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An Econometric model of location and pricing in the gasoline market

Author: Chan, Tat Y. ; Padmanabhan, V. ; Seetharaman, P. BINSEAD Area: MarketingIn: Journal of Marketing Research, vol. 44, no. 4, November 2007 Language: EnglishDescription: p. 622-635.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: The authors propose an econometric model of both the geographic locations of gasoline retailers in Singapore, as well as price competition between these retailers conditional on their geographic locations. Although market demand for gasoline is not observed, the authors are able to infer the effects of such demand from stations’ location and pricing decisions using available data on local market-level demographics. Using the proposed location model, which is based on the assumption of social welfare maximization by a policy planner, the authors find that local potential gasoline demand depends positively on the following local demographic characteristics of the neighbourhood: population, median income, number of cars, and proximity to airport, downtown and highways. Using the proposed pricing model, which is based on the assumption of Bertrand competition between retail chains, the authors find retail margins for gasoline to be about 21%. The authors also find that consumers are willing to travel up to a mile for a price saving of 3 cents per litre. Using the estimates of the proposed econometric model, the authors answer policy questions pertaining to a recent merger between two firms in the industry. Answering these questions has important policy implications for both gasoline firms and policy makers in Singapore.
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The authors propose an econometric model of both the geographic locations of gasoline retailers in Singapore, as well as price competition between these retailers conditional on their geographic locations. Although market demand for gasoline is not observed, the authors are able to infer the effects of such demand from stations’ location and pricing decisions using available data on local market-level demographics. Using the proposed location model, which is based on the assumption of social welfare maximization by a policy planner, the authors find that local potential gasoline demand depends positively on the following local demographic characteristics of the neighbourhood: population, median income, number of cars, and proximity to airport, downtown and highways. Using the proposed pricing model, which is based on the assumption of Bertrand competition between retail chains, the authors find retail margins for gasoline to be about 21%. The authors also find that consumers are willing to travel up to a mile for a price saving of 3 cents per litre. Using the estimates of the proposed econometric model, the authors answer policy questions pertaining to a recent merger between two firms in the industry. Answering these questions has important policy implications for both gasoline firms and policy makers in Singapore.

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