Retail gasoline pricing: What do we know?

Abstract

We use a data set consisting of a three year panel of prices from a sample of gasoline stations located in suburban Washington DC and a corresponding census of the region's stations to develop three new empirical findings about retail gasoline pricing. First, while average retail margins vary substantially over time (by more than 50% over the three years we analyze), the shape of the margin distribution remains relatively constant. Second, there is substantial heterogeneity in pricing behavior: stations charging very low or very high prices are more likely to maintain their pricing position than stations charging prices near the mean. Third, retail gasoline pricing is dynamic. Despite the heterogeneity in station pricing behavior, stations frequently change their relative pricing position in this distribution, sometimes dramatically. We then relate these three findings to relevant theories of retail pricing. While many models of retail pricing are consistent with some of our findings, we find that all have serious shortcomings.