Simulating a Homogeneous Product Merger: A Case Study on Model Fit and Performance

This paper studies Tesoro’s 2013 acquisition of British Petroleum’s Los Angeles refinery. We present a merger simulation model tailored to the gasoline market, which includes Cournot firms and a price-taking fringe. This hybrid model generates margins that are more plausible than those generated by a standard Cournot model. We also test the predictive accuracy of the models relative to empirical estimates of the acquisition’s price effect. We estimate the effect of the acquisition using both difference-in-differences estimation and the synthetic control method. Both methods suggest the acquisition had little if any effect on Los Angeles gasoline prices. We can reject the price effect predicted by the standard Cournot model, but not that of the hybrid model.