Know About Fuel

Competition and Pricing Strategies: Evidence from
Retail Gasoline Stations

Marc Remer∗
Swarthmore College
January 29, 2019
Abstract
I analyze the extent to which competitors adopt similar pricing strategies. Using
an extensive panel data set, I find substantial heterogeneity in the price setting be-
havior of nearby competitors. The differences in strategy can be explained, in part,
by the size of firms and relative profitability of gasoline within a firm’s overall prod-
uct offerings. More generally, I investigate the degree to which retail gasoline stations
change over time (i) price-cost margins, (ii) regular fuel prices, and (iii) the price-gap
between different grades of fuel. I pinpoint specific firm and market characteristics that
explain the substantial variation in each measure, both within and across local mar-
kets. Competition increases price and margin variation. Conversely, independent and
smaller firms react less frequently to changes in cost and other economic shocks. Also,
premium and mid-grade fuel, relatively low demand products, are more likely than
regular fuel to be priced using a rule-of-thumb. These results, and others, demonstrate
a positive relationship between the relative profitability of a product and the incentive
to invest in sophisticated pricing policies.
Keywords: Price-Cost Markups, Price Stickiness, Retail Gasoline

JEL classification: D22; L10; L13;
∗
Swarthmore College, Department of Economics, 500 College Avenue, Swarthmore, PA, 19081. Email:
mremer1@swarthmore.edu. I thank Stephanie Kestelman for excellent research assistance. I also thank Alex
MacKay, Ellen Magenheim, Nathan Miller, Mitsukuni Nishida, and Stephen O’Connell for helpful comments.
I also thank my mother, who has not read the paper but assures me I’m a good writer and do great work.
Electronic copy available at: https://ssrn.com/abstract=2819138

1 Introduction
How prices respond to changes in the economic environment, such as marginal cost or the
level of competition, is a fundamental issue across many fields of economics. For instance,
the rate at which firms pass-through exchange rate fluctuations is key to understanding
international trade (Campa and Goldberg (2005)). Marginal cost pass-through rates of
competing firms inform the impact of horizontal mergers (Miller, Remer, Ryan, and Sheu
(2016)), tax incidence, and the welfare consequences of third-degree price discrimination
(Weyl and Fabinger (2013)). In this article, I examine the frequency and magnitude with
which multi-product firms adjust prices and margins. I focus in particular on how these
decisions depend upon the competitive environment and firm characteristics. I show that
competition has an important impact on pricing behavior. Yet, there exists considerable
dispersion in the pricing strategies of close competitors, which can be explained by the size
of the firm and the extent of its product offerings.
The primary aim of this article is to understand (i) whether competing firms undertake
similar pricing strategies and (ii) the factors that give rise to rule-of-thumb pricing versus
more complex price-setting behavior. Using a panel dataset that includes two years of daily
gas station-level prices and wholesale costs for nearly every gas station in Kentucky and
Virginia, USA, I analyze pricing strategies across a diverse set of competitive environments
and populations. Retail gasoline offers an ideal setting to analyze the interaction of pricing
and competition. Firms in this industry are subject to frequent cost changes, sell vertically
differentiated grades of fuel, offer a host of horizontally differentiated complementary prod-
ucts, and there is cross-sectional variation in the competitiveness of local markets. I exploit
all of this information in the analysis and find that each has an important impact on price
and margin variation.
The National Association for Convenience & Fuel Retailing, a lobbying organization
representing gas stations, notes in its 2008 price kit:1
How a retailer reacts to wholesale market conditions is based upon its individ-
ual pricing strategy, which varies greatly from retailer to retailer...a retailer may
seek to maintain consistent margins, matching its retail price with variations in
the wholesale cost based upon a certain formula. This strategy may result in
a retailer pricing gasoline contrary to the prevailing competitive market condi-
tions...Conversely, a retailer may seek to remain competitive in the marketplace,
1
https://web.archive.org/web/20171108215110/http://www.nacsonline.com/yourbusiness/
fuelsreports/gasprices_2008/pages/howtogetgas.aspx. Last accessed January, 28th, 2019.

in spite of changing wholesale market conditions.
This quote implies that, when marginal costs change, gas stations vary in the extent to which
they internalize competitors’ reactions when updating prices. Moreover, some gas stations
may follow a simple strategy, such as maintaining a constant margin, while others take a
more sophisticated approach and consider market conditions more broadly. In this article,
I document substantial variation in the price-setting of retail gasoline stations, both within
and across markets. I then analyze the determinants of this variation. While competition has
an influence on pricing, a number of other factors play an important role, such as whether
a product accounts for a large share of a firm’s profits and if the station is affiliated with a
major oil company.
I focus on price stickiness, markup levels and variation, and the price gaps between dif-
ferent quality-grades of fuel (regular, mid-grade, and premium).2 As marginal costs fluctuate
frequently in retail gasoline markets, it can easily be gleaned if firms follow a simple markup
strategy or take into account additional factors when setting prices. Furthermore, frequent
firm-specific cost changes allow me to measure accurately the degree of price stickiness and
how firms change prices across a menu of products under changing economic conditions.
For each pricing strategy measure, I find a great deal of heterogeneity, both across the
industry and within local markets.3 For example, I measure price stickiness as the percentage
of days a gas station changes its regular fuel price. The median gas station changes its price
on 28.1% of days. Yet, firms in the 10th and 90th percentile change their price on 13.9%
and 58.2% of days, respectively. The average within-market difference between the most and
least sticky stations is 24.5%; thus flexibly pricing firms often compete against firms that
adjust price far less frequently. I also find substantial dispersion between competing firms in
average markups, markup variation, and adjustments to the price gap between quality-grades
of fuel. Nonetheless, the correlation of these strategies within local markets is stronger than
across markets. The within market correlation is stronger when the products sold be firms
are closer substitutes and have higher sales volume.
Given the varying approaches to pricing gasoline, I further investigate the underlying
sources of the dispersion. First, competition plays an important role. Gas stations with more
distant competitors have higher markups, and more stable margins and prices. These results
can be explained by greater market power and fewer residual demand shocks, respectively.
2
Throughout the article, I use “markup” and “margin” interchangeably to refer to price minus marginal
cost. Or, in the case of comparing grades of fuel, the premium-regular markup refers to the retail premium
price minus the retail regular price.
3
I define a market as the 1.5 mile radius around a gas station. See section 3.2 for more detail.

Firm characteristics are also an important determinant of pricing strategy. Independent
retailers, not affiliated with a major oil brand, change regular fuel prices less frequently and
maintain a more stable price gap between grades of fuels. This indicates that smaller firms
are less likely to respond changing market conditions. How gasoline fits into a firm’s overall
product portfolio, which typically varies within a market, affects overall pricing behavior.
For example, supermarkets appear to use gasoline as a loss-leader, maintaining low margins
and flexible prices.
I also find evidence that firms are less likely to update optimal prices for products
in the overall product line that generate relatively lower profits. For example, gas stations
that also offer car-repair services have stickier gasoline prices than other gas stations. Their
gasoline prices are also less likely to respond to non-cost changes, and they are less likely
to adjust the price gap between different quality grades of fuel. As retail gasoline has lower
per-unit margins than car repair, these firms may have a lower incentive to update their
optimal gasoline prices as frequently as other gas stations. Similarly, I find that firms tend
not to update the premium/mid-grade price gap as much as either the premium/regular
price gap or regular prices, in general. As regular fuel account for 85% of fuel sales in the
United States,4 firms are more likely to update prices for regular fuel relative to low-volume,
higher fuel grades.
As part of the analysis, I analyze the extent to which gas stations follow simple rules-
of-thumb. Simple pricing rules have been well documented across different industries. Hall
and Hitch (1939) use survey and qualitative evidence to demonstrate that many businesses
set prices as a fixed percentage markup over cost, rather than explicitly choosing a price such
that marginal revenue equals marginal cost. More recently, Fabiani et al. (2006) survey over
11,000 European firms and find that a large share of prices are set using markup rules, rules
of thumb, or without taking into account future expectations. They also find that smaller
firms are more likely to employ these simple strategies. Similarly, Apel et al. (2005) surveyed
more than 600 Swedish firms and find that smaller firms and those facing less competition
are less likely to change their price.
I find that no firms strictly adhere to a constant markup strategy, however, firms in
the 90th percentile vary margins almost twice as much as those in the 10th percentile. On
the other hand, some firms follow a simple rule-of-thumb when pricing different grades of
fuel; more than 5% of stations maintain a constant gap between premium and mid-grade
fuel over the data sample. The low variability of gas stations’ premium/mid-grade gap (both
4
See, https://www.eia.gov/dnav/pet/pet_cons_refmg_d_nus_VTR_mgalpd_m.htm. Last accessed
July 7th, 2016.

absolutely and relative to the premium/regular gap) is likely due to higher grades of fuel
being less profitable; premium and mid-grade accounted for only 9.7% and 6.5% of national
fuel sales over the time of the data.5
Finally, I more generally assess the pricing complexity of gas stations.6 Motivated by
the rational inattention literature (Sims (2003), Mackowia and Wiederholt (2009)), I define
pricing complexity as the number of variables a firm takes into account when setting its
price. I then determine the probability that a station changes its retail price conditional on
its wholesale cost remaining constant, which allows me to determine the likelihood that a firm
takes into account variables in addition to its cost, such as a demand shift or a competitor’s
price.7
I again find that both competition and firm characteristics determine the responsiveness
of firms to non-cost factors. Less competition reduces the propensity of a non-cost price
change, as the residual demand curve is more stable (i.e. the best-response function depends
on fewer variables). Smaller firms and those that offer car repair are also less likely to
adjust prices to non-cost factors. This again suggests that investing in sophisticated pricing
strategies is limited by the size of the firm and the importance of the product to the overall
firm.
The findings in this article have implications for counter-factual supply-side analysis.
It is standard in the industrial economics literature to assume firms play a specific game
and optimal strategies, conditional on demand and anticipated responses from competitors.
Here, I find that the ability and incentive for a firm to choose it’s prices depends upon
specific characteristics of a firm and the importance of a product to its overall business
model. Such factors should be considered when performing counter-factual analysis, such as
merger simulation or the pass-through of excise taxes.
The remainder of the paper proceeds as follows. Section 2 reviews the relevant litera-
ture, and section 3 summarizes the data. Section 4 presents evidence of pricing heterogeneity,
and sections 5 and 6 analyze firm and market-level sources of the dispersion. Section 7 con-
cludes.
5
See, https://www.eia.gov/dnav/pet/pet_cons_refmg_d_nus_VTR_mgalpd_m.htm. Last accessed
July 7th, 2016.
6
I provide a formal definition of pricing complexity below.
7
In retail gasoline markets, firms’ current period wholesale costs explain almost all of its pricing variation.
Below I run a simple regression of price on cost separately for each firm and find an average r-square of 0.96.
However, a wealth of previous research also demonstrates that additional factors tend to affect retail gasoline
prices, such as expected future costs (MacKay and Remer, 2017), demand shifters such as income (Barron,
Umbeck, and Taylor), the location of competitors (Chandra and Tappata, 2011), to name a few.

2 Related Literature and Theoretical Background
2.1 Related Literature
This article relates to a number of different literatures. First, this article closely relates to
the literature on price stickiness, a phenomenon that has been widely documented in retail
gasoline markets. Benoit, Lucotte, and Ringuede (2015), analyze the impact of competition
on price stickiness throughout France, and find that the frequency of price changes between
nearby competitors is closely related. Furthermore, they find that competition reduces stick-
iness. The connection between price rigidity and competition has been empirically identified
in other industries, such as banking (Hannan and Berger, 1991), consumer deposits (Neu-
mark and Sharpe, 1992) manufacturing (Weiss, 1995), and commodities (Carlton, 1986).
The primary difference between my analysis and the industry studies is that I focus on lo-
cal competition rather than industry-wide concentration, separately identify the influence
of firm characteristics, and detail the magnitude and determinants of within-market het-
erogeneity in stickiness. Furthermore, I study the interaction of competition and a host of
additional pricing outcomes, such as margin variation and the price gaps between vertically
differentiated products.
A classic explanation for price stickiness is menu costs (Mankiw (1985), Levy et al.
(1997)). More recently, slowly adjusting prices have been related to rational inattention
(Mackowia and Wiederholt (2009)) and managerial inattention (Ellison, Snyder, Zhang,
(2017)). In this article, I estimate substantial price stickiness. I find that competition
increases price responsiveness and large brands benefiting from the resources of large oil
companies are more likely to respond to both cost and non-cost changes.
There is a growing literature in industrial economics that analyzes the complexity of
firm pricing strategies. Hortacsu and Puller (2008) study the bidding behavior of firms
in Texas electricity spot market and find that those with small market share tend to bid
non-strategically compared to the static profit-maximizing benchmark. DellaVigna and
Gentzkow (2017) find that large retail chains often set uniform prices across locations, which
decreases the price responsiveness to local economic shocks. Chu, Leslie, and Sorensen (2011)
analyze the bundled prices of a theater company and find that their simple pricing strategy
approximates the profitability of a complex, profit-maximizing mixed-bundling scheme. Mi-
ravete, Seim, and Thurk (2014) find that Pennsylvania liquor laws mandating fixed markups
over cost significantly decrease profits by failing to account for the correlation between de-
mographics and preferences. Conlon and Rao (2016) show that liquor prices in Illinois and

Connecticut are typically priced to end in 99 cents, which leads to significant nominal rigidi-
ties. They demonstrate that not accounting for this rigidity can lead to biased estimates of
cost pass-through. There is also a strain of macroeconomics that explores the pricing be-
havior of rationally inattentive firms, and finds that focusing on only a few relevant factors
can lead to sticky prices (Sims (2003, 2006); Mackowia and Wiederholt (2009)). This article,
by leveraging a large panel of gas stations, analyzes the factors that lead firms to employ
simpler strategies and have stickier prices, and specifically isolates the impact competition.
There is a long literature documenting the existence of rule-of-thumb pricing and fixed
markups in particular. Rothschild (1947) argues that rational firms engage in full-cost
pricing if they are concerned with both profit-maximization and “secure” profits. Joskow
(1973) argues that utility companies, which are regulated to set a fixed markup, use rules-
of-thumb in seeking a rate change, and estimates a probit model to confirm the behavior.
Noble and and Gruca (1999) find that 56% of firms surveyed use cost-plus pricing and that
cost-based pricing was more likely in markets where demand is difficult to estimate. Ellison
(2006) provides a comprehensive review of bounded rationality in industrial economics and a
discussion of rule-of-thumb pricing. I contribute to this literature by investigating the extent
to which gas stations employ fixed markups or simple cost-based prices, and the economic
environments that give rise to such strategies.
Finally, there is a robust literature on retail gasoline pricing behavior. Hosken, McM-
millan, and Taylor (2008) examines general regular fuel price patterns of gas stations in
the Washington, DC area, and find frequently changing margins, dynamic pricing, and that
market and firm characteristics are not consistently associated with the size of markups.
Conversely, Eckert and West (2014) identify retail gasoline stations in select Candadian
cities charging near constant margins. Price dispersion has also frequently been identified
in retail gasoline markets (Barron, Taylor, Umbeck (2004); Lewis (2008)), and to be a con-
sequence of pricing to consumers with search costs (Chandra and Tappata (2011); Nishida
and Remer (2017)). Edgeworth cyles (Noel (2007); Lewis and Noel (2011)) and asymmetric
price responses (Borenstein, Cameron, Gilbert (1997); Bachmeier and Griffin (2003)) have
also been identified in retail gasoline markets. Verlinda (2008) and Deltas (2008) find a
connection between the magnitude of asymmetry and market concentration, whereas Remer
(2015) does not find such a relationship. Price stickiness in retail gasoline markets has also
been shown to correlate with firms charging prices that end in odd numbers (Lewis (2013)).
By documenting general patterns in firms’ margin variation, relative fuel-grade prices, the
frequency of price changes, and how each varies both within and across markets I expand
the knowledge of retail gasoline pricing behavior.

3 Data and Summary Statistics
3.1 Price, Cost, and Market Share Data
The data employed in the analysis consists of daily, station-level retail prices and wholesale
costs for nearly every gas station in the states of Kentucky and Virginia, which amounts to
about six thousand stations. The data was collected by the Oil Price Information Service,
whose data is commonly relied upon in academic studies of retail gasoline markets (e.g. Lewis
and Noel 2011; Chandra and Tappata 2011; Remer 2015). The price data include regular,
mid-grade, and premium fuel prices for each station, although there is not a price observation
for each station and fuel-type for all days. On average, a station has a regular, mid-grade,
or premium price observation on 81%, 49%, and 49% of days, respectively. The data span
just over two years, from September 25th, 2013 through September 30th, 2015, except for
the mid-grade and premium prices, which span two six month intervals: September 25th,
2013 to March 25th, 2014 and September 24th, 2014 to March 24th, 2015.
The data identify the daily regular fuel rack price charged by the wholesaler to the
station, and all federal, state, and local taxes. Therefore, aside from delivery costs to the
retailer,8 privately negotiated discounts off of the rack price, and credit card transaction fees,
all of which are likely fixed over the time of the data, I observe the entire marginal cost of
selling regular fuel. The wholesale costs are brand-specific and are matched to individual
stations by OPIS; I can therefore, with high likelihood, identify when an individual station’s
wholesale cost changes.
To measure how both the size of firms and market concentration correlate with pricing
behavior, I rely upon market share data provided by OPIS. This data is aggregated by OPIS
to the weekly, county/gasoline-brand level, and is obtained directly from “actual purchases
that fleet drivers charge to their Wright Express Universal card.”9 Furthermore, the share
data aggregates across all fuel-types and does not specify quantities, which limits the ability
to compare the size of stations across counties. In the analysis below, I rely upon this share
data only as a correlate of local market power.
8
OPIS estimates delivery costs to be about 1.5 cents per gallon for each station.
9
The brand of gasoline may differ from the brand of the station. For example, some 7-Eleven stations
sell Exxon branded gasoline.

3.2 Location Data and Defining Markets
The price and sales data is complemented by detailed location and characteristic information
on each individual station. The data identify the brand of the station and gasoline sold,
additional amenities and services offered at each location, all of which are summarized in
Table 1.
The latitude and longitude coordinates for each station are included in the data and
used to assign each firm to a market. In the market-level regressions employed in section 6.1,
two different market definitions are employed. The first defines a gas station’s market to be
the geographic area and all competitors within 1.5 miles.10 This type of market defintion is
employed in such studies as Lewis (2008), Chandra and Tappata (2011), and Remer (2015),
and implies that there are a large number of overlapping markets. This comports with the
reality that retail gasoline markets do overlap; for example, two firms one mile apart may
compete with each other, but the total set of competitors that each faces may not be the
same. A downside to this market definition, however, is that a price observation may be
assigned to multiple markets, which may introduce correlation in the unobserved errors. To
avoid these problems, the market-level regressions are also performed on a subset of non-
overlapping markets. A downside to restricting the analysis to non-overlapping markets is
that there is not a unique set of such markets, and a considerable share of markets and data
is discarded.11
Table 2 summarizes the structure and population characteristics12 of overlapping mar-
kets. This table restricts the data to only include markets used in the market-level regres-
sions. The markets, therefore, have at least two gas stations, all of which have 500 regular
fuel pricing observations. On average, there are 6.6 gas stations in a market, with a mean
distance between stations of 0.9 miles. This subset of markets tend to be in slightly more
populous, higher income areas, and include fewer independent brands than does the typical
market in the data.
10
Barron, Taylor, and Umbeck (2004), Hosken, McMillan, and Taylor (2008), and Lewis (2008) each
employ a 1.5 mile radius market in analyzing retail gasoline markets.
11
Results are robust to different sets of non-overlapping markets than those presented in the this article.
12
Census tract characteristics are taken from the American Community Survey.

4 Pricing Strategy Overview and Evidence of Pricing
Heterogeneity
4.1 Pricing Strategy Definitions
In the proceeding analysis, I study multiple facets of gas stations’ overall pricing strategy. I
pay particular attention to a firm’s price-cost markup, how often it changes its price, and its
relative menu prices. Specifically, I analyze six components of gas stations’ pricing strategy,
which are listed here and further detailed below.13
(i) Average Retail Markup ≡ The average observed regular retail price minus wholesale
price.
(ii) Retail Markup Variation ≡ σ(), where rit = αi + βi (cit + tit ) + it .
(iii) Price Stickiness ≡ Percent of days with a regular fuel price change.
(iv) Price Stickiness: no cost change ≡ Percent of days with a regular fuel price change,
for the subset of days when wholesale cost does not change.
(v) Premium/Regular Markup Changes ≡ Percent of days the price gap between premium
and regular fuel changes.
(vi) Premium/Mid-grade Markup Changes ≡ Percent of days the price gap between pre-
mium and mid-grade fuel changes.
Item (i) measures the amount by which a gas station sets its retail price above its
wholesale cost. This is a measure of market power,14 and is commonly reported as an
important consideration for gasoline retailers. In the analysis, I use each gas station’s average
markup over the span of the data.
Item (ii) is the standard deviation of the regression residual detailed below. It captures
the temporal variation in a gas station’s margin and the extent to which it follows a simple
13
Throughout the remainder of the article, unless otherwise specified, price and cost refer to regular-grade
fuel.
14
I use the absolute markup (p − c) rather than the percentage markup, ( p−c p ) for two reasons. First, it
is more natural to interpret the absolute markup as a dependent variable in an OLS regression, as it is not
bounded below one. Second, absolute markups are more typically reported as the strategic consideration in
the retail gasoline industry (e.g. in the pricing kit written by The National Association for Convenience &
Fuel Retailing, referenced above.). Results are robust to using the percentage markup.

markup rule of thumb. To generate the measure, I first run the following regression separately
for each firm, i:
rit = αi + βi (cit + tit ) + it , (1)
where rit is the per-gallon retail regular fuel price, cit is the wholesale price, tit is the total
per-gallon sales tax, and it is the error term.15 This equation estimates the extent to which
a gas station employs a fixed markup (percentage or dollar) or follows a simple linear-in-cost
pricing strategy. Having an estimate of βi for each gas station, I then predict the residual,
eit , for each gas station, i, and day, t.16 Finally, I calculate the standard deviation of the
residuals for each firm, σi . Gas stations with lower values of σi have more stable margins
and more linear pricing functions.17
Item (iii) measures the frequency with which a gas station changes its regular fuel
price and is a straightforward measure of price stickiness. Item (iv) measures the frequency
of regular fuel price changes, but only includes days when a station’s wholesale cost is
unchanged. This metric is motivated by the rational inattention literature, and is intended
to capture the extent to which gas stations respond to factors other than cost. Across
all station, the average r-squared from regression equation (1) is 0.96, therefore costs are
the predominant factor driving price levels. Item (iv), therefore, measures the extent to
which firms incorporate additional factors into its pricing decision. This measure can also be
contextualized as a measure of pricing “complexity.” Section 8 in the appendix formalizes
this concept. In short, a more complex strategy is one that responds to a greater number of
state variables.
Items (v) and (vi) calculate the percentage of days a gas station changes the price
difference between premium and regular fuel, and premium and mid-grade fuel, respectively.
These measures capture the frequency with which gas stations internalize changes in demand
to its vertically differentiated products. Hastings and Shapiro (2013) find that as gasoline
prices rise marginal consumers substitute from premium to regular fuel. In such a case,
a profit-maximizing firm decreases the gap between premium and regular prices. In the
analysis below, I investigate whether firms tend to respond to this consumer substitution,
15
I also estimated a model that allows for separate coefficients for wholesale costs and taxes. Results are
qualitatively identical.
16
Equation (1) is similar to the equation estimated in Lewis (2008) to analyze price dispersion in local
retail gasoline markets. An important difference, however, is that I estimate a unique cost coefficient for
each firm rather than pooling data across firms and using a time fixed-effect to control for cost changes.
Therefore, the residual, it , is a measure of within-firm temporal price dispersion, not local market price
dispersion as in Lewis (2008).
17
Results are qualitatively the same when simply using the standard deviation of firms’ price-cost markup
rather than the residual from equation (1).
10

or opt for a simpler strategy of maintaining constant price gaps between grades of fuel.
4.2 Evidence of Pricing Heterogeneity

In this section, I document substantial variation in firms’ price-setting behavior. To highlight
the different pricing patterns of individual stations, Figure 1 plots the regular fuel retail price,
wholesale cost, and margins for three individual gas stations, each with margins that vary to
different degrees over time. Even as the wholesale cost of gasoline drops by more than 50%
from about $3.00 to $1.30, the firm in the first panel has little variation in its margin; over
two years of data, the standard deviation of its margin is 6 cents, which places it in bottom
1% of gas stations in the data. Conversely, the firm in third panel has a margin standard
deviation of 14 cents, which places it in the top 10% of firms.
Gas stations also vary widely in the extent to which they adjust the price gap between
grades of fuel: regular, mid-grade, and premium. Figure 2 plots for three stations the price
gap between premium/regular, premium/mid-grade, and mid-grade/regular fuel. The firm
in the first panel essentially has constant markups between grades of fuel for the six month
period depicted, the firm in the second panel exhibits slightly more price gap variation, and
the third firm frequently changes the gaps between fuel grades. Also, in these figures, the
the premium/mid-grade lines vary less than the premium/regular or mid-grade/regular line,
suggesting that gas stations tend to employ a simple rule when setting the relative prices of
premium and mid-grade.
A more general analysis confirms substantial disparity in the pricing behavior of gas
stations. Figure 3 depicts the distribution across firms of the six pricing metrics detailed
above, and Table 3 summarizes the distributions. The median of the average markup distri-
bution is 21.2 cents, and the 10th and 90th percentile are 12.9 and 34.7 cents, respectively.
Thus, margins in the high end of the distribution are almost three times higher compared
to the lower end. The extent to which firms vary margins, as captured by the standard
deviation of equation (1), also exhibits dispersion. The median value is 10.1 cents, and the
90/10 percentile ratio is 13.1
8.2
= 1.6. Firms at the far left tail of the distribution still exhibit
markup variation (the 1st percentile is 6.6 cents), ruling out constant markups as a strategy
employed with any regularity in the industry.
Regular fuel prices change infrequently, relative to cost changes, although there is
considerable dispersion in the level of stickiness across firms. The median firm changes its
price 28.1% of days, whereas it’s wholesale price changes on 64.6% of days. Thus, prices are
2.3 times less likely to change than are marginal costs. However, the overall distribution of
11

price change frequency is quite dispersed; the 75th percentile firm changes it’s price every
2.5 days and the 25th percentile firm changes its price every 5.2 days (40% vs. 19.1%
of days). The difference in stickiness across firms is not driven entirely by firm-specific
marginal cost changes, as the distribution of cost changes is much tighter. The difference
between the 75th and 25th percentile is only 66.5% − 61.8% = 4.7%. The shape of the
distribution of price changes, conditional on costs remaining constant, is very similar to the
unconditional distribution. The only difference is that the conditional distribution is shifted
4.6 percentage points to the left. While firms are statistically significantly more likely to
change their price when costs change, the small average difference, 4.6 percentage points, is
somewhat surprising. Furthermore, there is a 96.8 correlation between the two measures,
suggesting that firms are generally responsive or unresponsive to factors that may affect
optimal prices.
Comparing the frequency of premium/regular and premium/mid-grade gap changes
demonstrates that, in general, firms tend not to adjust the gap between premium and mid-
grade fuel. The median firm only adjusts the premium-mid grade gap 11.3% of days (once
very nine days), and there are a mass of firms that kept the gap constant throughout the
sample. The premium-regular gap, on the other hand, is adjusted more frequently, although
the distribution is even more dispersed than the regular fuel price change distribution. In-
deed, the 90/10 and 75/25 percentile ratios for the premium-regular gap distribution are
62.3
8.3
= 7.5 and 47.0
18.4
= 2.6, respectively. Taken as a whole, there are some firms that tend to
follow a rule-of-thumb, and maintain a constant gap between fuel-grade prices. Other firms,
however, consider substitution between quality grades. Still, gas stations appear more likely
to internalize customer substitution between premium and regular, rather that premium and
mid-grade when setting their menu prices. Premium and mid-grade combine for only 16.2%
of gasoline sales in the United States. I therefore find that firms employ a simpler strategy
when pricing relatively low-demand products.
The difference in fuel-grade price-gap variation is unlikely to be entirely explained by
differences in wholesale costs for the grades of fuel; mid-grade gasoline is typically a 50/50
blend of premium and regular fuel created by mixing the two fuel-types in the underground
tank at the retail location. Therefore, a cost shock that affects the premium/regular cost
spread should also affect the premium/mid-grade cost spread. If, however, the variation in
fuel-grade price gaps were entirely explained by wholesale cost differences then this would also
suggest firms are likely ignoring consumer demand substitution between grades. Hastings
and Shapiro (2013) find that as gasoline prices rise marginal consumers substitute from
premium to regular fuel, which should serve to shrink the premium/regular gap. Yet, there
12

is considerable heterogeneity across firms in the degree to which they change fuel-grade price
gaps, suggesting that some firms are more responsive to demand and supply conditions than
others.
The evidence presented in this section demonstrates substantial differences across gas
stations in how fuel prices are set. In the following section, I analyze the extent to which
these station-level differences can be explained by the competitive environment versus other
station characteristics. I then further investigate how variation in pricing behavior varies
within a market compared to across markets. While, in theory, the variation detailed in
this section could be driven entirely by cross-sectional differences in economic conditions
across markets, I find that within local markets firms still vary in how they change prices
and margins.
5 Determinants of Firm-level Prices

5.1 Competition and Distance Between Gas Stations
I now analyze the determinants of firm-level pricing strategy. Before presenting the regres-
sion analysis, I first highlight the nature of competition in retail gasoline markets and the
importance of competitive interaction. Competition is local in retail gasoline markets, as
firms tend to respond mostly to competitors within a short distance.18 Figures 4 (a) and (b)
demonstrate that gas stations are more likely to respond to more closely located competitors,
and that competitors’ prices factor into the decision to change prices.
In panel (a), I first subset firms into quartiles, according to the distance between a gas
station and its closest competitor. I then pool observations within quartiles and calculate
the probability of a firm changing its price, conditional on the size of its closest competitor’s
concurrent price change. Panel (a) depicts the probability of a price change for firms in the
1st and 4th quartile, those whose closest rival is less than 0.09 miles and greater than 0.72
miles, respectively. For rival price changes of all magnitude, gas stations are more likely to
react if their closest rival is closer than 0.09 miles. For example, if the closest competitor
increases its price by five cents then firms in the first quartile respond with 50.4% likelihood,
but firms in the fourth quartile only respond in 35.0% of observations. Thus, as firms are
18
The Federal Trade Commission typically defines “highly localized” markets, “ranging up to a few miles,”
in its antitrust investigations. See, for example, https://www.ftc.gov/system/files/documents/cases/
171-0207_act-jet_pep_complaint_0.pdf. Houde (2012), on the other hand, defines markets more broadly
by incorporating commuting patterns into an analysis of retail gasoline in Quebec City. Not accounting for
more distant competition should not affect the results in this article.
13

closer substitutes in geographic space they are more likely to respond to each other’s price
changes. Another interesting feature in panel (a) is that firms are more likely to respond
to their rival’s price decrease than increase. For firms in the first (fourth) quartile the
probability of reacting to a 2 cent rival price change is 58.8% and 43.7% (44.8% and 33.1%)
for negative and positive changes, respectively. This suggests that firms are more sensitive
to negative than positive demand shocks.
Panel (b) of Figure 4 uses data for all firms and plots the probability of a firm changing
its price in response to an own-cost change and its closest rivals price change. Gas stations
are much more responsive to a change in a competitors price than its own cost. While these
findings cannot distinguish between responding to a rival price change versus a common
demand shock, they do suggest that prices respond, in the short-run, to certain shocks (such
as a residual demand shock due to competition) more than others. One explanation is that a
firm will be more likely to react to an economic shock if it is common to the industry, rather
than firm specific. In total, Figure 4 demonstrates that (i) competition is an important
determinant of price movements, and (ii) competition diminishes with the distance between
firms. The following regressions analysis confirms these findings.
5.2 Regression Analysis: Firm-level predictors of price and mar-

gin changes
In this section, I implement a series of regressions to understand firm pricing decisions. I
use each of the six metrics detailed above as a dependent variable in a regression. The
regressions focus on two sets of explanatory variable: the competitive environment and firm
characteristics. To reflect the level of competition, I include the total number of competitors
less than 0.1 miles, the total number of competitors between 0.1 and 1.5 miles, and the
distance to the closest competitor. Finally, I include a measure of each station’s market
share. As detailed above, the data include market share at the brand/county level. I
therefore do not observe market share at the station-level; if a brand, such as Exxon, has
multiple locations in a county then I only observe its share aggregated across locations. The
market share measure, therefore, is only a proxy for market power, and may also capture
the size of the chain to which a station belongs.
The second set of regressors capture individual station characteristics. These variables
are meant to control for the extent to which a station’s complementary product offerings af-
fect its pricing strategy. In retail gasoline markets, firms typically sell at least three grades of
gasoline and additional complementary products; a majority have a convenience store which
14

sells at least dozens of additional products. In theory, a profit-maximizing firm accounts for
the cross-price elasticity of each product. However, given the complexity of internalizing the
cross-elasticities of each product, in a market with multiple firms and daily cost fluctuations,
the incentive and ability of firms to set optimal prices may vary. I account for whether a
station has a convenience store, is part of a supermarket chain, or offers repair service. I
also distinguish between small and “major” convenience stores, such as Wawa and 7-11.
Lastly, I control for whether a station is independently branded rather than affiliated with
a major oil corporation.19 Major oil companies provide “marketing support, imaging, and
other benefits” to its branded gas stations.20 Thus, independent retailers are less likely to
have the support of a large cooperation in implementing their pricing strategy.
Finally, I control for cross-sectional differences in demand conditions. To do so, I
include controls for population and mean income at the census-tract level.21 I also include
a county fixed-effect, to account for unobserved differences across geographies. Summary
statistics for the control variables are reported in Table 1.
The regressions take the following form,
Si = α + X c βc + X f βf + X p βp + δm + ui , (2)
where Si is a statistic that measures variation in firm pricing and βc , βf , and βp measure the
impact of competition, firm, and population characteristics, respectively, and δm is a county
fixed-effect. This specification also allows me analyze how each factor affects components of
firms’ pricing strategy. Moreover, I can compare variables across specifications to understand
whether certain stations undertake loss-leading strategies, or follow simple pricing rules.
Table 5 presents the results for each of the six pricing strategy metrics.22 The most stark
result is the relationship between the distance to the closest competitor and pricing behavior,
across all six measures. More distant competition affords market power and increases pricing
stability. These results are consistent with Figure 4, which demonstrates that stations are
less likely to change their regular fuel price in response to a station that is further away. Here,
I find that more distant competition results in stickier prices, more stable margins, and fewer
19
I define an independent brand station as one with fewer than 30 locations in the dataset.
20
See, “The Price Per Gallon,” on the National Association of Convenience Store’s website. https:
//www.convenience.org/Topics/Fuels/The-Price-Per-Gallon. Last accessed on January, 29th, 2019.
21
Nishida and Remer (2017) find that certain population characteristics, such as income, positively affect
gasoline consumers’ search costs and impact pricing strategies.
22
For the percentage of days with a price change (column (3)), I also control for the percentage of days
a station has a wholesale cost change. For the markup standard deviation (column (2)), I control for the
average markup.
15

changes to fuel grade price gaps. A one standard deviation in the distance to the closest
competitor (1.29 miles) decreases the likelihood of a price change by about 1.7 percentage
points and the probability of changing the fuel grade gaps by 1.2 to 1.3 percentage points.
The number of competitors within a given distance does not have as robust of an impact on
prices, suggesting that firms may largely respond to their closest substitute.
Because market share is measured at the brand-county level, rather than the station
level, it is not possible to attribute its coefficient estimates specifically to market power or
being part of a large chain. Still, the findings yield insight into pricing behavior. First,
stations belonging to a brand with a higher share enjoy greater markups, which may stem
from market power and/or brand-equity. Larger market share also leads to more stable
margins and more flexible regular fuel prices. The estimates imply that a one standard
deviation increase in market share (0.15) leads to the probability of a price change to increase
by 1.4 to 1.7 percentage points. Previous literature, such as Hannan and Berger (1991) and
Carlton (1986), find that markets with higher concentration have stickier prices. Here, I find
the opposite. However, because I find that a more direct measure of market power, distance
to the closest competitor, yields stickier prices, it may be that my measure of market share is
picking up the effect of belonging to a large brand or chain. As such, these findings may be
more akin to DellaVigna and Gentzkow (2017), who find that chains choose uniform prices
across locations. Here, I find that larger chains prefer stable margins, which leads to flexible
prices as marginal costs change frequently.
More generally, firm characteristics play an important role in setting prices. Super-
markets appear to use gasoline as a loss-leader. Their margins are 5.5 cents lower and
prices change 16 to 17 percentage points more, depending on whether or not costs have also
changed. The magnitude of these are economically significant, as the average margin is 22.7
cents, and the average price change frequency is 32.3%. There is also evidence that major
convenience stores pursue loss-leading, as their average markup is 4.7 cents lower. However,
their price stickiness is not statistically distinguishable from other firms.
The estimates for independent brands and gas stations that offer repair service suggest
these firms have a less complex overall strategy than other gas stations. Conditional on costs
remaining unchanged, independents and car service stations are 4.2 and 3.1 percentage points
(15% and 11%, relative to the average firm) less likely to change their price, respectively.
Thus, these firms are substantially less likely to account for factors other than cost in their
regular fuel pricing decision. Similarly, both types of firms have generally stickier prices and
are less likely to adjust the gaps between grades of fuel. The reason for less frequent price
adjustments for the two types of stations is related.
16

Independent brands are not affiliated with large oil companies and therefore have fewer
resources, such as access to a regional pricing manager or costly competitive intelligence,23
Furthermore, independent brands have slightly lower margins (-0.45 cents per gallon24 ) in
an industry with thin margins, and therefore may have less revenue to invest in developing
a sophisticated pricing strategy.
Gas stations with car repair services may commit relatively more resources to their
car repair service, as it is likely to be more profitable than retail gasoline. As such, they
will be less likely to respond to non-cost supply and demand shocks. Furthermore, gasoline
is not acting as a loss-leader; car repair stations have significantly higher margins (1.62
cents per gallon), as gasoline is less likely to drive25 consumers to its car repair services.
Consumers are unlikely to choose expensive car repairs based upon saving relatively little
money on gasoline. Alternatively, consumers may choose to fill up their tank when their
car repairs are finished, rather than searching for lower priced-gasoline. This economy of
scope in purchasing car repair and gasoline allows these firms maintain a higher margin.
In total, independents and car repair services are both resource constrained: the former by
low-margins and a lack of corporate backing, the latter by a more profitable business line
that demands more attention.
In the appendix, I develop a definition of pricing complexity and show that the propen-
sity to adjust prices when costs are constant serves as a measure of pricing complexity. In
Table 5, I find that independent stations and those with a repair service are less likely to
adjust prices in response to a change other than wholesale cost. On the other hand, stations
belonging to a larger chain (as measured by brand-county market share) and supermar-
kets (which belong to a chain and have a business model that involves pricing thousands of
products daily) more frequently react to non-cost changes. These findings are economically
significant. The average (median) gas station changes its price on 27.7% (23.3%) of days
17.2
when costs are constant. Gas stations with a supermarket are 23.3 = 73.8 percent more likely
to respond to a non-cost change. On the other hand, an independent gas station is 5.87
23.3
= 25.2
percent less likely to change its price when costs are constant. Thus, pricing complexity in-
creases with the size and scope of the firm. Furthermore, smaller firms (independents) and
those with additional sources of profit (car repair service) may have a decreased incentive
or ability to invest in a complex pricing strategy. Similarly, independents and car repair
23
For example, OPIS sells a subscription services that give access to real-time competitors prices, wholesale
terminal prices, or weekly regional sales volume.
24
The significance of this results is only at the 89% level.
25
Pun intended.
17

stations are the only station types with significantly more stable price gaps between quality
grades of fuel. As premium and mid-grade are the lowest demand fuel-types, adjusting their
relative prices likely yields less marginal profit than changes to regular fuel prices. Thus, I
find that firms with lower incentive and ability to invest in optimizing prices exhibit simpler
pricing with respect to relative menu prices.
6 Determinants of Market Prices

6.1 Regression Analysis: Market-level predictors of pricing het-
erogeneity
In this section, I analyze the similarity of pricing strategies between firms within local mar-
kets. The previous section demonstrated that local competition affects firms’ pricing strat-
egy. Nonetheless, there are likely limits to the impact of competition on pricing decisions;
supermarkets may loss-lead gasoline and independents may be limited in ability to perfectly
optimize price each day, regardless of competitive pressure. Here, I analyze the degree of
pricing conformity within markets, and whether firms with widely different pricing behavior
compete in the same market.
To undertake the analysis, components of firms’ pricing strategy are defined as in the
previous section. For each component, I calculate the variance and range across firms within
a market. As detailed above, I define a market to be the 1.5 mile radius around each gas
station. For the regressions, I present results for all markets, as well as a subset of markets
that are non-overlapping.
Table 4 summarizes the variance and range of strategies within each market, and
each strategy exhibits substantial within-market heterogeneity.26 For example, the median
range of the frequency of price changes is 22 percentage points; the median station changes
it’s price on 28.1 percent of days. Thus, in a typical market, gas stations with frequently
changing prices compete with stations that have much stickier prices. Similarly, the median
variance and range of changes to the premium/regular gap is 160.0 and 31.1 percentage
points, respectively. The median station changes this gap on 30.2% of days; therefore firms
vary widely within local markets in the extent to which they change relative menu prices.
On the other hand, there is much less dispersion in markup variation; the median within
market variance is 1.2 cents, compared to a station-median of 10.1 cents. Average markups
26
I only include markets with at least two gas stations.
18

also exhibit less within market variation, as compared to dispersion in price stickiness. It
therefore appears that competitors vary less in their markups than in the strategy they
implement to achieve those markups.
Given the substantial within-market variation in pricing, I now implement a series
of regressions to explain these pricing differences. I use the within-market variance of each
strategy metric as a dependent variable in a series of regressions.27 To capture the the degree
of competition in a market, I include the number of stations and the average distance between
stations as dependent variables. The results above show that greater distance between firms
diminishes competition. The fraction of stations that are independent is also included, as
these firms are found to exhibit different pricing behavior than firms affiliated with major
oil companies. I also use a variable that measures the similarity of amenities offered by gas
stations in the market. To create this variable, for each firm, I generate a vector of zeros
and ones that indicate if a station has a particular set of characteristics, such as car repair
or a convenience store.28 I then take the pairwise distance between all characteristic vectors
in the market, and use the mean pairwise distance in the market as a dependent variable.
Finally, to capture demographic differences, census-tract mean income and population, and
a state fixed-effect are included.
Results of regressing each pricing metric on the set of controls is reported in Table
6. In regressions (1) through (4), the variance in market-level strategy increases with the
average distance between gas stations. For example, increasing the average distance by one
standard deviation (0.35 miles) increases the variance in non-cost price changes by 29.6
percentage points. These results demonstrate that more direct competition between firms
leads to greater pricing conformity. Interestingly, mean distance affects only metrics that
capture exclusively regular gasoline prices, which account for 84% of fuel sales in the United
States. The price gaps between quality-grades of fuel are not significantly affected by the
closeness of competitors. This may be because consumers of high-grade fuels have higher
search costs,29 and therefore are less likely to substitute between stations. Alternatively, it
may be that premium and mid-grade account for a low percentage of revenue, and therefore
firms invest less in optimizing these relative menu prices in response to competitors.
I also find that pricing strategies are more heterogeneous in markets with stations
more distant in characteristic space. In five of the six regressions, there is a positive and
27
Results are qualitatively the same when using the within-market range as the dependent variable.
28
The full list of characteristics are independent brand, major convenience store, regular convenience store,
car repair service, and supermarket.
29
See, for example, Remer (2015).
19

significant relationship between distance in characteristic space and pricing strategy variance.
These results are consistent with the station-level regressions, where, conditional on controls
for competition, station characteristic influence pricing behavior. Here, I find that even
within local markets, stations with different amenities tend to vary prices, markups, and
relative menu prices at different rates. Product differentiation can explain differences in firms’
average markup. Heterogeneity in price stickiness, margin variation, or changes to relative
menu prices, however, are less directly interpreted as a result of product differentiation.
Results in the previous section, however, show that certain characteristics lead to different
overall strategies, such as loss-leading, and change the incentive to invest in optimal pricing
strategies. These market-level regressions lend further support to this explanation. Table
7 confirms that results are robust to restricting the data to only include non-overlapping
markets.
6.2 Market-level conformity in pricing strategy

In this section, I asses directly whether a gas station’s strategy is more closely related to the
competitors in its market than a randomly selected group of stations. The purpose of the
analysis is to understand (i) the extent to which firms internalize local market conditions in
their pricing decisions, and (ii) whether the extent of internalization varies across different
pricing decisions. To perform the analysis, I compare the variance in pricing strategy metrics
within each market to a “random” market with the same number of firms.
More specifically, for each of the six pricing metrics I implement the following proce-
dure.
(i) Select a firm, j, that is at the center of a market of 1.5 mile radius.
(ii) Calculate the variance in pricing strategy metric across all firms in the market: Var(Sj ).
This includes the strategy of firm j, and its N competitors.
(iii) Randomly select N firms from the data, such that none of the randomly selected firms
are in the same market as firm j.
(iv) Calculate the variance in pricing strategy across all firms in the “random” market:
Var(Rj ). This includes the strategy of firm j, and the N random firms.
(v) Calculate the difference in the variance of the random market to that of the actual
market: Dj ≡ Var(Rj ) - Var(Sj ).
20

I enact this procedure for all firms in the data with at least one competitor within 1.5
miles and sufficient data available to calculate the strategy statistic. This results in 1,686 to
3,926 markets, depending on the strategy component.30 If strategies within a local market
are generated from the same distribution as the industry at large, then the difference in the
variance between random and actual markets should be zero, on average. On the other hand,
if the pricing strategies within a market are more correlated than in a random market, then
the difference in variance between random and actual markets should be positive, on average.
This setup is preferred to comparing each market’s variance to the population variance, as
markets typically have a small number of firm’s.31 Thus, the law of large numbers does not
apply in most instances when comparing the market’s variance to the population variance.
Figure 5 depicts the distribution of variance differences between a random and actual
market, Dj , for each of the six strategy metrics. Table 8 lists the percentage of markets such
that the actual market has a lower variance than the random market. For all six strategies,
the a majority of local markets have a lower variance than a random market. Moreover,
for each strategy, Dj is significantly greater than zero. These findings demonstrate that
firms internalize local market conditions and respond to competition. Given the relationship
between competition and pricing, the results are perhaps unsurprising. Comparing the
distribution of Dj across strategy metrics, however, yields important additional insight into
firm pricing behavior.
For average markups, 86.4% of the Dj distribution is above zero. In standard price-
stetting models, such as in static Nash-Bertrand competition, markups are related to the
elasticity of a firm’s residual demand curve. The elasticity is largely driven by consumers
willingness to pay (aggregate market elasticity) and the degree of substitutability between
products (cross-price elasticity). These relationships are a direct consequence of firms’ first-
order profit maximizing condition. Here, I find that firms within a market are choosing
markups that are much more related than to a random collection of gas stations. Thus,
when choosing marginal profit firms generally internalize local market conditions.
Similarly, the distributions of Dj are largely above zero for the price stickiness measures.
For the frequency of price changes, 81.1% of markets have a lower variance than a random
market, and 77.7% of markets for price changes conditional on costs being constant. Thus,
while there exists a large amount of dispersion in price stickiness within a market, there tends
30
I define “sufficient” data to be 500 regular fuel observations for each station in the market, for strategies
pertaining only to regular fuel. I include the extra condition of at least 150 fuel-gap price changes (which
can be zero in magnitude), for fuel-gap change metrics.
31
Conditional on there being at least 2 firms in the market, the mean (median) number of firms is 6.6 (6).
Also, 13% of these markets have only 2 stations.
21

to be less than would be expected if firms were not internalizing local market conditions
(including competition).
On the other hand, the distribution of Dj for premium/mid-grade adjustments is al-
most centered at zero. In only 55.2% of markets is the variance of premium/mid-grade
adjustments lower than that of a random market with the same number of competitors.
This finding is consistent with the market-level results above, where the average distance
between competitors has no impact on this statistic. Thus, when choosing to change the gap
between high-quality fuel grades, firms often do not follow a strategy similar to their local
competitors. This again demonstrates that firms may not invest resources in optimizing
prices for products that generate a low percentage of profits.
7 Conclusion
In this article, I document substantial heterogeneity in the pricing behavior of retail gasoline
stations. I find that while gas stations do respond to local market conditions, there are
constraints on the extent to which firms adjust their prices. In particular, firms are less
likely to adjust prices of products that account for a relatively low share of their profits.
Moreover, smaller firms may be constrained in the ability to frequently optimize prices.
Market-level analysis demonstrates that within-market correlation of pricing strategies
is greater than across markets. Closer competitors, as measured by the average distance be-
tween competitors, have a more similar pricing strategy. However, there are still substantial
differences between the pricing behavior of firms within local markets.
These findings have important implications for counter-factual supply-side analysis.
In such analysis, firms are assumed to play optimal strategies conditional on demand and
anticipated responses from competitors. Yet, I find that the ability and incentive for a firm to
choose it’s prices depends upon specific firm characteristics and the importance of a product
to its overall business model. Such factors should be carefully considered when performing
counter-factual analysis.
References
Apel, M., R. Friberg, and K. Hallsten (2005): “Microfoundations of Macroeconomic
Price Adjustment: Survey Evidence from Swedish Firms,” Journal of Money, Credit, and
Banking, 37(2), 313–338.
22

Armstrong, T. A. (2015): “Large Market Asymptotics for Differentiated Product Demand
Estimators with Economic Models of Supply,” Discussion paper.
Bachmeier, L., and J. Griffin (2003): “New Evidence on Asymmetric Gasoline Price
Responses,” Review of Economics and Statistics, 85(3), 772–776.
Barron, J. M., B. A. Taylor, and J. R. Umbeck (2004): “Number of Sellers, Average

Prices, and Price Dispersion,” International Journal of Industrial Organization, 22(8),
1041–1066.
Baumol, W. J., and R. E. Quandt (1964): “Rules of Thumb and Optimally Imperfect
Decisions,” The American Economic Review, 54(2), 23–46.
Benoit, S., Y. Lucotte, and S. Ringuede (2015): “Competition and Price Stickiness:
Evidence from the French Retail Gasoline Market,” Discussion paper.
Borenstein, S., A. C. Cameron, and R. Gilbert (1997): “Do Gasoline Prices Respond
Asymmetrically to Crude Oil Price Changes?,” Quarterly Journal of Economics, 112(1),
305–339.
Bulow, J. I., and P. Pfleiderer (1983): “A Note on the Effect of Cost Changes on
Prices,” Journal of Political Economy, 91(1), 182–185.
Burdett, K., and K. L. Judd (1983): “Equilibrium Price Dispersion,” Econometrica,

51(4), 955–969.
Campa, J. M., and L. Goldberg (2005): “Exchange Rate Pass-through into Import
Prices,” Review of Economics and Statistics, 87(4), 679–690.
Carlton, D. W. (1986): “The Rigidity of Prices,” The American Economic Review, 76(4),
637–658.
Chandra, A., and M. Tappata (2011): “Consumer search and dynamic price dispersion:
an application to gasoline markets,” The RAND Journal of Economics, 42(4), 681–704.
Chu, C. S., P. Leslie, and A. Sorensen (2011): “Bundle-Size Pricing as an Approxi-

mation to Mixed Bundling,” The American Economic Review, 101(1), 263–303.
Conlon, C., and N. S. Rao (2015): “Discrete Prices and the Incidence and Efficiency of
Excise Taxes,” Discussion paper.
23

Davis, M. C., and J. D. Hamilton (2004): “Why are Prices Sticky? The Dynamics of
Wholesale Gasoline Prices,” Journal of Money, Credit, and Banking, 36(1), 17–37.
DellaVigna, S., and M. Gentzkow (2017): “Uniform Pricing in US Retail Chains,”

Discussion paper.
Eckert, A., and D. S. West (2004): “Retail Gasoline Price Cycles Across Spatially
Dispersed Gasoline Stations,” The Journal of Law and Economics, 47(1), 245–273.
(2014): “Daily Price Cycles and Constant Margins: Recent Events in Canadian
Gasoline Retailing,” Energy Journal, 35, 47–69.
Ellison, G. (2006): “Bounded Rationality in Industrial Organization,” in Advances in

Economics and Econometrics: Theory and Applications, Ninth World Congress, Volume
2, pp. 142–174. Cambridge University Press.
Ellison, S. F., C. M. Snyder, and H. Zhang (2017): “Costs of Managerial Attention

and Activity as a Source of Sticky Prices: Structural Estimates from an Online Market,”
Discussion paper.
Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias,

F. Martins, T. Matha, R. Sabbatini, H. Stahl, and A. Stokman (2006): “What
Firms’ Surveys Tell Us about Price-Setting Behavior in the Euro Area,” International
Journal of Central Banking, 2(3), 3–47.
Hall, R. L., and C. J. Hitch (1939): “Price Theory and Business Behaviour,” Oxford
Economic Papers, (2), 12–45.
Hannan, Y., and A. N. Berger (1911): “The Rigidity of Prices: Evidence from the
Banking Industry,” The American Economic Review, 81(4), 938–945.
Hastings, J. S., and J. M. Shapiro (2013): “Fungibility and Consumer Choice: Evidence
from Commodity Price Shocks,” The Quarterly Journal of Economics, 128(4), 1449–1498.
Hortaçsu, A., and S. L. Puller (2008): “Understanding Strategic Bidding in Multi-

Unit Auctions: A Case Study of the Texas Electricity Spot Market,” The RAND Journal
of Economics, 39(1), 86–114.
Hosken, D. S., R. S. McMillan, and C. T. Taylor (2008): “Retail Gasoline Pricing:

What Do We Know?,” International Journal of Industrial Organization, 26(6), 1425–1436.
24

Houde, J.-F. (2012): “Spatial Differentiation and Vertical Mergers in Retail Markets for
Gasoline,” American Economic Review, 102(5), 2147–2182.
Joskow, P. L. (1973): “Pricing Decisions of Regulated Firms: A Behavioral Approach,”

The Bell Journal of Economics and Management Science, 4(1), 118–140.
Levy, D., M. Bergen, S. Dutta, and R. Venable (1997): “The Magnitude of Menu
Costs: Direct Evidence from Large U. S. Supermarket Chains,” Quarterly Journal of
Economics, 112(3), 791–824.
Lewis, M. S. (2008): “Price Dispersion and Competition with Differentiated Sellers,” Jour-
nal of Industrial Economics, 56(3), 654–678.
(2011): “Asymmetric Price Adjustment and Consumer Search: An Examination

of the Retail Gasoline Market,” Journal of Economics & Management Strategy, 20(2),
409–449.
(2013): “Odd Prices at Retail Gasoline Stations: Focal Point Pricing and Tacit
Collusion,” Journal of Economics & Management Strategy, 24(3), 664–685.
Lewis, M. S., and M. Noel (2011): “The Speed of Gasoline Price Response in Markets
with and without Edgeworth Cycles,” Review of Economics and Statistics, 93(2), 672–682.
MacKay, A., and M. Remer (2017): “The Dynamics of Pass-through with Expected and
Unexpected Costs,” Discussion paper.
Mackowiak, B., and M. Wiederholt (2009): “Optimal Sticky Prices under Rational
Inattention,” The American Economic Review, 99(3), 769–803.
Mankiw, N. G. (1985): “Small Menu Costs and Large Business Cycles: A Macroeconomic
Model of Monopoly,” Quarterly Journal of Economics, 100(2), 529–537.
Miller, N. H., M. Remer, C. Ryan, and G. Sheu (2016): “Pass-Through and the
Prediction of Merger Price Effects,” Journal of Industrial Economics, 64(4), 683–709.
Miravete, E., K. Seim, and J. Thurk (2014): “Complexity, Efficiency, and Fairness of
Multi-Product Monopoly Pricing,” Discussion paper.
Neumark, D., and S. A. Sharpe (1992): “Market Structure and the Nature of Price
Rigidity: Evidence from the Market for Consumer Deposits,” The Quarterly Journal of
Economics, 107(2), 657–680.
25

Nishida, M., and M. Remer (2016): “The Determinants and Consequences of Search
Cost Heterogeneity: Evidence from Local Gasoline Markets,” Discussion paper.
Noble, P. M., and T. S. Gruca (1999): “Industrial Pricing: Theory and Managerial
Practice,” Marketing Science, 18(3), 435–454.
Noel, M. (2007): “Edgeworth Price Cycles, Cost-based Pricing, and Sticky Pricing in
Retail Gasoline Markets,” Review of Economics and Statistics, 89(2), 324–334.
Remer, M. (2015): “An Empirical Investigation of the Determinants of Asymmetric Pric-

ing,” International Journal of Industrial Organization, 42, 46–56.
Rothschild, K. W. (1947): “Price Theory and Oligopoly,” The Economic Journal,

57(227), 299–320.
Schechner, S. (2017): “Why Do Gas Station Prices Constantly Change? Blame the
Algorithm,” The Wall Street Journal, May, 8th.
Schmitt-Grohe, S., and M. Uribe (2004): “Optimal fiscal and monetary policy under
sticky prices,” Journal of Economic Theory, 114(2), 198–230.
Sims, C. A. (2003): “Implications of Rational Inattention,” Journal of Monetary Eco-

nomics, 50(3), 665–690.
(2006): “Rational Inattention: Beyond the Linear-Quadratic Case,” The American

Economic Review, 96(2), 158–163.
Tappata, M. (2009): “Rockets and Feathers: Understanding Asymmetric Pricing,” The

RAND Journal of Economics, 40(4), 673–687.
Varian, H. R. (1980): “A Model of Sales,” The American Economic Review, 70(4), 651–
659.
Verlinda, J. A. (2008): “Do Rockets Rise Faster and Feathers Fall Slower in an Atmo-
sphere of Local Market Power? Evidence from the Retail Gasoline Market,” Journal of
Industrial Economics, 56(3), 581–612.
Weiss, C. R. (1995): “Determinants of Price Flexibility in Oligopolistic Markets: Evidence

from Austrian Manufacturing,” Journal of Economics and Business, 47(5), 423–439.
26

Weyl, G. E., and M. Fabinger (2013): “Pass-Through as an Economic Tool: Principles
of Incidence under Imperfect Competition,” Journal of Political Economy, 121(3), 528–
583.
Yang, H., and L. Ye (2008): “Search with Learning: Understanding Asymmetric Price
Adjustments,” The RAND Journal of Economics, 39(2), 547–564.
27

8 Appendix - A Simple Measure of Pricing Complexity
I present a simple definition of pricing complexity that provides guidance and context for
some of the empirical analysis performed in the body of the article. In words, the complexity
of a pricing strategy, at a point in time, is increasing in the number of factors, such as costs,
rivals prices, etc., upon which it depends.
Consider a firm i that sets a price, pit , at each time period t, where pit solves the firm’s
profit maximization problem:
∞
X
max{E[ β t Π(pit , Θit )]}.
pit
t=0
Here, Θit represents the firm’s information set at time t and may include current and
previous period variables, as well as expected future realizations of variables. Assume Θit
is a finite vector in Rn . While Θit ∈ Rn , a firm may choose to place zero weight on any
number of variables, m ≤ n. For example, a firm may ignore the cross-price elasticity of
distantly related product offerings, the prices of small competitors, or expected future cost
realizations. I then define a firm’s effective information set as θit ⊆ Θit , where θit ∈ Rk , and
k =n−m
A firm’s optimal pricing function,32 pit (θit ), is then a mapping from Rk → R. I define
the complexity of a firm’s strategy at time, t, to be of order k: the number of variables upon
which it places positive weight when settings its price. A strategy of order k is more complex
than one of order g if k > g.
While it is unlikely to directly observe the order of complexity of a firm’s pricing
strategy, I devise a simple measure of gas stations’ relative pricing complexity. In particular,
I empirically test the extent to which retail gas stations take factors into account in addition
to its own wholesale cost when setting its current price. To do so, I calculate the probability
that a gas station changes its price, conditional on its wholesale cost remaining constant. In
retail gasoline markets, wholesale costs explain nearly all of a firm’s pricing variation. By
investigating a firm’s price when its costs are unchanged, I am able to identify if its price
responds to a non-cost factor. Thus, by definition, a firm that changes its price when costs
are constant has a more complex strategy at time t than a firm whose price is unchanged, and
therefore more frequent non-cost price changes reflect relatively more complex strategies.33
32
For notational simplicity, I assume single product firms.
33
This identification technique does not distinguish between the number of factors a firm considers and
the frequency with which it considers a single non-cost factor. Extending the simple model to include the
probability a firm considers each factor, and defining complexity as an increasing function of the sum of these
28

I also perform indirect tests of pricing complexity: the frequency with which firms
vary (i) price-cost margins (ii) price gaps between grades of fuel and (iii) the frequency of
regular fuel price changes. While these measures are not direct tests of complexity, as defined
above, it seems straight forward to interpret a gas station that seldom changes its price or
margin as implementing a less complex strategy. Indeed, the rational inattention models of
Sims (2003, 2006) and Mackowia and Wiederholt (2009) derive sticky prices as a result of
firms ignoring relevant information. Also, it is important to mention that gas stations may
possess different technologies that allow for greater price flexibility, such as electronic signage
or pricing software.34 These technologies, however, are endogenous investment choices of the
firm that reflect the importance it places on pricing sophistication, and are not an exogenous
constraint on pricing behavior.
probabilities would then allow for this strategy to directly identify relative complexity. Also, identification
implicitly assumes that each day there is some non-cost factor to which a gas station could react.
34
Schechner (2017) describes the recent proliferation of artificial intelligence-based pricing software being
adopted by gas stations in the Netherlands.
29

9 Figures
Figure 1: Price, Cost, and Markups: Three Individual Stations
400 400
300 300
200 200
100 100
Cents per gallon
0 0
10/1/2013 4/1/2014 10/1/2014 4/1/2015 10/1/2015 10/1/2013 4/1/2014 10/1/2014 4/1/2015 10/1/2015
400
300
200
100
0
10/1/2013 4/1/2014 10/1/2014 4/1/2015 10/1/2015
Regular Price Wholesale Cost

Regular Markup
Notes: The per-gallon prices of retail regular fuel, wholesale regular fuel, and the difference
between the two (“Markup”) are depicted for three individual stations. The daily data
ranges from September 25th, 2013 through September 30th, 2015.
30

Figure 2: Price Gap Between Retail Fuel Grades: Three Individual Stations
60 60
50 50
40 40
30 30
20 20
10 10
Cents per gallon
0 0
10/1/2014 12/1/2014 2/1/2015 4/1/2015 10/1/2014 12/1/2014 2/1/2015 4/1/2015
100
80
60
40
20
0
10/1/2014 12/1/2014 2/1/2015 4/1/2015
Prem/Regular Gap Mid/Regular Gap

Prem/Mid Gap
Notes: The price gaps are defined as the difference between the prices of specified grades
of fuel. The daily data depicted are for three individual firms and ranges from September
24th, 2014 to March 24th, 2015.
31

Figure 3: Pricing Strategy Heterogeneity
Average Retail Markup Price Stickiness Premium/Regular Markup Changes

.15 .15 .15
.1 .1 .1
.05 .05 .05

Fraction of Observations
0 0 0
0 25 50 75 100 0 .25 .5 .75 1 0 .25 .5 .75 1
Cents Per Gallon Percent of Days Percent of Days
Retail Markup Variation Price Stickiness: Premium/Mid-Grade Markup Changes

.15 No Cost Change .15
.15
.1 .1
.1
.05 .05 .05
0 0 0
0 5 10 15 20 0 .25 .5 .75 1 0 .25 .5 .75 1
Cents per Gallon Percent of Days Percent of Days
Notes: The histograms depict the distribution across gas stations of the strategy statistics
defined in section 4.1.
Figure 4: Probability of a Price Change: Competition vs. Cost
(a) (b)
.8 .8
Probability of Price Change
Probability of Price Change
.6 .6
.4 .4
.2 .2
-10 -8 -6 -4 -2 0 2 4 6 8 10 -10 -8 -6 -4 -2 0 2 4 6 8 10
Closest Rival Price Change: Cents Per Gallon Cents Per Gallon
Rival < .09 Miles Polynomial Smoother Closest Rival Price Change Polynomial Smoother
Rival > .72 Miles Polynomial Smoother Own-Cost Change Polynomial Smoother
Notes: Panel (a) depicts the probability that a station changes its price, conditional on the
size of the price change of its closest competitor. Panel (b) depicts the probability that a
station changes its price, given the size of its closest competitor’s price change or the size of
its own-cost change. The points are fitted using a local polynomial smoother.
32

Figure 5: Market Variance Relative to “Random” Market
Average Retail Markup Retail Markup Variation

.2 .2
.1 .1
0 0
-300 -200 -100 0 100 200 300 -15 -10 -5 0 5 10 15
Fraction of Observations
Price Stickiness Price Stickiness:

.2 No Cost Change
.2
.1
.1
0 0
-1000 -500 0 500 1000 -1000 -500 0 500 1000
Premium/Regular Markup Changes Premimum/Mid-Grade Markup Changes

.2 .2
.1 .1
0 0
-1000 -500 0 500 1000 -1000 -500 0 500 1000
Notes: Each panel depicts the distribution of Dj , as defined in section 6, for each strategy
statistic. For a given strategy statistic, Dj is the within-market variance of a “random”
market minus the within-market variance of an actual market.
33

10 Tables
Table 1: Summary Statistics: Individual Retail Gasoline Stations
Mean Std. Dev. Min. Max. Observations

Independent Brand 0.48 0.50 0.00 1.00 6388
Convenience Store 0.69 0.46 0.00 1.00 5929
Major Convenience 0.08 0.27 0.00 1.00 6388
Supermarket 0.03 0.18 0.00 1.00 5922
Repair Service 0.08 0.27 0.00 1.00 5922
Brand Market Share 0.16 0.15 0.00 1.00 5530
Closest Comp. 0.77 1.29 0.00 12.62 6388
Comp. ∈ (0.1, 1.5) 2.33 2.72 0.00 16.00 6388
Comp. < 0.1 miles 0.33 0.61 0.00 4.00 6388
Population - Tract 4.80 1.82 0.00 13.51 6380
Mean Income - Tract 65.88 30.89 15.40 335.99 6372
Notes: Summary statistics are at the individual gas station level. Brand
Market Share is the average weekly gasoline-brand share for the county in
which the station is located. Population and Mean Income are for the census
tract in which the station is located. Both are measured in thousands.
Table 2: Market-level Summary Statistics
Mean Std. Dev. Min. Max. Observations

Number of Stations 6.63 3.78 2.00 23.00 3926
Mean Distance Between Stations 0.91 0.35 0.01 1.88 3926
Fraction Independent 0.35 0.25 0.00 1.00 3926
Charteristic Similarity 0.90 0.35 0.00 2.00 3926
Population - Tract 4.91 1.86 0.95 13.51 3926
Mean Income - Tract 70.31 32.79 15.40 274.13 3926
Notes: Summary statistics are at the market-level. A market is a 1.5 mile radius around
a gas station. Population and Mean Income are for the census tract at the center of
the market. Characteristic Similarity measures the average distance between stations in
characteristic space, and is defined in section 5.4.
34

Table 3: Pricing Strategy Order Statistic
Mean 10% 25% 50% 75% 90% Observations

Average Retail Markup 22.7 12.9 16.8 21.2 26.2 34.7 4520
Retail Markup Variation 10.4 8.2 9.1 10.1 11.5 13.1 4520
Price Stickiness 32.3 13.9 19.1 28.1 40.0 58.2 4520
Price Stickiness: No Cost Change 27.7 10.1 15.2 23.3 34.5 52.9 4520
Prem/Reg Markup Changes 33.5 8.3 18.4 30.2 47.0 62.3 4463
Prem/Mid Markup Changes 16.5 0.0 4.3 11.3 24.0 38.5 4335
Notes: Order statistics are at the gas-station level for the strategy statistics defined in section
4.1. The units in the first two rows are cents per gallon. The units in the last four rows are
percentage points.
Table 4: Market-level Strategy Dispersion
Mean 10% 25% 50% 75% 90% Observations

Market Variance
Market Range
Notes: Order statistics are at the market level, where a market is defined as the 1.5 mile radius
around a gas station. The top portion takes the variance of the given strategy statistic for all gas
stations in a market. The bottom portion takes the range (maximum minus minimum) of the given
strategy statistic for all gas stations in a market. Only markets with at least two gas stations are
included. To be included in the sample, a gas station in the market must have 500 regular gasoline
observations, and for quality-markup changes, at least 150 quality-markup change observations.
35

Table 5: Determinants of Station Pricing Strategies
(1) (2) (3) (4) (5) (6)

Avg. Markup Markup Var. Sticky Sticy NC Prem-Reg Prem-Mid
Independent Brand -0.447 0.034 -3.643∗∗∗ -4.247∗∗∗ -5.869∗∗∗ -3.898∗∗∗
(0.28) (0.06) (0.81) (0.91) (0.98) (0.69)
Convenience Store 0.506∗∗ -0.319∗∗∗ -0.318 -0.183 0.309 0.586
(0.24) (0.08) (0.61) (0.63) (1.31) (1.13)
Major Convenience -4.657∗∗∗ 0.972∗∗∗ 0.663 0.402 1.028 1.081
(0.50) (0.22) (1.24) (1.31) (1.80) (1.37)
Supermarket -5.453∗∗∗ 1.909∗∗∗ 16.480∗∗∗ 17.120∗∗∗ 10.888∗∗∗ 4.036∗∗
(0.41) (0.15) (1.45) (1.56) (2.76) (1.73)
Repair Service 1.618∗∗ -0.155 -3.045∗∗∗ -3.087∗∗∗ -2.782∗ -2.455∗∗
(0.71) (0.11) (1.15) (1.09) (1.50) (0.97)
Brand Market Share 3.429∗∗ -0.865∗ 9.502∗∗ 11.506∗∗ -4.810 -6.229
(1.51) (0.49) (4.56) (4.93) (3.73) (5.22)
Closest Comp. 0.275∗∗ -0.070∗ -1.399∗∗∗ -1.328∗∗∗ -1.013∗∗ -0.925∗∗
(0.11) (0.04) (0.23) (0.25) (0.46) (0.36)
Comp. ∈ (0.1, 1.5) -0.050 0.028∗ 0.145 0.090 0.100 -0.056
(0.06) (0.01) (0.10) (0.10) (0.14) (0.13)
Comp. < 0.1 miles -0.140 -0.098∗ 0.030 0.129 0.358 0.291
(0.21) (0.05) (0.35) (0.34) (0.63) (0.56)
Constant 22.485∗∗∗ 9.755∗∗∗ 52.942∗∗∗ 27.345∗∗∗ 34.952∗∗∗ 16.294∗∗∗
(0.73) (0.54) (4.08) (1.60) (1.57) (1.59)
Observations 4362 4362 4362 4362 2757 2565
County FE Yes Yes Yes Yes Yes Yes
Pop. Controls Yes Yes Yes Yes Yes Yes
Pct. Cost No No Yes No No No
Avg. Markup No Yes No No No No
Notes: Regressions are at the station-level. Dependent variables are the six strategy statistics defined
in section 4.1. Brand Market Share is the average county share of sales for the brand of gasoline that
the station sells. “Comp.” stands for competitor. Regressions include a county fixed-effect. Census-
tract population and mean income are included as population controls. “Pct. Cost” is a control for the
percentage of days with a wholesale cost change. “Avg. Markup” is the station’s average markup of price
over wholesale cost. Standard errors are clustered at the county level and robust to heteroskedasticity.
Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
36

Table 6: Market-level Variance in Pricing Strategies
(1) (2) (3) (4) (5) (6)

Number of Stations 1.39∗∗∗ 0.10∗∗∗ 2.57∗∗∗ 2.04∗∗∗ -5.27∗∗∗ -0.48
(0.19) (0.01) (0.67) (0.76) (1.29) (1.37)
Mean Distance Between Stations 10.72∗∗∗ 0.88∗∗∗ 74.17∗∗∗ 84.63∗∗∗ 27.46 13.51
(1.73) (0.14) (9.18) (10.02) (19.88) (17.45)
Fraction Independent 3.10 0.62∗∗∗ -88.79∗∗∗ -90.93∗∗∗ 12.98 -69.03∗∗∗
(2.74) (0.15) (10.21) (11.50) (23.20) (16.69)
Similarity of Amenities 4.73∗∗∗ 0.63∗∗∗ 19.14∗∗ 13.72 87.37∗∗∗ 61.27∗∗∗
(1.38) (0.11) (7.91) (9.03) (17.89) (16.11)
Population - Tract -0.06 0.03 -1.16 -0.72 -0.52 2.93∗
(0.38) (0.02) (1.31) (1.36) (2.14) (1.69)
Mean Income - Tract 0.17∗∗∗ 0.01∗∗∗ -0.21∗∗∗ -0.16∗∗ -0.41∗∗∗ 0.23∗∗
(0.02) (0.00) (0.07) (0.08) (0.12) (0.11)
Constant -12.15∗∗∗ -1.12∗∗∗ 73.01∗∗∗ 78.51∗∗∗ 167.34∗∗∗ 61.45∗∗∗
(2.96) (0.22) (13.09) (14.77) (32.32) (19.29)
Observations 3926 3926 3455 3455 1926 1721
State FE Yes Yes Yes Yes Yes Yes
Notes: Regressions are at the market-level. Dependent variables are the market-level variance of the six strategy
statistics defined in section 4.1. Characteristic Similarity measures the average distance between stations in charac-
teristic space, and is defined in section 5.4. Population and Mean Income are for the census tract at the center of the
market. Standard errors are in parenthesis and robust to heteroskedasticity. *** p<0.01, ** p<0.05, * p<0.1.
37

Table 7: Non-Overlapping Markets: Variance in Pricing Strategies
(1) (2) (3) (4) (5) (6)

Number of Stations 2.10∗∗∗ 0.14∗∗∗ 5.22∗∗ 7.00∗∗∗ -3.00 -2.37
(0.56) (0.04) (2.20) (2.54) (4.14) (4.61)
Mean Distance Between Stations 8.66∗∗∗ 0.57∗∗∗ 76.46∗∗∗ 75.77∗∗∗ 58.74 40.00
(2.89) (0.22) (23.30) (24.28) (41.21) (40.83)
Fraction Independent -4.42 0.77∗∗ -57.71∗∗∗ -79.62∗∗∗ -9.91 -55.51
(6.42) (0.37) (20.82) (23.62) (48.28) (39.71)
Similarity of Amenities 0.94 0.61∗∗∗ 6.98 6.22 92.48∗∗∗ 74.42∗∗
(1.66) (0.21) (15.19) (16.95) (34.54) (31.00)
Population - Tract 0.48 0.06 1.05 3.32 4.79 -1.11
(0.89) (0.06) (3.74) (3.34) (5.37) (4.28)
Mean Income - Tract 0.11∗∗∗ 0.01∗ -0.01 0.04 -0.65∗∗ 0.21
(0.04) (0.00) (0.17) (0.20) (0.32) (0.31)
Constant -7.38 -0.99 33.75 32.86 123.41∗∗ 55.15
(4.71) (0.62) (30.50) (29.18) (59.62) (38.20)
Observations 747 750 672 680 411 380
Notes: Regressions are at the market-level. Only non-overlapping markets are included. A gas station belongs to at
most one market. Dependent variables are the market-level variance of the six strategy statistics defined in section
4.1. Characteristic Similarity measures the average distance between stations in characteristic space, and is defined
in section 5.4. Population and Mean Income are for the census tract at the center of the market. Standard errors are
in parenthesis and robust to heteroskedasticity. *** p<0.01, ** p<0.05, * p<0.1.
Table 8:
Market Pricing Strategy Variance:
Lower Variance than Random Market
Fraction of Markets
Average Markup 0.864
Retail Markup Variation 0.757
Price Stickiness 0.811
Price Stickiness: No Cost Change 0.777
Prem/Reg Markup Changes 0.707
Prem/Mid Markup Changes 0.552
Notes: This table presents the fraction of markets such
that the variance in the strategy statistic is lower than the
variance in a “random” market. Section 6 defines the “ran-
dom” market.
38

11 Appendix Tables
Table 9: Market-level Range of Pricing Strategies
(1) (2) (3) (4) (5) (6)

Number of Stations 0.71∗∗∗ 0.26∗∗∗ 2.25∗∗∗ 2.22∗∗∗ 2.32∗∗∗ 2.38∗∗∗
(0.09) (0.01) (0.07) (0.08) (0.12) (0.15)
Mean Distance Between Stations 3.80∗∗∗ 0.61∗∗∗ 4.07∗∗∗ 4.74∗∗∗ 2.92∗∗ 1.54
(0.67) (0.09) (0.79) (0.83) (1.30) (1.32)
Fraction Independent 2.33∗∗ 0.43∗∗∗ -4.61∗∗∗ -4.44∗∗∗ -0.22 -4.74∗∗
(1.05) (0.13) (1.06) (1.17) (1.98) (2.01)
Similarity of Amenities 0.09 0.79∗∗∗ 5.09∗∗∗ 4.62∗∗∗ 5.28∗∗∗ 2.78∗∗∗
(0.55) (0.08) (0.71) (0.76) (1.20) (1.04)
Population - Tract -0.20∗∗ 0.01 -0.23∗∗ -0.09 -0.21 0.19
(0.10) (0.02) (0.11) (0.12) (0.16) (0.16)
Mean Income - Tract -0.01 0.00 -0.01 -0.01 0.02 0.02
(0.01) (0.00) (0.01) (0.01) (0.01) (0.01)
Constant 6.37∗∗∗ -0.10 5.23∗∗∗ 5.01∗∗∗ 10.08∗∗∗ 6.81∗∗∗
(1.13) (0.17) (1.36) (1.45) (2.28) (2.16)
Observations 1678 3892 3428 3428 1904 1703
Notes: Regressions are at the market-level. Dependent variables are the market-level range of the six strategy
statistics defined in section 4.1. Characteristic Similarity measures the average distance between stations in charac-
teristic space, and is defined in section 5.4. Population and Mean Income are for the census tract at the center of
the market. Standard errors are in parenthesis and robust to heteroskedasticity. *** p<0.01, ** p<0.05, *
39

Table 10: Non-Overlapping Markets: Range of Pricing Strategies
(1) (2) (3) (4) (5) (6)

Number of Stations 1.25∗∗∗ 0.32∗∗∗ 2.70∗∗∗ 3.14∗∗∗ 2.90∗∗∗ 3.14∗∗∗
(0.13) (0.03) (0.24) (0.32) (0.38) (0.49)
Mean Distance Between Stations 1.26∗ 0.43∗∗∗ 5.36∗∗∗ 3.65∗∗ 4.72∗ 3.04
(0.69) (0.15) (1.71) (1.83) (2.71) (2.68)
Fraction Independent 1.86∗∗ 0.56∗∗ -2.20 -3.37 0.23 -1.07
(0.89) (0.28) (2.08) (2.38) (3.76) (4.20)
Similarity of Amenities 0.92∗ 0.60∗∗∗ 2.48∗ 2.42∗ 3.43 2.58
(0.55) (0.14) (1.34) (1.42) (2.24) (1.94)
Population - Tract -0.05 0.05 -0.09 -0.01 -0.42 -0.29
(0.16) (0.04) (0.32) (0.32) (0.46) (0.52)
Mean Income - Tract -0.00 0.00 -0.02 0.03 0.00 0.03
(0.01) (0.00) (0.03) (0.03) (0.04) (0.04)
Constant -0.09 -0.57 2.78 -0.47 9.53∗ 2.73
(1.44) (0.36) (3.35) (3.45) (5.13) (4.65)
Observations 678 673 597 608 367 332
Notes: Regressions are at the market-level. Only non-overlapping markets are included. A gas station belongs to
at most one market. Dependent variables are the market-level range of the six strategy statistics defined in section
4.1. Characteristic Similarity measures the average distance between stations in characteristic space, and is defined
in section 5.4. Population and Mean Income are for the census tract at the center of the market. Standard errors
are in parenthesis and robust to heteroskedasticity. *** p<0.01, ** p<0.05, * p<0.1.
40

Know About Fuel

Uploaded by

Copyright:

Available Formats

You might also like

Know About Fuel

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Know About Fuel

Uploaded by

Copyright:

Available Formats

Competition and Pricing Strategies: Evidence from

Retail Gasoline Stations

Keywords: Price-Cost Markups, Price Stickiness, Retail Gasoline

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

4.2 Evidence of Pricing Heterogeneity

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

5 Determinants of Firm-level Prices

Electronic copy available at: https://ssrn.com/abstract=2819138

5.2 Regression Analysis: Firm-level predictors of price and mar-

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

6 Determinants of Market Prices

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

6.2 Market-level conformity in pricing strategy

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Barron, J. M., B. A. Taylor, and J. R. Umbeck (2004): “Number of Sellers, Average

Burdett, K., and K. L. Judd (1983): “Equilibrium Price Dispersion,” Econometrica,

Chu, C. S., P. Leslie, and A. Sorensen (2011): “Bundle-Size Pricing as an Approxi-

Electronic copy available at: https://ssrn.com/abstract=2819138

DellaVigna, S., and M. Gentzkow (2017): “Uniform Pricing in US Retail Chains,”

Ellison, G. (2006): “Bounded Rationality in Industrial Organization,” in Advances in

Ellison, S. F., C. M. Snyder, and H. Zhang (2017): “Costs of Managerial Attention

Fabiani, S., M. Druant, I. Hernando, C. Kwapil, B. Landau, C. Loupias,

Hortaçsu, A., and S. L. Puller (2008): “Understanding Strategic Bidding in Multi-

Hosken, D. S., R. S. McMillan, and C. T. Taylor (2008): “Retail Gasoline Pricing:

Electronic copy available at: https://ssrn.com/abstract=2819138

Joskow, P. L. (1973): “Pricing Decisions of Regulated Firms: A Behavioral Approach,”

(2011): “Asymmetric Price Adjustment and Consumer Search: An Examination

Electronic copy available at: https://ssrn.com/abstract=2819138

Remer, M. (2015): “An Empirical Investigation of the Determinants of Asymmetric Pric-

Rothschild, K. W. (1947): “Price Theory and Oligopoly,” The Economic Journal,

Sims, C. A. (2003): “Implications of Rational Inattention,” Journal of Monetary Eco-

(2006): “Rational Inattention: Beyond the Linear-Quadratic Case,” The American

Tappata, M. (2009): “Rockets and Feathers: Understanding Asymmetric Pricing,” The

Weiss, C. R. (1995): “Determinants of Price Flexibility in Oligopolistic Markets: Evidence

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Electronic copy available at: https://ssrn.com/abstract=2819138

Figure 1: Price, Cost, and Markups: Three Individual Stations

Regular Price Wholesale Cost