Competition and Price Stickiness: Evidence from the French Retail Gasoline Market

Abstract

Using daily price quotes from about 10,000 French gas stations, this paper empirically analyses whether the level of competition determines the degree of price stickiness on the retail gasoline market. The degree of price rigidity is measured by the frequency of price changes as well as the average duration of uncensored price spells, while the distance to the nearest station and the number of gas stations within a given radius are considered as proxies for local competition. The results confirm that local competition is an important determinant of the price-setting behavior of gas stations. Indeed, for both measures of price stickiness, we find that the degree of price rigidity is positively related to the distance to the nearest station, and negatively related to the concentration of firms in a given geographical area. This result can be notably explained by the fact that gas stations facing a high competitive pressure are more likely to adjust their prices more quickly and more frequently in response to crude oil price decreases than stations enjoying market power.