An econometric model of location and pricing in the gasoline market

The authors propose an econometric model of both the geographic locations of gasoline retailers in Singapore and price competition among retailers conditional on their geographic locations. Although market demand for gasoline is not observed, the authors are able to infer the effects of such demand from stations' locations and pricing decisions using available data on local market-level demographics. Using the proposed location model, which is based on the assumption of social welfare maximization by a policy planner, the authors find that local potential gasoline demand depends positively on the local demographic characteristics of the neighborhood. Using the proposed pricing model, which is based on the assumption of Bertrand competition between retail chains, the authors find that retail margins for gasoline are approximately 21%. The authors also find that consumers are willing to travel up to a mile for a savings of $.03 per liter. Using the estimates of the proposed econometric model, the authors answer policy questions pertaining to a recent merger between two firms in the industry. Answering these questions has important policy implications for both gasoline firms and policy makers in Singapore.