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

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

Abstract

Previous research suggests that consumers’ price information influences fuel prices. In this paper we quantify the effect of consumers’ price uncertainty on gasoline prices and margins. Using a longitudinal change in consumers’ price information, triggered by a mandatory policy that allows consumers to observe on the same sign the prices of four nearby stations, we estimate a model of consumers 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 mandatory policy and (iii) a hypothetical scenario 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 45.8% 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, providing individual signs for stations is worth 22 (euro) cents to consumers.

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