On the Extent of the Market: Wholesale Gasoline in the Northeastern United States

Abstract

This paper develops the classical view of the extent of markets by introducing explicitly in the analysis the concept of arbitrage costs. Arbitrage or transaction costs imply that market boundaries are essentially stochastic. While a set of products (or regions) may have binding arbitrage conditions (i.e. may be in the same market) at a given point in time, they may not at another. Thus, in defining a market, the probability that a set of agents (or regions) would h3ve binding arbitrage conditions has to be assessed. This paper develops an econometric methodology to estimate the. transaction costs required to arbitrage among a given set of products, as well as the probability that that set of products would be bound by binding arbitrage condi tions. Finally, the methodology is applied to wholesale gasoline in the Northeastern part of the United states. Address for Communications: Pablo T. Spiller Herbert Hoover Memorl~l Bldg. 9348 Stanford, CA 94305