Too close to be similar: Product and price competition in retail gasoline markets |
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Authors: | Ganesh Iyer P B Seetharaman |
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Institution: | (1) Walter A. Haas School of Business, University of California at Berkeley, Berkeley, USA;(2) Rice University, Houston, TX, USA |
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Abstract: | We examine how product and pricing decisions of retail gasoline stations depend on local market demographics and the degree
of competitive intensity in the market. We are able to shed light on the observed empirical phenomenon that proximate gasoline
stations price very similarly in some markets, but very differently in other markets. Our analysis of product design and price
competition between firms integrates two critical dimensions of heterogeneity across consumers: Consumers differ in their
locations and in their travel costs, as in models of horizontal differentiation. They also differ in their relative preference
or valuations for product quality dimensions, in terms of the offered station services (such as pay-at-pump, number of service
bays or other added services), as in models of vertical differentiation. We find that the degree of local competitive intensity
and the dispersion in consumer incomes are sufficient to explain variations in the product and pricing choices of competing
firms. Closely located retailers who face sufficient income dispersion across consumers in a local market may differentiate
on product design and pricing strategies. In contrast, retailers that are farther apart from each other may adopt similar
product design and pricing strategies if the market is relatively homogeneous on income. Using empirical survey data on prices
and station characteristics gathered across 724 gasoline stations in the St. Louis metropolitan area, and employing a multivariate logit model that predicts the joint probability of stations within a local market differentiating on product design and pricing
strategies as a function of market demographics and local competitive intensity, we find strong support for the central implications
of the theory.
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Keywords: | Vertical differentiation Horizontal differentiation Product competition Price competition Spatial models Multivariate logit Retail gasoline markets |
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