Oligopoly in Alaska’s wholesale gasoline market

Michael Giberson

Last year, as crude oil and gasoline prices went on their wild ride, gasoline prices in Alaska took a somewhat different path than prices in the lower 48 states.  For years, average prices in Alaska were about the same as the U.S. average price.  Higher costs of delivery in Alaska were mostly offset by the nation’s lowest gasoline tax, just 8 cents a gallon, and the result was a price that more or less tracked the U.S. average price.

That pattern changed beginning in June 2008.  Prices had been marching up everywhere, but the price march stalled in the lower 48, while in Alaska (and Hawaii) prices continued to rise for another month.  Prices fell sharply throughout the country from July through December – excepting a short pause during the late hurricane season in the lower 48 – but Alaska’s prices now seemed to track the higher prices of Hawaii rather than returning to the U.S. average. (See this chart at www.alaskagasprices.com.)

Last fall the State of Alaska initiated an investigation, and in January 2009 they concluded that oligopoly was to blame.  No illegal acts were discovered, but the report suggested that with relatively few players involved competitive pressures can be weak and prices above the competitive level can be sustained for some time.

Explanation from the report, 2008 ALASKA GASOLINE PRICING INVESTIGATION:

The fewer the number of sellers in a market, the easier it is for each to observe the other and develop expectations as to the way in which each will likely react to the other’s decisions regarding output and prices. In these markets, each seller will naturally take into account the potential impact of its own actions on market prices, including the potential responses that its actions might elicit from other sellers. This type of “competitive” behavior is often referred to as oligopolistic pricing or “oligopolistic interdependence” because the decisions that each make are “dependent” in part on the expected actions (or reactions) of other sellers. In this environment, it is easier for sellers to develop a “live and let live” attitude toward their rivals that would not be possible to maintain in competitively structured markets with more sellers. As a result, oligopolistic or interdependent behavior can result in prices that are above competitive levels over extended periods of time.

Interdependent behavior on the part of sellers is not generally regarded as a violation of antitrust law as long as firms develop and implement their pricing and output decisions independently.

… Alaska’s gasoline markets can fairly be characterized as oligopolies at the wholesale level. Oligopoly markets can produce a wide range of prices, high or low, without there ever being any illegal behavior or collusion by sellers. …. [The ability to keep prices high] is dependent on the existence of some sort of entry barrier that prevents non-incumbent suppliers from entering the market and taking advantage of the higher profit opportunities. As discussed above, these entry barriers exist in parts of Alaska, limiting competition from outside suppliers, particularly during short-term periods or periods such as the second half of 2008 characterized by extreme market volatility and uncertainty.