A Spatial Econometric Analysis of the Effect of Vertical Restraints and Branding on Retail Gasoline Pricing

Posted by D. Daniel Sokol

Stephen Hogg (University of Queensland), Stan Hurn (Queensland University of Technology), Stuart McDonald (University of Queensland) and Alicia Rambaldi (University of Queensland) offer A Spatial Econometric Analysis of the Effect of Vertical Restraints and Branding on Retail Gasoline Pricing.

ABSTRACT: This paper builds an econometric model of retail gas competition to explain the pricing decisions of retail outlets in terms of vertical management structures, input costs and the characteristics of the local market they operate within. The model is estimated using price data from retail outlets from the South-Eastern Queensland region in Australia, but the generic nature of the model means that the results will be of general interest. The results indicate that when the cost of crude oil and demographic variations across different localities are accounted for, branding (i.e. whether the retail outlet is affiliated with one of the major brand distributers – Shell, Caltex, Mobil or BP) has a statistically significant positive effect on prices at nearby retail outlets. Conversely, the presence of an independent (non-branded) retailer within a locality has the effect of lowering retail prices. Furthermore, the results of this research show that service stations participating in discount coupon schemes with the two major retail supermarket chains have the effect of largely off-setting the price increase derived from branding affiliation. While, branding effects are not fully cancelled out, the overall effect is that prices are still higher than if branding did not occur.