1 - (1) You are concerned that gasoline stations may be...

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(1) You are concerned that gasoline stations may be able to exercise market power. Explain how you could detect the exercise of market power. What evidence is available on the presence of market power? What policies should or should not be pursued? (2) Should retail prices respond immediately to events that impact production (e.g. a hurricane in the Gulf or risk of conflict in Middle East)? Recent research has stressed the importance of identifying the demand and supply shocks underlying unpredictable shifts in the price of imported crude oil. The same distinction between demand and supply shocks obviously applies to the retail gasoline market. While crude oil is the main input in the production of motor gasoline, the US retail price of gasoline is also affected by gasoline-specific demand and supply factors, such as the ability of US refiners to process crude oil. Refinery fires, changes in the regulatory environment or refinery outages caused by hurricanes, for example, may cause increases in the retail price of gasoline that are not driven by events in the crude oil market. But the US market does not operate in isolation. We can only hope to understand the evolution of US retail gasoline prices if we also account for the global demand and supply shocks that drive the price of crude oil. In recent research, I propose such a model where global and US demand and supply shocks co-exist and there is feedback between the markets. Estimating it on US data, my analysis helps us understand the forces been behind the surge in US gasoline prices since 2002. The model allows for five distinct demand and supply shocks: global crude oil supply shocks; shocks to the demand for industrial commodities (including crude oil) that reflect fluctuations in global real activity; demand shocks that are specific to the crude oil market; domestic gasoline supply shocks (such as refinery outages); and domestic gasoline demand shocks (reflecting changes in the degree of urbanization, driving habits, tastes, etc.). Given the importance of crude oil imports, it is natural to focus first on developments in global crude
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This note was uploaded on 05/01/2011 for the course ECON 689 taught by Professor Staff during the Spring '08 term at Texas A&M.

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1 - (1) You are concerned that gasoline stations may be...

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