chakravo_05

Emory University
Department of Economics
Working Papers

Title: Boutique Fuels and Market Power

Number: 05-11

Author: Ujjayant Chakravorty and Céline Nauges

Issue Date: February 2005

Abstract: The US Clean Air Act allows individual states to implement their own clean fuel programs to
address local or regional air quality concerns. These regulations have led to a proliferation of fuel
blends known as “boutique fuels.” For each of the three grades of gasoline, more than 15 types of
boutique fuels are currently in use, leading to about 45 different fuel blends in use nationally.
These fuels are costly to produce, but they also segment the market and increase the market
power of refiners. Using measures that differentiate gasoline regulation in a given state from
those in neighboring states, we find that both cost and market segmentation significantly affect
wholesale gasoline prices. In particular, the greater the regulatory “distance” between a state and
its neighboring states, the higher the wholesale price in that state. Simulations suggest that for
some states regulating a single boutique fuel nationally may lead to a counter-intuitive outcome:
gasoline prices may decline, even though a larger share of their market will be under regulation.

Title:	Boutique Fuels and Market Power
Number:	05-11
Author:	Ujjayant Chakravorty and Céline Nauges
Issue Date:	February 2005
Abstract:	The US Clean Air Act allows individual states to implement their own clean fuel programs to address local or regional air quality concerns. These regulations have led to a proliferation of fuel blends known as “boutique fuels.” For each of the three grades of gasoline, more than 15 types of boutique fuels are currently in use, leading to about 45 different fuel blends in use nationally. These fuels are costly to produce, but they also segment the market and increase the market power of refiners. Using measures that differentiate gasoline regulation in a given state from those in neighboring states, we find that both cost and market segmentation significantly affect wholesale gasoline prices. In particular, the greater the regulatory “distance” between a state and its neighboring states, the higher the wholesale price in that state. Simulations suggest that for some states regulating a single boutique fuel nationally may lead to a counter-intuitive outcome: gasoline prices may decline, even though a larger share of their market will be under regulation.

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