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Essays in industrial organization with application to retail gasoline markets

Purdue University
Publication Date
  • Economics
  • General|Economics
  • Theory|Energy
  • Mathematics


This dissertation consists of four essays which examine the industrial organization of retail gasoline markets. In particular, each essay studies issues involving product differentiation. Each essay employs a data set which includes detailed information on every gasoline station in the five-county Los Angeles Basin. These data include information on wholesale and retail prices, volumes sold, station characteristics, and station location.^ Essay One constructs a model which combines both vertical and horizontal product differentiation to explain observed price-cost margin differentials between unleaded grades of gasoline. The model's predictions are supported using the station-level data from the Los Angeles market. In particular, the results indicate that margins and margin differentials are a function of the proximity of rival stations and the distribution of consumers' marginal value for quality, among other things.^ Essay Two utilizes the voluminous theory of spatial location and differentiation to construct an empirical model which estimates the relationship between spatial differentiation and the number of competing stations in a market, controlling for demand and cost considerations, as well as non-spatial station attributes and firm distribution-chain effects. The results indicate that gasoline stations, ceteris paribus, prefer to spatially differentiate themselves from competing stations as the number of competing stations in the market increases.^ Essay Three considers a model of product differentiation characterized by stations extracting rents from consumers based on consumers' willingness to pay for quality in the form of full-service gasoline. In particular, the model predicts that stations offering both self- and full-service gasoline can set prices such that consumers self-select into the appropriate quality category. The results of the empirical model indicate that stations offering both service types (1) charge higher full-service prices than stations offering only full-service gasoline, and (2) charge lower self-service prices than stations offering only self-service gasoline.^ Finally, Essay Four extends the third essay by examining the determinants of service mix for gasoline stations in the Los Angeles market. Empirical results indicate that the likelihood of observing full-service at a gasoline station is a function of market determinants, complementarity of ancillary profit centers, contract type, and the level of congestion in the self-service queue. ^

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