Competition and Pricing Strategies: Evidence from Retail Gasoline Stations
41 Pages Posted: 8 Aug 2016 Last revised: 31 Jan 2019
Date Written: January 29, 2019
I analyze the extent to which competitors adopt similar pricing strategies. Using an extensive panel data set, I find substantial heterogeneity in the price setting behavior of nearby competitors. The differences in strategy can be explained, in part, by the size of firms and relative profitability of gasoline within a firm's overall product offerings. More generally, I investigate the degree to which retail gasoline stations change over time (i) price-cost margins, (ii) regular fuel prices, and (iii) the price-gap between different grades of fuel. I pinpoint specific firm and market characteristics that explain the substantial variation in each measure, both within and across local markets. Competition increases price and margin variation. Conversely, independent and smaller firms react less frequently to changes in cost and other economic shocks. Also, premium and mid-grade fuel, relatively low demand products, are more likely than regular fuel to be priced using a rule-of-thumb. These results, and others, demonstrate a positive relationship between the relative profitability of a product and the incentive to invest in sophisticated pricing policies.
Keywords: Price-Cost Markups, Price Stickiness, Retail Gasoline
JEL Classification: D22, L10, L13
Suggested Citation: Suggested Citation