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Price Regulation and Fraud—with Special Emphasis on Gasoline Retailing

Abstract

In this paper, we study fraud and price regulation in gasoline retailing: We model the incentives that retail stations have to dispense less gasoline than the amount that consumers pay for: both under fixed and flexible price regimes. The results of the model indicate that competition, cheating fines, and law enforcement efforts reduce incentives to cheat regardless of the price regime. Interestingly, price-cap regulation itself creates additional incentives to cheat and reduces welfare. Nevertheless, its effect on consumers’ surplus is ambiguous.

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Notes

  1. 1.

    According to the statistics in National Petroleum News, there were 13,657 public retail gasoline stations in Texas in 2008. If these 2,000 pumps were uniformly distributed across all stations, we would expect to find a cheating pump approximately in one out of seven gas stations.

  2. 2.

    Nelson (1970) distinguishes between search and experience goods in the context of quality. In the first case, consumers at some cost can determine quality prior to purchasing the good. In the second case, consumers discover quality after purchasing and using the good.

  3. 3.

    Gasoline prices liberalization in Mexico started in 2017. Several articles such as Arteaga and Flores (2010), Guerrero (2012), and Liu et al. (2018) study empirically the effects of different policies on fraud in the Mexican gasoline retail market before price liberalization.

  4. 4.

    Suvankulov et al. (2012) explain the deregulation process that took place in Canada during the 1970s and 1980s. Similarly, Contín-Pilart et al. (2009) review the process that took place in Spain during the 1980s and 1990s.

  5. 5.

    There is an accepted range of error that varies by country: For example, Aguilar (2006) explains that the allowed tolerance in Mexico is 100 ml per 20 L. This represents a 0.5% shortage. Allowed shortages are 0.5% in Spain (Gonzalez, 1998), 0.6% in Paraguay (INTN cuenta con dos técnicos, 2018), and 1% in Ukraine (Smitters, 2020).

  6. 6.

    This task could be left to the market: Specialist information firms could certify that retail stations do not cheat. Nevertheless, as was pointed out by Dranove and Jin (2010), one of the main problems with this approach is the potential conflict of interest in certifiers.

  7. 7.

    In Mexico, fines are between 12,000 and 56,000 US dollars according to Ley Federal sobre Metrología y Normalización (Article 112-A).

  8. 8.

    A barrel of gasoline is about 159 L.

  9. 9.

    Eckert (2013) explains that empirical studies of gasoline retailing often assume also that stations buy gasoline at a single wholesale price; however, they actually buy at different prices. Wholesale prices usually vary with brands and volumes (there are volume price discounts).

  10. 10.

    This assumption can be relaxed and allow firms to dispense more gas than the amount that consumers pay for.

  11. 11.

    Nelson (1970) explains that consumer recommendations are important for the purchases of experience goods.

  12. 12.

    Information about regulatory monitoring of gas stations may be accessed at https://combustibles.profeco.gob.mx.

  13. 13.

    Note that in Eqs. (12) and (14) the size of the market z and the number of firms have opposite effects. Therefore, the ratio \({\raise0.5ex\hbox{$\scriptstyle n$} \kern-0.1em/\kern-0.15em \lower0.25ex\hbox{$\scriptstyle z$}}\) would be a better measure of competition for empirical purposes than the number of firms itself.

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Acknowledgements

The authors acknowledge helpful suggestions of the two anonymous referees and the editor.

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The authors declare that they received no research funding to elaborate this article.

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Correspondence to Daniel Flores.

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Arteaga, J.C., Flores, D. Price Regulation and Fraud—with Special Emphasis on Gasoline Retailing. Rev Ind Organ (2021). https://doi.org/10.1007/s11151-021-09840-z

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Keywords

  • Gasoline
  • Price cap
  • Cheating

JEL Classification

  • K4
  • L11
  • L13