Geographic Competition in the Retail Gasoline Market: Who are a Gas Station’s Competitors?

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Paul F. Byrne


Volatility in gasoline prices often leads the public to question thecompetitiveness of gasoline markets in the US. However, the retail gasoline market hasreceived less examination in the literature in part because the market exhibitscharacteristics consistent with a competitive market. The retail gasoline market consistsof numerous stations selling a homogeneous product to price conscious consumers.Competitive pressures are heightened further by the prominent posting of prices loweringconsumers’ cost of obtaining price information. The assumption of a competitive markethowever ignores the spatial differentiation that results when consumers incur travel costs.By giving individual firms pricing power, spatial differentiation creates the potential forcompeting firms to engage in strategic interaction in their pricing decision. This studyuses spatial econometrics to examine the extent to which this product differentiationresults in strategic interaction in the pricing decision of retail gas stations. Resultsindicate that gas stations engage in strategic interaction with neighboring stations whensetting prices and specification tests suggest that the each station considers the behaviorof its fifteen nearest competitors. (R3, L1)

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