Gasoline Price and Competition: New Evidence from Traffic Pattern

Abstract

Competition is considered as an important factor that influences gasoline prices. In spatial competition, an increased density of competitors has a direct impact on lowering gasoline price. However, prior research omitted an important demand factor: traffic volume. This paper uses a reduced-form approach to test for the relationship between market density and retail gasoline price with and without traffic volume. The omission of traffic volume biases the estimated effect of market density on retail gasoline price and leads to a 61% overstatement. Furthermore, this paper examines the relationship between market density and price dispersion with and without traffic dispersion.