Department of Agricultural and Resource Economics

Retail and wholesale gasoline prices vary over time and across geographic locations due to differences in government policies and other factors that affect demand, costs, and market power. We use a two-equation, reduced-form model to determine the relative importance of these various factors. An increase in the price of crude oil has been virtually the only major factor contributing to a general rise in prices over the last couple of decades. Tax variations and mergers contribute substantially more to geographic price differentials than do price discrimination, cost factors, or pollution controls.