Spatial Competition in the Retail Gasoline Market: An Equilibrium Approach Using SAR Models∗

This paper investigates the nature of competition in the retail gasoline market using a two year panel data of weekly prices for gas stations in San Diego county. The primary dimension of product differentiation in the retail gasoline market is spatial in the sense that a gas station’s market power depends on the locations of all other gas stations. In contrast to previous empirical studies, I explicitly model the fact that retail gasoline prices of all gas stations are simultaneously determined in a spatially competitive system. I use IV methods to estimate several spatial autoregressive (SAR) models of stations’ price reaction functions after specifying spatial weights based on distance between stations. My results are consistent with the spatial competition model. I also find that retail prices are heavily influenced by station’s characteristics such as brand name and amenities. By using the SAR model I am able to identify that the brand of competing stations and their relative geographic proximity to each other are important factors in explaining price variation across gasoline stations, as opposed to just the number of competing stations. I find that gas stations most intensely compete with stations less than 1 mile away and that the intensity of competition diminishes with distance.