To Price Discriminate or Not : Product Choice in Retail Gasoline Markets

In this paper, we investigate a gasoline station’s incentive to price-discriminate by selling full-service gasoline as well as self-service gasoline. Unlike previous research, we explicitly model a firm’s incentive to price discriminate by choosing to be either single-product or multi-product as a function of market and station characteristics. Using cross-sectional survey data on prices, station and market characteristics for 198 gasoline stations in the Greater Saint Louis area, we estimate a switching regression model of station decisions. Specifically, we employ a binary probit framework that models a station’s decision to pricediscriminate through the choice of the station-type as a function of market and station characteristics. We then estimate conditional linear regressions with self-selectivity corrections for the station’s choice of prices. Our empirical analysis shows that significant spurious inferences about station pricing behavior would result if the endogeneity in the choice of the station-type were ignored in the estimation. The analysis shows that a larger income spread in the market implies a greater likelihood of the gasoline station being multi-product. In addition, we have support for the various within firm and across firm price differentials as predicted by the theory of price discrimination. We also examine the effect of branding and other station characteristics (such as the presence of convenience stores, service station and pay-at-pump) on a station’s incentive to price discriminate.