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Spatial Differentiation in Retail Markets for Gasoline

By Jean-François Houde


This paper studies an empirical model of spatial competition. The main feature of my approach is to formally specify commuting paths as the “locations” of consumers in a Hotelling-type model of spatial competition. This modeling choice is motivated by the fact that consumers are moving across the market when consuming the product. Although this feature is perhaps more relevant for gasoline markets, this also applies to most retail markets since consumers are not immobile. The consequence of this behavior is that competition is not fully localized as in the standard address-model. In particular, the substitution patterns between stations depend in an intuitive way on the structure of the road network and the direction of traffic flows. Another feature of the model is that consumers ’ available options are directly linked with their commuting behavior. Consumers who commute more encounter more stations, observe more prices, and therefore may pay less on average; a result observed empirically (Yatchew and No [2001]). The demand-side of the model is estimated by combining a model of traffic allocation with econometric techniques used to estimate models of demand for differentiated products (Berry, Levinsohn and Pakes [1995]). The empirical distribution of commuters is compute

Year: 2006
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