Price Uncertainty and Market Power in Retail Gasoline: The Case of an Italian Highway

We quantify the effect of consumers’ price uncertainty on gasoline prices and margins on an Italian highway. We observe the change in prices triggered by a longitudinal policy-based change in consumers’ price information from one in which drivers on the highway have no information on the prices of stations they encounter to one that allows consumers to observe the prices of four upcoming stations on a single price sign by the side of the highway. Using these data, we estimate a model of consumer search and purchase behavior and a corresponding model of gas station pricing. We then measure the impact of varying degrees of price information on equilibrium prices, including (i) no price information, (ii) the current policy, and (iii) full price information. We also compare the current policy with an alternative policy in which stations’ prices are advertised with individual price signs. We find that when consumers do not have price information, gas stations are able to charge 31% more, in terms of higher price-cost margins, than when prices are known. Our welfare analysis suggests that price information is worth €0.57 to consumers every time they take the highway. Relative to the current mandatory policy, advertising price on individual signs is worth €0.19 more to consumers.

The e-companion is available at https://doi.org/10.1287/mksc.2018.1105.