Price Transparency and Retail Prices

Abstract

Price transparency initiatives are typically undertaken by third parties to ensure that consumers have access to price information in markets where obtaining such information is costly. Since providing information is not a strategic decision by the firms in the market, what is the effect of such a practice on the pricing behavior of firms? We investigate the effect of mandatory price posting (on large electronic signs) by competing gas stations on their pricing behavior in the Italian motorway. The theoretical ambiguity in how the signs may affect prices, due to the opposing forces of lower search costs and the potential for collusion, motivates our empirical question. When prices are posted, the average price of gasoline decreases by 1 cent per liter, which represents about 20\% of stations' margins. About half the price decrease can be attributed to the introduction of a sign posting a station's own price and those of its nearest neighbors, with the other half coming from the introduction of other signs posting other stations' prices; specifically those located after the focal station in the direction of travel. Posting of prices by preceding stations does not affect prices. Despite the documented price changes, however, the introduction of signs seems to have little impact on price dispersion, suggesting that price uncertainty persists even after the policy is implemented. Analysis of customer transaction data confirms this finding, showing that less than 10\% of consumers use the posted prices effectively.

Keywords: price transparency, posted prices, retail competition, price information, difference-in-differences