The Effects of Competition in the Retail Gasoline Industry

We estimate the effect of competition on incumbent firm pricing by using high frequency price data and the precise geographic location for all gas stations in California. Using an event study design, we find that the entry of a new station is associated with a 2.5 cent decrease in prices at incumbent stores, which equates to a 7% reduction in estimated retail markups. The effects are immediate, persistent, and show no sign of deterrence or limit pricing behavior. In contrast, nearby exit results in precisely estimated null effects on prices with no evidence of predatory pricing in the lead up to the station departure. The results are consistent across all fuel blends and dissipate with station distance. Finally, we explore the asymmetric effects, showing that the difference cannot be attributed to difference in branding, proximity to highway, or data quality idiosyncrasies, although we find suggestive evidence that exit tends to happen in more competitive markets and amongst less heavily trafficked stations.