Wednesday, September 18, 2013
Posted by D. Daniel Sokol
Mariano E. Tappata, University of British Columbia - Sauder School of Business, Strategy and Business Economics Division and Jing Yan, University of British Columbia - Sauder School of Business investigate Competition in Retail Gasoline Markets.
ABSTRACT: We study the relationship between prices and market structure in geographically isolated markets that are exposed to large demand shocks. The temporal variation in market size allows us to overcome the classical endogeneity bias in standard concentration-performance regressions. We find evidence of local market power in gasoline markets due to product differentiation. Additionally, the high margins that characterize concentrated markets dissipates quickly with the number of competitors. Ignoring market structure endogeneity leads to underestimating the effect of market concentration on prices between 55 and 70 percent.