An Economic Analysis of the Location Effect on the Gasoline Retail Price: The Nearest Gas Station is a Competitor or a Collaborator?

Abstract

We empirically research the relationship between the location of gas stations and the retail price in order to study how gas stations mutually affect competitors’ prices in the local market. We collect the location and price data of the Seoul Metropolitan area, and we examine how the prices of gas stations are affected by the number of competing stations, the distance from the nearest station, and the distance from the lowest price station. To control the attributes of gas stations market, our regression additionally concerns the land price, the ownership (private or corporate), the number of traffic lanes, the oil company brands, and dummy variables for the car wash, the garage, the convenience store and self-service. The results show that gasoline prices in gas stations decrease with increases in the number of adjacent gas stations, while they rise with increases in the distance from the adjacent gas station and the lowest price station. However, in the specific estimation using the data of gas stations within 200 meter radius, results show the opposite phenomenon that the gasoline prices increase with decreases in the distance from the most adjacent gas station. These results imply that the adjacent gas stations (within 200 meter radius) may not be competitors or may be the collaborators.