Essays in industrial organization with application to retail gasoline markets

Beck Allen Taylor, Purdue University

Abstract

This dissertation consists of four essays which examine the industrial organization of retail gasoline markets. In particular, each essay studies issues involving product differentiation. Each essay employs a data set which includes detailed information on every gasoline station in the five-county Los Angeles Basin. These data include information on wholesale and retail prices, volumes sold, station characteristics, and station location. Essay One constructs a model which combines both vertical and horizontal product differentiation to explain observed price-cost margin differentials between unleaded grades of gasoline. The model's predictions are supported using the station-level data from the Los Angeles market. In particular, the results indicate that margins and margin differentials are a function of the proximity of rival stations and the distribution of consumers' marginal value for quality, among other things. Essay Two utilizes the voluminous theory of spatial location and differentiation to construct an empirical model which estimates the relationship between spatial differentiation and the number of competing stations in a market, controlling for demand and cost considerations, as well as non-spatial station attributes and firm distribution-chain effects. The results indicate that gasoline stations, ceteris paribus, prefer to spatially differentiate themselves from competing stations as the number of competing stations in the market increases. Essay Three considers a model of product differentiation characterized by stations extracting rents from consumers based on consumers' willingness to pay for quality in the form of full-service gasoline. In particular, the model predicts that stations offering both self- and full-service gasoline can set prices such that consumers self-select into the appropriate quality category. The results of the empirical model indicate that stations offering both service types (1) charge higher full-service prices than stations offering only full-service gasoline, and (2) charge lower self-service prices than stations offering only self-service gasoline. Finally, Essay Four extends the third essay by examining the determinants of service mix for gasoline stations in the Los Angeles market. Empirical results indicate that the likelihood of observing full-service at a gasoline station is a function of market determinants, complementarity of ancillary profit centers, contract type, and the level of congestion in the self-service queue.

Degree

Ph.D.

Advisors

Umbeck, Purdue University.

Subject Area

Economics|Economic theory|Energy

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