Price Uncertainty and Market Power in Retail Gasoline: The Case of an Italian Highway

46 Pages Posted: 29 Aug 2016 Last revised: 28 Mar 2018

Federico Rossi

Purdue University - Krannert School of Management

Pradeep K. Chintagunta

University of Chicago

Date Written: March 22, 2018

Abstract

We quantify the effect of consumers' price uncertainty on gasoline prices and margins on an Italian highway. We observe the change in prices triggered by a longitudinal policy-based change in consumers' price information from one in which drivers on the highway had no information on the prices of stations they encountered to one that allows consumers to observe the prices of four upcoming stations on a single price sign by the side of the highway. Using these data, we estimate a model of consumer search and purchase behavior and a corresponding model of gas station pricing. We then measure the impact of varying degrees of price information on equilibrium prices, including (i) no price information, (ii) the current policy and (iii) full price information. We also compare the current policy with an alternative policy in which stations' prices are advertised with individual price signs. We find that when consumers do not have price information, gas stations are able to charge 31% more, in terms of higher price-cost margins, than when prices are known. Our welfare analysis suggests that price information is worth 57 euro cents to consumers every time they take the highway. Relative to the current mandatory policy, advertising price on individual signs is worth 19 euro cents more to consumers.

Keywords: Consumer search, Price Uncertainty, Retail Competition, Retail Gasoline

Suggested Citation

Rossi, Federico and Chintagunta, Pradeep K., Price Uncertainty and Market Power in Retail Gasoline: The Case of an Italian Highway (March 22, 2018). Chicago Booth Research Paper No. 16-15. Available at SSRN: https://ssrn.com/abstract=2819084 or http://dx.doi.org/10.2139/ssrn.2819084

Federico Rossi

Purdue University - Krannert School of Management ( email )

403 W. State Street
West Lafayette, IN 47907-2056
United States

Pradeep K. Chintagunta (Contact Author)

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

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