Geographic Competition in the Retail Gasoline Market: Who are a gas station's competitors?

Volatility in gasoline prices often leads the public to question the competitiveness of gasoline markets in the US. However, the retail gasoline market has received less examination in the literature in part because the market exhibits characteristics consistent with a competitive market. The retail gasoline market consists of numerous stations selling a homogeneous product to price conscious consumers. Competitive pressures are heightened further by the prominent posting of prices lowering consumers' cost of obtaining price information. The assumption of a competitive market however ignores the spatial differentiation that results when consumers incur travel costs. By giving individual firms pricing power, spatial differentiation creates the potential for competing firms to engage in strategic interaction in their pricing decision. This study uses spatial econometrics to examine the extent to which this product differentiation results in strategic interaction in the pricing decision of retail gas stations. Results indicate that gas stations engage in strategic interaction with neighboring stations when setting prices and specification tests suggest that the each station considers the behavior of its fifteen nearest competitors.