Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS NEWS: FTC economists present gasoline market merger simulation model, (Oct 29, 2015)

By Greg Hammond, J.D.

Several economists from the FTC Bureau of Economics released a working paper yesterday that examines Tesoro Corp.’s 2013 acquisition of BP, p.l.c.’s Los Angeles refinery. The paper, entitled “Simulating a Homogenous Product Merger: A Case Study on Model Fit and Performance,” presents a merger simulation model tailored to the gasoline market.

The FTC closed its investigation into Tesoro’s acquisition of BP’s Los Angeles gasoline marketing and refining assets in May 2013, concluding that the transaction would not be likely to substantially reduce competition in the market for California-grade gasoline. The Commission sent letters to counsel for Tesoro and BP, informing them of the close of the investigation, but noting that it reserved the right to take further action if necessary.

The working paper—which expresses the views of FTC economists Daniel Greenfield, Nicholas Kreisle, and Mark Williams—noted two goals: (1) to simulate the price effect of the acquisition using a variant of the Cournot model—a standard framework for analyzing issues of market power in homogeneous goods industries—which includes a competitive fringe of price-taking firms and (2) to empirically estimate the price effect of the acquisition.

According to the paper, “introducing competitive fringe of price-taking firms breaks the strict relationship between overall market shares and margins found in the standard Cournot model.” Specifically, the economists’ hybrid model restricted “equilibrium marginal costs to the range of plausible values, between the cost of crude oil and the price of gasoline.” While the standard Cournot model predicted a price increase of six percent, the hybrid model predicted a price increase between zero and one percent.

Using the two methodologies to estimate the causal effect of the transaction and test the models’ predictions, the economists found that neither method provided robust evidence of a price change after Tesoro’s acquisition of BP’s Los Angeles refinery. The economists could reject the six percent increase predicted by the Cournot model, but not the one percent increase predicted by the hybrid model. Further, the economists’ “placebo exercise indicates that if we relabel the acquisition city in our dataset at random, the probability of obtaining a result of the magnitude that we obtained for Los Angeles is greater than 0.5.”

The implications of the results, according to the paper, contribute to the merger retrospective literature, which is a growing body of studies that estimate the price effects of mergers. The study also contributes to the industrial organization literature by evaluating a simulation model that is tailored to a specific market, the paper claims.

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