Consumers in the market for gasoline face price uncertainty, for at least two reasons. First, gasoline prices change periodically, mainly due to the high volatility in the price of crude oil. Second, each gas station sells only one type of brand, so differently from other non-durable markets consumers cannot compare prices of competing gasoline brands at the point of purchase. The price uncertainty of consumers increases the market power of gas stations, allowing them to charge higher prices for gasoline. In this paper we investigate the effect of price uncertainty and consumers’ search costs on gasoline prices. Our identification strategy is based on the introduction of a mandatory price disclosure policy, which forces competing gas stations located on Italian motorways to post their prices on large electronic signs along the road. To interpret the price change observed after the price disclosure policy, we develop a dynamic demand model for motorway retail gasoline; since gas stations are located sequentially along the motorway routes, consumers make purchase decisions by forward-looking and comparing the utility of purchasing at each of the nearby stations. The estimated model allows us to assess the percentage of gas stations' markup that is due to price uncertainty. We also evaluate the effect of installing additional devices that would make price information more accessible to consumers.

Pain Driving to the Pump: The Effect of Consumer Search Costs on Gasoline Prices

ROSSI, FEDERICO;
2014

Abstract

Consumers in the market for gasoline face price uncertainty, for at least two reasons. First, gasoline prices change periodically, mainly due to the high volatility in the price of crude oil. Second, each gas station sells only one type of brand, so differently from other non-durable markets consumers cannot compare prices of competing gasoline brands at the point of purchase. The price uncertainty of consumers increases the market power of gas stations, allowing them to charge higher prices for gasoline. In this paper we investigate the effect of price uncertainty and consumers’ search costs on gasoline prices. Our identification strategy is based on the introduction of a mandatory price disclosure policy, which forces competing gas stations located on Italian motorways to post their prices on large electronic signs along the road. To interpret the price change observed after the price disclosure policy, we develop a dynamic demand model for motorway retail gasoline; since gas stations are located sequentially along the motorway routes, consumers make purchase decisions by forward-looking and comparing the utility of purchasing at each of the nearby stations. The estimated model allows us to assess the percentage of gas stations' markup that is due to price uncertainty. We also evaluate the effect of installing additional devices that would make price information more accessible to consumers.
Marketing Dynamics
Rossi, Federico; P., Chintagunta
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3962723
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