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Driving competition in local markets with near-perfect substitutes: an application on the Spanish retail gasoline market

Abstract

Relevant market definition remains a key element in the economic analysis of competition in the gasoline market. However, this is particularly difficult to undertake when competition is local and market power is geographically constrained, as they are in the case of the gasoline market. We analyse how the hypothetical monopolist or Small but Significant Non-Transitory Increase in Prices test performs when defining isochrones based solely on price information and the distance between competitors. We conclude that geographic information systems can be successfully employed in the precise definition of relevant geographic markets in the gasoline retail sector. Their application to the Spanish gasoline market indicates that the relevant geographic market is delineated by a 5- to 6-min travel-time isochrone around each station. Localized market power needs to be taken into account when analysing the adverse effects of mergers and entry regulations on gasoline retailing. To drive competition in these local circumstances, markets need to be delineated on the basis of sufficiently small isochrones since only close rivals seem to compete effectively with each other.

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Fig. 1
Fig. 2

Notes

  1. 1.

    The effect of any difference in resident income across market is equivalent to the effect of a market expansion: it would drive higher prices and markups up to the point in which it would drive more entrants into the market (see Table 1).

  2. 2.

    Results not change if we take into account price with taxes because the taxation is the same for all the petrol stations.

  3. 3.

    Results include the variable number of rivals squared is in “Annex 1”. We can see like results are less precise because there is not a large heterogeneity of number of rivals between petrol stations, so the two variables are very similar.

  4. 4.

    The results are not significantly altered if we consider that traffic as a demand factor can also influence the equilibrium price. If there are barriers to entry that deter new operators when the traffic increases, then traffic may explain prices rather than the number of entrants.

  5. 5.

    For an in-depth analysis of instruments, see Staiger and Stock (1997) and Stock and Yogo (2002).

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Acknowledgements

Jordi Perdiguero thanks the funding received from Fundación Rafael del Pino, and Joan Ramon Borrell thanks the funding received from the Catalan competition authority (Tribunal Català de Defensa de la Competencia, TDCD). Both authors thank the comments and suggestions from the members of the TCDC, the participants at the Encuentro de Economia Aplicada and EARIE 2007, and the funding received from RECERCAIXA. We thank the excellent research assistance in the use of geographic information systems by Adrià Botey.

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Correspondence to Jordi Perdiguero.

Annex 1: Estimations with the variable number of rivals squared

Annex 1: Estimations with the variable number of rivals squared

See Table 7.

Table 7 IV Estimates

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Perdiguero, J., Borrell, J.R. Driving competition in local markets with near-perfect substitutes: an application on the Spanish retail gasoline market. Empir Econ 57, 345–364 (2019). https://doi.org/10.1007/s00181-018-1427-6

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Keywords

  • Gasoline retailing
  • Market definition
  • Competition
  • Simulation

JEL Classification

  • L11
  • L12
  • L14
  • R12