Competition in the Retail Gasoline Industry
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Competition in the Retail Gasoline Industry Item Type text; Electronic Dissertation Authors Brewer, Jed Publisher The University of Arizona. Rights Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author. Download date 28/09/2021 06:29:31 Link to Item http://hdl.handle.net/10150/195202 COMPETITION IN THE RETAIL GASOLINE INDUSTRY by Jedidiah Brewer _________________ A Dissertation Submitted to the Faculty of the DEPARTMENT OF ECONOMICS In Partial Fulfillment of the Requirements For the Degree of DOCTOR OF PHILOSOPHY In the Graduate College THE UNIVERSITY OF ARIZONA 2007 2 THE UNIVERSITY OF ARIZONA GRADUATE COLLEGE As members of the Dissertation Committee, we certify that we have read the dissertation prepared by Jedidiah Brewer entitled Competition in the Retail Gasoline Industry and recommend that it be accepted as fulfilling the dissertation requirement for the Degree of Doctor of Philosophy _______________________________________________________________________ Date: 11/08/07 Price Fishback _______________________________________________________________________ Date: 11/08/07 Keisuke Hirano _______________________________________________________________________ Date: 11/08/07 Stanley Reynolds Final approval and acceptance of this dissertation is contingent upon the candidate’s submission of the final copies of the dissertation to the Graduate College. I hereby certify that I have read this dissertation prepared under my direction and recommend that it be accepted as fulfilling the dissertation requirement. ________________________________________________ Date: 11/08/07 Dissertation Director: Price Fishback 3 STATEMENT BY AUTHOR This dissertation has been submitted in partial fulfillment of requirements for an advanced degree at the University of Arizona and is deposited in the University Library to be made available to borrowers under rules of the Library. Brief quotations from this dissertation are allowable without special permission, provided that accurate acknowledgment of source is made. Requests for permission for extended quotation from or reproduction of this manuscript in whole or in part may be granted by the head of the major department or the Dean of the Graduate College when in his or her judgment the proposed use of the material is in the interests of scholarship. In all other instances, however, permission must be obtained from the author. SIGNED: Jedidiah Brewer 4 ACKNOWLEDGEMENTS I would like to specially thank Price Fishback, Keisuke Hirano, and Stanley Reynolds for serving on my dissertation committee and providing valuable feedback that greatly improved the quality of this work. I would also like to thank Greg Crawford, Alfonso Flores-Lagunes, David Reiley, and Mark Stegeman for helping me more concretely formulate my ideas in the early stages of the dissertation. Gary Libecap provided constant advice and encouragement. Furthermore, I would like to thank my colleagues Haimanti Bhattacharya, Carmen Carrion-Flores, Robert Cheley, Chung Choe, Joseph Cullen, Tim Davies, Oleksandr Shcherbakov, Adrian Stoian, Todd Sorensen, and Travis Rust, who each provided a listening ear and helpful suggestions. I owe much gratitude to NSF Grant #355770, Mark Walker, John Wooders, and the Department of Economics at the University of Arizona for providing financial assistance in collecting the datasets used to make this dissertation possible. I am also grateful to David Nelson for allowing me to use some of his data. I am indebted to Adam Baker who generously traveled with me to collect data. Lastly, I would like to thank my wife, Jordan Brewer, for her constant support throughout the years. She helped me collect data, read drafts, provided emotional stability, and sacrificed much to make this dissertation a successful completion. 5 DEDICATION I dedicate this dissertation to my parents Stephen and Tina Brewer. They have faithfully encouraged and supported me in each of my endeavors. More importantly, they have exemplified hard work, self-motivation, dedication, and perseverance. These tools have benefited me greatly in the process of completing this dissertation. 6 TABLE OF CONTENTS LIST OF TABLES …………………………………………………………………..……….8 LIST OF FIGURES …………………………………………………………………..……..10 ABSTRACT …………………………………………………………………………..…....11 CHAPTER 1. INTRODUCTION ……………………………………………...…………....13 CHAPTER 2. THE RETAIL GASOLINE INDUSTRY : MARKET STRUCTURE AND PROFITABILITY …………………………………………………………………..22 2.1 Introduction ……………………………………………………………………22 2.2 Ownership ……………………………………………………………………...25 2.3 Profitability …………………………………………………………………….29 2.4 Profitability and Price Changes ………………………………………………..34 2.5 Conclusion ……………………………………………………………………..43 CHAPTER 3. BIG -BOX STORES AND PRICING BY TRADITIONAL RETAILERS : ‘H YPERMARTS ’ AND THE RETAIL GASOLINE INDUSTRY ………………………………45 3.1 Introduction …………………………………………………………………….45 3.2 Model …………………………………………………………………………..49 3.3 Industry Overview……………………………………………………………...58 3.4 Tucson Market …………………………………………………………………64 3.4.1 Data …………………………………………………………………….64 3.4.2 Estimation ……………………………………………………………...71 3.5 Nashville Market ………………………………………………………………74 3.5.1 Data …………………………………………………………………….75 3.5.2 Estimation ……………………………………………………………...79 3.6 The Entry of The Home Depot ………………………………………………83 3.7 Economic Significance of Hypermart Entry …………………………………...90 3.8 Conclusion ……………………………………………………………………..92 CHAPTER 4. BRANDING AND COMPETITION IN RETAIL MARKETS : THE CASE OF RETAIL GASOLINE …………………………………………………………………95 4.1 Introduction ……………………………………………………………………95 4.2 Geographic Locations and Brands in the Retail Gasoline Market …………….97 4.3 Model …………………………………………………………………………100 4.4 Data …………………………………………………………………………...106 4.5 Estimation …………………………………………………………………….110 4.6 Results ………………………………………………………………………...111 4.7 Conclusion ……………………………………………………………………117 7 CHAPTER 5. CONCLUSIONS …………………………………………………………...120 APPENDICES ……………………..………………………………………………………124 A.1. Alternative Distance Metrics …………………………………………………124 A.2. Characterization of Unbranded Stations ……………………………………...128 A.3. Form of Weighting Factors …………………………………………………...133 A.4. Spatial Autoregression ………………………………………………………..140 A.5. Common Ownership of Stations ……………………………………………...145 REFERENCES …………………………………………………………………………….149 8 LIST OF TABLES TABLE 2.1. Top Six Oil Companies’ Profits …………………………………………30 TABLE 2.2. Retail Gasoline Station Profitability ……………………………………..31 TABLE 2.3. Asymmetric Impact of Retail Price Changes on Margins and Profits ………………………………………………………………..36 TABLE 3.1. Consumer Choices ……………………………………………………….55 TABLE 3.2. US Gasoline Retailers Declining, Hypermarts Increasing ……………….59 TABLE 3.3. Hypermarts by Store Type: 2006 ………………………………………...60 TABLE 3.4. Mean Price of Regular Gasoline: Tucson, AZ …………………………...66 TABLE 3.5. Mean Price of Regular Gasoline by Brand: Tucson, AZ ………………...67 TABLE 3.6. Summary Statistics of Control Variables: Tucson, AZ ………………….70 TABLE 3.7. Regression of Regular Price of Gasoline: Tucson, AZ …………………..73 TABLE 3.8. Market Characteristics: Nashville, TN…………………………………...76 TABLE 3.9. Mean Price of Regular Gasoline: Nashville, TN ………………...………77 TABLE 3.10. Mean Prices of Regular Gasoline by Brand – Census 1: Nashville, TN …………………………………………………………….78 TABLE 3.11. Regression of Price of Regular Gasoline – Census 1: Nashville, TN …………………………………………………………….81 TABLE 3.12. Comparison of Key Variables Across Censuses: Nashville, TN ………...82 TABLE 3.13. Regression of Price Change on Home Depot Treatment Dummies: Census 2 – Census 1 ………………………………………….87 TABLE 3.14. Regression of Price Change on Home Depot Treatment Dummies: Census 3 – Census 2 ………………………………………….88 TABLE 4.1. Regular Gasoline Pricing Statistics by Brand or Type of Station ………107 TABLE 4.2. Population Density and Traffic Flow Summary Statistics ……………...108 TABLE 4.3. Station Price Regression Results Using Road Distances ………...…….111 TABLE 4.4. Comparison of Results Based on Alternative Distance Metrics ………..116 TABLE A.1.1. Station Price Regression Results Using Euclidean Distances ……...…..124 TABLE A.1.2. Station Price Regression Results Using Travel Times …………………126 st TABLE A.2.1. Station Price Regression Results of 1 Adapted Model Using Road Distances………………………………………………………….130 nd TABLE A.2.2. Station Price Regression Results of 2 Adapted Model Treating Other Stations as a Single Category and Using Road Distances………………………………………………………….131 nd TABLE A.2.3. Station Price Regression Results of 2 Adapted Model Treating Other Stations as Separate Categories and Using Road Distances………………………………………………………….132 9 d ij − α TABLE A.3.1. Station Price Regression Results Using wij = e and Road Distances ……………………………………………………..135 3 dij − α TABLE A.3.2. Station Price Regression Results Using wij = e and Road Distances ……………………………………………………..136 TABLE A.3.3. Station Price Regression Results Using Distance Ring Model and Road Distances ……………………………………...……...138 TABLE A.3.4. Comparison of Price Effects from Distance Ring Model and Original Model ……………………………………………………..139 TABLE A.4.1. Station Price Regression Results of Autoregressive Spatial Model Using Road Distances ………………………………......142 TABLE A.4.2. Station Price Regression Results of Autoregressive Spatial Model Using Euclidean Distances ……………………………...143 TABLE A.4.3. Station Price