Price Transparency and Retail Prices: Evidence from Fuel Price Signs in the Italian Highway System

Abstract

Price transparency initiatives are typically undertaken by third parties to ensure that consumers can compare the prices of competing offers in markets in which obtaining such information is costly. Such practices have recently become widespread, yet it is unclear whether the increased price competition due to lower search costs overcomes the potential for collusion between competitors due to lower price coordination costs. Motivated by this question, the authors investigate the effect of mandatory price posting (on large electronic signs) on the pricing behavior of competing gas stations in the Italian highway system. The authors find that when prices are posted, the average price of gasoline decreases by 1 euro cent per liter, which represents about 20% of stations’ margins. About half the price decrease can be attributed to the introduction of a sign posting a station's own price and those of its nearest neighbors, with the other half due to the introduction of other signs posting the prices of other stations on the same road. Despite the price reduction, however, the introduction of signs seems to have little impact on price dispersion, suggesting that price uncertainty persists even after the policy is implemented. Analysis of customer transaction data confirms this finding, showing that less than 10% of consumers use the posted price information effectively.