Gasoline stations set prices to match a small number of other stations

July 31, 2008,

For many years, there have been competition concerns regarding how retail gasoline prices are set in the U.S. and Canada. Consumers have complained about the perceived uniformity of retail gas prices and the perception that retailers raise their prices at the same time. A new study in Economic Inquiry shows that to a large extent, gas stations do set prices to match a small number of other gas stations. However, these stations are not necessarily the closest in distance.

Benjamin Atkinson, Andrew Eckert, and Douglas S. West collected regular-grade gasoline prices every two hours over 103 days for 27 stations in Guelph, Ontario.

Results indicate, consistent with an informal theory of competitive gasoline pricing, that stations did tend to set prices to match a small number of other gas stations. The stations, however, were not necessarily the closest. Instead, price movements of stations within the same chain are often highly correlated, suggesting that certain stations' prices are only indirectly dependent on rival stations' prices.

Also, while some stations often respond to price changes of another station within two hours, many take considerably longer to respond.

In addition, while price decreases do ripple through the market like falling dominos, the order in which stations increase prices appears to be more strongly associated with the location and source of price control than with proximity to the leaders of these increases.

"Our results suggest that the stylized facts that the competitive theory was designed to explain are an oversimplification of how retail gasoline prices are actually set," the authors conclude. "Competition authorities should be hesitant to accept the competitive model of gasoline pricing without a full analysis of pricing in other retail gasoline markets."

Source: Wiley

Explore further: Alcoa and Phinergy show electric car with aluminum-air battery

Related Stories

Explaining the games gasoline retailers play

June 20, 2014

(Phys.org) —When it's time to top up the tank, how much thought do you give to where you will buy gas? Maybe you drive around town, looking for the best deal. Chances are, you usually visit the same station in your neighbourhood, ...

Shock at pump stems from high crude oil prices

April 24, 2008

Next time you visit the gas station and fill your tank with $3.50 or more a gallon gasoline, reflect on this. Nine years ago you could have bought that same gas for 98 cents a gallon. What is going on?

Recommended for you

Study sheds new light on ancient human-turkey relationship

January 17, 2018

For the first time, research has uncovered the origins of the earliest domestic turkeys in ancient Mexico. The study also suggests turkeys weren't only prized for their meat—with demand for the birds soaring with the Mayans ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.