anticompetitive.  The following are some of the perceived
dangers to competition from vertical integration:68 

	(1)  Increased market power.  Increased market power is not a likely
consequence of vertical integration, it is argued, because the monopolist
of any single distribution level generally can obtain all monopoly
profits available in a given distribution chain.
	
	(2)  Barriers to entry.  Vertical integration can make it more
difficult for new firms to enter a market if the integrating firm has a
very large share of the market.  For example, if a monopolist widget
manufacturer has acquired all of the independent widget fabricators,
there would no longer be independent firms left at either production
level.  Any firm desiring to enter either level would have to enter both
simultaneously, or it would have no one with which to deal. However,
vertical integration creates a true barrier to entry only if the need for
two-level entry makes entry into the market more expensive than it would
be otherwise.69
	
	(3)  Price discrimination.  A firm may vertically integrate to
facilitate price discrimination, i.e., when a seller obtains two
different rates of return on two different sales.  Price discrimination
enables a firm to maximize its profits regarding different groups of
customers instead of finding an "average" profit-maximizing price.  Only
a firm with a certain amount of market power can engage in price
discrimination, since it will be earning monopoly profits from those
sales in which its profits are highest.  For example, a monopoly
manufacturer of widgets that has two different groups of customers with
different demands for widgets may make more money by selling widgets for
50 cents at a retail store, and for $1.00 at concessionaires at public
events, rather than by finding a profit-maximizing price somewhere
between 50 cents and $1.00.  However, under certain circumstances, the
Robinson-Patman Act may prevent the firm from selling the same product to
two classes of buyers at two different prices.70
	
	(4)  Rate regulation avoidance.  Price-regulated firms may integrate
vertically into unregulated markets to "cheat" on a regulatory scheme.
	
	(5)  Cartels.  Cartel members may vertically integrate in order to
discourage cheating on the cartel agreement.
	
	
     Oligopolies

	In addition to vertical integration, another important feature of
gasoline markets, both in the U.S. mainland71 and in Hawaii,72 is that
they are oligopolies--markets in which prices and other factors are
controlled by a few sellers.  Oligopolies, which are "the most dominant
industrial market structure within the nation's economy",73 are not in
themselves illegal, so long as new competition is free to enter and
compete in the market, and no violation of antitrust laws occurs if the
oligopoly simply persists as a result of natural market conditions. 
However, a seller's practice of keeping competition out of the market or
conspiring with other sellers to fix market prices will violate the
antitrust laws.74
	
	Pricing in an oligopoly is influenced both by the limited number of
competitors and their interdependence:
	
     Because their numbers are small, sellers in an
     oligopoly perceive that their interdependent action
     will be more profitable than independent action.
     Interdependence suggests that each seller takes into
     account the actual or potential market reactions of
     competitors before output or price decisions are made.

          If one seller were to increase output and reduce
     price in order to capture more sales, other producers
     in the oligopoly would follow suit and, if the first
     price change is not concealed, the reaction would be
     swift.  A price cutter would gain little.  Accordingly,
     the incentive to price-compete is reduced.  Likewise,
     unless a price increase were coordinated among all
     members of the oligopoly, there would be no rational
     incentive to undertake it, since consumers would buy
     from the sellers that did not increase price.
     Reaction, coordination, and strategic behavior are,
     therefore, important elements of oligopoly behavior.75 

Although price competition is reduced in an oligopoly, nonprice
competition--including quality improvements and advertising--may
take place, but may be subject to the same limitations as price
competition.76  Oligopoly pricing is a concern from an antitrust
perspective since it may not be based on competitive factors but
rather on coordinated pricing actions, whether from tacit or
overt collusion.77  In general, the greater the interdependence
among firms in an oligopoly, the more the market may result in
monopolistic conduct.78 

	Allvine and Patterson (1972) argue that oligopolistic pricing,
including market interdependence and the avoidance of price competition,
occurs in the petroleum industry;79 Moreover, while the petroleum
industry in the United States is not as concentrated as other
oligopolistic industries that appear to be workably competitive, they
argue that the presence of vertical integration frustrates potentially
workable competition at the retail level:
	
          While the gasoline market does tend to behave like
     a classic oligopoly, the petroleum industry is not
     nearly as concentrated as many other industries which
     seem to be workably competitive.  There are probably
     just too many gasoline sellers, and the geographic
     distribution of their shares of the market is too
     uneven for price competition to be completely
     suppressed as it is in those oligopolistic industries
     dominated by fewer than one-half dozen sellers.
     Without the presence of vertical integration, there is
     reason to believe that at least the retailing of
     gasoline could be workably competitive from a practical
     standpoint.  Competitive self-restraint among twenty to
     thirty firms is likely to breakdown as each jockeys for
     competitive advantage.  Even sporadic price competition
     among this many sellers would serve to keep prices and
     margins in line, rewarding the innovators and the
     efficient and disciplining the laggards and the
     inefficient.  However, vertical integration is very
     much present in the industry, and its presence
     effectively frustrates this potentially workable
     competition at retail for a number of reasons.  Because
     it frustrates retail competition, vertical integration
     strengthens the tendency of a marginally oligopolistic
     market to behave as a classic textbook example of
     oligopoly at its worst.80 

	Others, however, contend that people are quick to blame rising oil
prices following market disruptions on oil company collusion, although
other equally plausible explanations exist. Lee (1991), for example,
maintains that price rises following the Iraqi invasion are equally well
explained by efficient market operation as by tacit collusion:
	
          Politicians professing outrage at the rapid,
     dramatic post-invasion rise in petroleum prices often
     cite the rise itself as "economist evidence" supporting
     the inference of tacit collusion.  But these price
     rises comport at least as well with the efficient
     operation of a market as with tacit collusion.  The
     invasion created considerable uncertainty about the
     supply of crude oil and petroleum products in the near
     future.  With a shortfall threatened, the right to buy
     these goods in the near future became more valuable to
     some consumers.  These consumers, and those expecting
     to supply them, bid up the price of these rights.  In
     order to compete for petroleum supplies, current
     consumers had to bid up spot prices.  All of this
     occurred rapidly because the petroleum market
     efficiently impounds information into prices.  As a
     result, this market allocates products over time far
     more optimally than could any group of government
     functionaries.  Prices rose dramatically not only
     because the threatened oil reservoirs were relative
     large, but more importantly, because they were
     relatively cheap to produce.  Replacing some of the
     output of the threatened oil reservoirs with increased
     production from others would necessarily put producers
     to far more cost.  To induce producers to incur these
     costs, consumers had to bid up prices accordingly.81 

	Lee concluded that "the available evidence ... provides almost no
support for the inference of collusion."82
	

     Gasoline Retailing

	Gasoline retailing may be viewed as involving a principal (the
refiner) and an agent (the station manager) in a vertical context.83 
Most retail outlets are built by the refiner, who selects station
location, gasoline sales capacity, and other services, such as automotive
or convenience store services, choosing these characteristics to maximize
station profit given local supply and demand conditions.  The refiner
also designs the contract, usually making a take-it-or-leave-it offer to
potential managers, to induce the manager to use the manager's best
efforts in areas preferred by the refiner:
	
     Within the constraints imposed by the contract and
     given the characteristics of the station, the operator
     chooses the retail price and effort level that
     maximizes downstream profit.  Final demand for station
     output (gasoline and other products or services) is
     assumed to increase in quality and decline in price.
     The station manager can exert sales and service effort
     that increases quality.  Effort is costly for the
     manager and she or he will not, in general, choose the
     level that is optimal from the refiner's point of view
     without some contractual restraint.  Similarly, the
     manager's unconstrained choice of retail price will not
     be the price the refiner would have chosen.  The
     purpose of the vertical contract is to induce the
     manager to make choices preferred by the refiner,
     either by directly specifying outcomes or providing
     incentives that align the interests of the manager with
     those of the refiner.84 

	Three types of contractual arrangements are used in gasoline
retailing:  company-owned, lessee-dealer, and open-dealer. Company-owned
contracts approximate full vertical integration at one extreme, while
open-dealer contracts approximate trade between independent firms at the
other; between these two are lessee-dealer contracts which constitute a
type of franchise agreement:85
	
	(1)  Company-owned contracts.  At stations operated under
company-owned contracts, the refiner owns all of the capital, employs the
manager as a salaried employee, and maintains ownership of the gasoline
until it is sold to consumers, and therefore may set the retail price. 
This is the only contractual form under which the refiner may set retail
prices; courts have consistently held that refiners may not set the
retail price at any station not operated by an employee.86
	
	(2)  Lessee-dealer contracts.  At stations operated under
lessee-dealer contracts, the refiner owns the land and capital, and sets
the wholesale price and an annual rental fee; the manager is
self-employed.  The contract allocates some quality control to the
refiner and usually specifies a minimum volume of gasoline the manager
must purchase.  Although contractual requirements are enforced by the
threat of lease termination and nonrenewal, the federal Petroleum
Marketing Practices Act was enacted to protect lessee-dealers and defines
the circumstances under which a dealer can be terminated or not
renewed.87  The net effect of that Act was to give dealers more latitude
to take actions that increased dealer profits at the expense of joint
dealer-oil company profits:  "Since the Act increased the cost of
franchising, it provided incentives for companies to use company- owned
stores more frequently."88
	
	(3)  Open-dealer contracts.  At stations operated under open-dealer
contracts, the refiner controls the wholesale price but has no investment
in the station and does not charge a rental or franchise fee.  The
station manager owns the land and capital, and generally makes decisions
over service quality and retail price.  Managers, however, cannot sell
gasoline supplied by another refiner in pumps identified with the
contracting refiner. As in lessee-dealer contracts, open-dealer contracts
frequently include a minimum purchase requirement, but the only penalty
for failing to meet this requirement is termination of the supply
relationship.
	
	Generally, retailers obtain their gasoline from a refiner either
directly or indirectly.  These supply arrangements ultimately influence
the price of gasoline in the supply chain. In the direct distribution
system, a refiner sells or supplies branded gasoline, i.e., gasoline
marketed under the refiner's trademark, to its company-operated stations
or lessee dealers, or unbranded gasoline to open dealers.  In the
indirect distribution system, refiners sell branded or unbranded gasoline
to independent distributors, who in turn sell the gasoline to consumers
through their own retail stations or resell the gasoline to other
retailers.89
	
	
	Oil and Gasoline Prices
	
	The pricing of gasoline raises issues of both national and
international importance.90  According to a 1993 United States General
Accounting Office (GAO) analysis of the pricing of crude oil and
petroleum products, wholesale and retail prices of gasoline and other
refined petroleum products are based largely on crude oil prices. 
Domestic prices for oil have been linked to world oil prices since their
decontrol by late 1981.  However, the GAO found that the world price of
crude oil is not necessarily related to its production or acquisition
costs, but to the following factors:91
	
     (1)  OPEC.  Because of the Organization of Petroleum
          Exporting Countries' large low-cost crude oil reserves
          and excess production capacity, crude oil prices are
          influenced by members' decisions affecting the world's
          oil supply.

     (2)  Scarcity.  Crude oil is a scarce and valuable resource;
          since it can only be replaced at a higher cost once
          current reserves are depleted, the price of crude oil
          compensates the owner for its scarcity.
	
     (3)  Lack of substitutes.  In the short term, there are a
          lack of substitutes for crude oil, and there are no
          economically viable substitutes for gasoline.

     (4)  Seasonal demand.  Crude oil prices are affected by
          seasonal demand, especially for gasoline and heating
          oil due to higher demand in the summer and winter
          months, respectively.

	Although Yamaguchi and Isaak (1993) note that OPEC has little control
over world oil pricing,92 the importance of OPEC's influence on the
world's supply of crude oil cannot be understated.  Most of the world's
crude oil is situated in OPEC countries, and OPEC retains almost all of
the world's estimated excess production capacity.  While OPEC no longer
sets crude oil prices, it does set voluntary production quotas for member
countries in order to maintain a target price for oil, and member
countries' decisions regarding oil supply still have a significant impact
on world oil prices.93
	
	Despite the political instability of the oil-producing Middle East
region, others predict that oil demand will grow moderately in response
to strong growth in developing countries; production capacity should also
grow, principally in OPEC countries where the main reserves exist; and
oil prices, while remaining somewhat volatile in the short run, should
remain fairly stable over the longer term, in a range of $20 to $25 per
barrel in 1991 dollars through the year 2010.  A principle reason given
for these projections is that Saudi Arabia and its Persian Gulf oil
allies will be able to exert a controlling influence on OPEC policies,
given these countries' strong interest in avoiding another oil
disruption, which would endanger prospects for a growing long-term market
for their oil, as well as political and security risks for themselves.94 
Nevertheless, "another sizable oil disruption has to be rated a
possibility, simply because so much of the world's oil needs, a growing
proportion in fact, is supplied from an area of chronic political
volatility--the Middle East."95  A large net shortfall in supply from a
political upheaval in the Middle East "would cause a disproportionately
large jump in the price of oil--a response dictated by the inelastic
demand for oil in the short run."96
	
	During market shocks, moreover, prices for crude oil, including
gasoline held by local service stations, rapidly adjust to reflect the
current market value, even if the oil or gasoline was produced or
acquired at a lower or higher cost.97  In addition, many industry
representatives and consumers believe that retail gasoline prices rise
quickly when crude oil prices rise during a market shock, but are slow to
reflect price decreases.  While the GAO's model of price adjustment in
the gasoline market shows some evidence that this occurs, but only under
certain circumstances, other models have found evidence that retail
prices of gasoline adjust more slowly to falling crude oil prices or
wholesale gasoline prices, or both.  Factors accounting for this
asymmetry at the retail level include uncertainty about decreases in
crude oil and wholesale prices during market shocks, retailers' knowledge
of consumers' psychology and buying patterns, and the short-term
inelasticity of the demand for gasoline.98
	
	Under normal market conditions, however, the GAO found that prices
for gasoline and other petroleum products are fundamentally determined by
the price of crude oil; competition in the petroleum products markets and
threats that OPEC may raise prices for crude oil tend to keep the prices
of crude oil and petroleum products in line with each other.99  However,
wholesale prices are also affected by seasonal demand and supply
arrangements.  Increased demand for gasoline during the summer generally
leads to higher wholesale gasoline prices during those months; during
periods of higher anticipated demand, prices increase as distributors
build up their inventories.100  A recent study further found that, apart
from crude variations, short-term variations in resale gasoline prices
"are mainly a function of the prior month's spread, the time of year, and
the supply demand balance--not demand by itself or supply, but the
relationship between the two."101
	
	According to the GAO, short-term variations in wholesale prices are
also affected by the type of supply arrangement between the buyer and
seller under normal market conditions. Gasoline and other petroleum
products may be bought and sold at wholesale in the futures, spot, and
contract markets.  Daily movements in wholesale prices for petroleum
products on the futures market serve as the basis for negotiations
regarding prices in the other two markets.  Different types of dealers
may pay one or more wholesale prices, either spot prices or one of three
contractual prices, namely, branded rack, unbranded rack, and dealer
tankwagon prices:102
	
	(1)  Spot prices.  These prices are generally lower and more volatile
than contract prices; there is no binding contract between the buyer and
seller, so buyers on the spot market are free to shop around for the
lowest price.  Although the spot market accounts for a small portion of
domestic gasoline sales, spot prices and futures prices strongly
influence contract prices by providing the daily competitive signals that
serve as a basis for setting contract prices.
	
	(2)  Contractual prices.  Under a contract, which is based on a
prearranged pricing formula, buyers pay premiums for the security of
having a guaranteed supply of gasoline.
	
     A.   Rack prices.  Rack prices are paid by distributors and
          dealers for gasoline supplied by refiners at the
          refiner's wholesale terminal, or "rack".  These prices
          are generally higher than spot prices under normal
          market conditions because of the relative certainty of
          supply and stability.  Branded rack prices are paid by
          distributors for gasoline supplies from major refiners
          selling under their trademark.  Unbranded rack prices
          are paid for gasoline supplies largely from independent
          refiners.  Branded rack prices tend to be higher than
          unbranded rack prices because the former include a
          premium for the recognized brand name, while the latter
          are for generic gasoline; branded gasoline contracts,
          while less flexible, also guarantee a more secure
          supply than unbranded gasoline.

     B.   Dealer tankwagon (DTW) prices.  DTW prices are paid by
          lessee dealers and some open dealers to suppliers
          (refiners or distributors) for branded gasoline
          delivered at the dealers' outlets; DTW prices, which
          are set by suppliers and include the cost of
          transporting the gasoline to outlets as well as other
          premiums, are generally less volatile and higher than
          spot and rack prices.  The contractual agreement
          between the dealer and supplier provides for a minimum
          purchase, allowing the dealer little flexibility to
          shop around for lower prices, but affording greater
          stability of these prices and security of supply, even
          during periods of constrained supplies and volatile
          prices.

     (3)  Transfer prices.  Transfer prices are internal prices
at which distributors or refiners supply gasoline to their
company-owned and -operated retail service stations.

     In addition, the GAO found that, also under normal market
conditions and in the short term, retail gasoline prices are
influenced by the extent of competition within a local market:

     Typically, a gasoline retailer closely watches the
     pricing by other retailers within the vicinity and
     keeps the retail price competitive so as to preserve
     market share and profitability.  Moreover, the fewer
     the retail stations that are equally accessible to
     motorists within a given vicinity, the more likely the
     chance that retail prices will be, on average, higher
     than in areas with more competitors.  A gasoline
     distributor with whom we spoke claimed that rural
     outlets can more easily pass on any increases in
     wholesale costs because there is less competition than
     in urban areas.

     According to some oil industry representatives and
     experts, there is often "price leadership" in the
     marketplace.  One retailer in a given area may adopt an
     aggressive pricing strategy by frequently changing
     prices, and other retailers in the area will generally
     tend to follow that retailer's lead.  For example, as
     some industry representatives and experts pointed out,
     a typical price leader may choose to lower prices in an
     attempt to increase market share, and an integrated oil
     company owning large domestic reserves of crude oil may
     lower prices at company-owned and -operated stations in
     an attempt to move large volumes of gasoline.103 

	The GAO further noted that retail gasoline prices often do not
reflect daily fluctuations in wholesale and crude oil prices: "This
'stickiness' of the retail price can occur for a variety of reasons,
including the fact that some retailers will generally delay a price
change until it is initiated by another retailer within the local
market."104
	
	Federal and state excise taxes also form a large component of the
retail price of gasoline.  These taxes are basically a highway user's
fee; because they have traditionally been levied on a per unit basis
(usually a fixed number of cents per gallon), more frequent users pay
more in gasoline taxes than do less frequent users.105  While revenues
collected from gasoline taxes vary depending on the amount of the levy
and the quantity of gasoline sold, the average combined federal and state
taxes nearly doubled during the 1980s, from 12.7 cents per gallon in 1981
to 24.4 cents per gallon in 1989.  These tax increases, which were made
in part because of diminishing tax revenues and increasing highway
construction and maintenance costs, had a significant impact on the
retail price of gasoline.  From 1978 to 1981, gasoline taxes as a
percentage of the average retail price of gasoline dipped sharply due to
the abrupt increase in gasoline price during that period.  Since 1981,
however, gasoline taxes have increased as a component of retail gasoline
prices; by the end of the 1980s, gasoline taxes were proportionally
higher than before the 1979-1980 oil crisis.106
	
	
	Federal Legislation
	
	Petroleum Marketing Practices Act (PMPA).  The PMPA107 was intended
to protect gas station franchise owners from arbitrary termination or
nonrenewal of their franchises with large oil companies and gasoline
distributors, and to remedy the disparity in bargaining power between
parties to gasoline franchise contracts.108  That Act, inter alia,
specifies the grounds for termination and nonrenewal of a franchise
relationship.  The Act prohibits major oil companies from terminating
dealers unless the location is uneconomical for the lessor, the site is
being converted to other uses, the lessor is leaving the local market,
the parties cannot agree on a new contract after good faith negotiations,
or the dealer has violated its contract with the lessor.109
	
	Antitrust laws.  The Sherman, Clayton, Robinson-Patman, and Federal
Trade Commission Acts are intended to protect the competitive process at
all levels of distribution and apply to the petroleum industry.
	
	The Sherman Act,110 which was enacted in 1890, contains two main
provisions:  section 1 of that Act prohibits contracts, combinations, and
conspiracies in restraint of trade or commerce, and section 2 prohibits
monopolies, or attempts, combinations, or conspiracies to monopolize any
part of the trade or commerce.111 The courts have construed this Act to
preclude only those contracts or combinations that unreasonably restrain
competition.112  Hawaii has also enacted laws regarding monopolies and
restraint of trade.113
	
	The Clayton Act,114 which was enacted in 1914 to supplement and
improve enforcement under the Sherman Act, prohibits price
discrimination, tying arrangements115 and exclusive dealing contracts,
and certain mergers and acquisitions where the effect may be to
substantially lessen competition or tend to create a monopoly.116
	
	The Federal Trade Commission Act,117 also enacted in 1914, created
the Federal Trade Commission which may restrain conduct considered
harmful or potentially harmful to competition. Although not defined as an
"antitrust law" for purposes of federal statutes, this Act applies to
anticompetitive practices that may fall short of violating either the
Sherman or Clayton Acts.118
	
	The Robinson-Patman Act,119 section 1 of which amended section 2 of
the Clayton Act,120 was enacted in 1936 to curb anticompetitive price
discrimination.121  The Act prohibits certain instances of differential
pricing, that is, charging different buyers different prices for goods of
like grade and quality.
	
	Trademark Act.  Supplier trademarks are protected by the Lanham
Act,122 which is designed to protect both the public and the trademark
owner.  The Act prevents the copying of the supplier's trademark or
symbol, thereby preventing others from passing off their products as
those of the supplier and encouraging competition by preserving good will
and investment in product quality and promotion.123
	
	Proposed federal legislation.  In addition, bills have been
introduced in recent years that have proposed retail divorcement, open
supply, and anti-price inversion measures on the national level.  The
Attorney General's 1993 report on the impact of divorcement on consumer
prices reviewed several of these bills, which were introduced in the 102d
Congress (1991 - 1992), but which were not enacted into law.124
	
	

		Endnotes	Chapter 3 Table of Contents