By MATTHEW L. WALD - April 30th, 2002:Senate investigators looking into surges in the price of gasoline in 2001 and 2000 said declining competition in the refining industry was a primary reason, but they found no illegal activity.

The report, by the majority staff of the Permanent Subcommittee on Investigations, said that some refiners were withholding supplies in tight markets to drive up prices. But it did not find any evidence that they colluded with one another to do so. Senator Carl Levin, Democrat of Michigan and chairman of the committee, said in a telephone interview, "in a number of states, over half now, a few companies can take steps to keep supply very low.""That has the natural effect that they can raise prices with little concern of competitors coming in to undermine them."

But Red Cavaney, the president of the American Petroleum Institute, said that the companies had done nothing wrong. "To operate individually as a company, and to determine when you're going to put your supply on the market, is something businessmen and women do every single day," he said. One reason for decreased competition and more price spikes, he said, is that the gasoline market has been broken up into fragments by environmental regulations that require a different recipe in each metropolitan area; as a result, a supply disruption cannot be immediately remedied by bringing in fuel from a neighboring city. The report made the same point but also said that "retail prices are higher in areas where there is greater market concentration, especially among the major brands." The report also said that refining capacity had fallen; because of mergers and other factors, in the last 20 years, the country has gone from 324 refineries owned by 189 companies to 155 refineries owned by 65 companies, it said.

"Gasoline prices now regularly vary more in one month than they previously did in entire years," the report said.The report also said that an internal BP memorandum from 1999 identified several options for reducing supply in the Midwest, including providing incentives to other companies not to send gasoline to Chicago. A spokeswoman for the company, Jennifer Ruys, said, "they were ideas from a brainstorming session; they were ideas that were rejected by management; management decided to do the opposite."Mr. Cavaney said that overall, the refineries were doing poorly, with a rate of return on capital of only 4 percent in the last few years. But Senator Levin cited figures from Fortune Magazine's Web site that put the total return to shareholders at 12.3 percent for the last 10 years.

Questions:

1.Using concepts of supply and demand curves, explain how a decline in the number of refineries affects the market equilibrium price of gasoline.

2.What does the article convey regarding consumers' price elasticity of demand for gasoline and the change in total revenue to gasoline refineries?

3.Should refineries be allowed to withhold gasoline from the market if they believe the price is too "low"? Should individuals be allowed to withhold their labor if they believe the wage/salary they receive is too "low"?