Pricing in Retail Gasoline Markets

Although fuel costs represent over half of the per mile cost of driving an automobile, vehicle miles traveled are relatively inelastic with respect to changes in gasoline prices. Thus, when there are large increases in gasoline prices as there have been on occasion over the past few years, there have been concerns raised regarding the possibility of anti-competitive behavior on the part of gasoline retailers. The purpose of this paper is to examine price-cost margins for retail gasoline stations in local markets and to determine whether movements in these margins indicate the presence of such behavior. This study uses a unique proprietary data set from an extensive pricing survey that was collected twice weekly for 25 local markets in Oregon. Using a VAR specification, evidence of tacit collusion is tested for and found as indicated by downward price stickiness. Price leadership is observed in several markets, but this behavior is not found to have a significant impact on price-cost margins when compared with markets in which price leadership is not observed. This result supports the hypothesis that price leadership serves to signal price changes in the face of volatile costs in very competitive retail gasoline markets. Other factors, such as whether the firm was a known low-price firm, located in an isolated area, whether the firm was selling unbranded or branded gasoline, and whether the firm was located on an interstate exit, are found to be important and significant determinants of price-cost margins for retail gasoline stations