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Source: Journal of Marketing Research, Vol. 44, No. 4 (Nov., 2007), pp. 622-635

Published by: American Marketing Association

Stable URL: http://www.jstor.org/stable/30162507 .

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and P.B.SEETHARAMAN*

TATY. CHAN,V.PADMANABHAN,

modelof boththe geographic

The authorsproposean econometric

inSingaporeand pricecompetition

locationsofgasolineretailers

among

retailersconditionalon theirgeographiclocations.Althoughmarket

demandforgasolineis notobserved,the authorsare able to inferthe

effectsof such demandfromstations'locationsand pricingdecisions

demographics.Using the

using available data on local market-level

the assumptionof social

on

which

is

based

location

model,

proposed

the

a

welfaremaximization

by policyplanner, authorsfindthatlocal

on the local demographic

potential

gasolinedemanddependspositively

ofthe neighborhood.

characteristics

Usingthe proposedpricingmodel,

betweenretail

ofBertrand

whichis based on theassumption

competition

are

for

find

retail

that

the

authors

chains,

margins gasoline approximately

to travelup to a

21%. The authorsalso findthatconsumersare willing

milefora savingsof$.03 per liter.Usingtheestimatesoftheproposed

to a

econometric

model,theauthorsanswerpolicyquestionspertaining

recentmergerbetweentwo firmsin the industry.

Answeringthese

forbothgasolinefirmsand

policyimplications

questionshas important

policymakersinSingapore.

and

ModelofLocation

AnEconometric

intheGasolineMarket

Pricing

Locationis repeatedlystressedin thebusinesspressas

It

forsuccessin retailing.

one,if nottheonly,requirement

as being an

is also recognizedin the academic literature

JohnM. Olin School

of Marketing,

*TatY. Chanis AssociateProfessor

in St. Louis (e-mail: chan@wustl.

of Business,WashingtonUniversity

edu). V. Padmanabhanis INSEAD Chaired Professorof Marketing,

P.B.

INSEAD, Singapore (e-mail: paddy.padmanabhan@insead.edu).

ofMarketing,

JesseH. JonesGraduateSchoolof

is Professor

Seetharaman

The authorsare

Rice University

(e-mail:seethu@rice.edu).

Management,

listedin alphabeticalorder.TheythankYuanfangLin forsettingup the

datain usableformfortheempiricalanalyses.Theyalso thankProfessors

GlennMacDonaldandMarkDaskinfortheirvaluableguidanceand commentsduringthepreliminary

stagesof thisproject.Theyappreciatethe

commentsby participantsat the SummerInstituteof

manyinsightful

Calif.(July2003); theMarketing

in Berkeley,

Camp

Strategy

Competitive

at the Kellogg School of Management,Northwestern

University,in

2003); theseminarsat JesseH. JonesSchoolofManChicago(September

(November2003), INSEAD (November2003),

agement,Rice University

of Pennsylvania

The WhartonSchool,University

2004), Indian

(January

Ahmedabad(August2004), NationalUniversity

of Management,

Institute

BusinessSchool (KUBS),

of Singapore(August2004), KoreaUniversity

Seoul (May 2006), and VelloreInstituteof Technology(VIT), Vellore,

theassistance

India(February

acknowledge

2007). Finally,theygratefully

of ProfessorIvan Png,Mrs. PritiDevi, Mr. AlbertTan, Mr. Low Siew

Thiam,Mr.HenryWee,andMr.Eng Kah Joo.

To read and contributeto reader and authordialogue on JMR,visit

httpilwww.marketingpowercom/finrblog.

Association

2007,

2007,AmericanMarketing

ISSN: 0022-2437(print),1547-7193(electronic)

622

determinant

important

ance. Indeed,someof theearliestworkson retailcompetition (e.g., D'Aspremont,Gabszewicz, and Thisse 1979;

Hotelling1929) werebased on modelsof spatialheterogeneitygivenretailfirms'locationdecisions.This article

of retailperformthephenomenon

to understand

attempts

modelof locationand

ance by developingan econometric

price decisions.The simultaneousconsiderationof both

interactionsenables us to

location and marketing-mix

addressa broaderset of questionsrelatedto publicpolicy

andto providea morecomprehensive

analysisoftheissues

For example,we

of firmconductand marketperformance.

can nowaddressthefollowing

questions:

to thepotential

factors

.Whataretheimportant

contributing

ata location?

demand

locationwhenconis a retailer's

.Howimportant

geographic

are

Whattrade-offs

retailers?

alternative

chooseamong

sumers

demand

between

fora retailer

involved

largepotential

facing

atthe

tocompetitors

andbeingincloseproximity

ata location

location?

tworetailchainson

between

ofa merger

'Whatis theimpact

intheretail

industry?

pricesandprofits

The contextof thisarticleis thegasolinemarketin Singaa censusof

data set thatrepresents

pore.Using a primary

all gasoline stationsin Singaporeand tracksgeographic

locations,gasolineprices,and variousstationcharacteristics across 226 gasoline stations,as well as the demoResearch

JournalofMarketing

Vol. XLIV (November2007),622-635

All use subject to JSTOR Terms and Conditions

623

of thestations'local neighborhoods,

graphiccharacteristics

modelof locationand pricing

we estimatean econometric

decisionsof gasolinestations.

The locationmodelis builton thepremise(whichis consistentwithinstitutional

realitiesin Singapore,as we disin thesection"Descriptionof Data") thatthe

cuss further

determines

whereto locategasoline

Singaporegovernment

stationsin the city.The government,

as a social welfare

planner,is assumed to minimizeaggregatetravelcosts

incurredby consumersin theirefforts

to buy gasolinein

This

leads

to

a

model

thatis called a

decision

Singapore.

"P-medianproblem."We use a minimum-distance

method

to estimatesucha locationmodel,whichenablesus to infer

thegeographicdistribution

of potentialgasolinedemand

acrosslocal marketsin Singaporeand thedependenceof

suchdemandon local demographic

characteristics.

We thenproposea pricingmodelforgasolinestations,

conditionalon theirlocations,based on the premiseof

Bertrandcompetitionbetweenretailchains.The pricing

modelrequireslocal firm-level

demand,whichis a function

of thepotentialdemandforgasolineat variouslocations,

as inputs.Because

prices, and gasoline characteristics,

in thedata,we use equilibgasolinedemandis unobserved

rium conditionsof demand and supply to obtain an

estimablemodelof pricing.Estimatingthepricingmodel

enables us to inferboththe cost and demandfunctions.

oftheparameters

ofthelocationmodel

Usingtheestimates

and pricingmodel,we answerpolicyquestionspertaining

to therelativeprofitability

of variousretailchainsand the

consequencesof a mergerbetweentwo retailchains on

of firmsin theindustry.

pricesandprofits

Fromestimating

ourproposedlocationmodel,we find

thatlocal potentialgasolinedemanddependspositivelyon

the followinglocal demographiccharacteristics

of the

neighborhood:

population;medianincome;numberofcars;

and proximityto the airport,downtown,and highways.

Usingtheestimated

potential

gasolinedemandat eachlocal

in

as

neighborhood Singapore an input,we thenestimate

ourproposedpricingmodelwithempiricaldata on actual

pricesof gasoline at variousstations.We findthatretail

21% and thatmarmarginsforgasolineare approximately

ketsharefora gasolinestationis negatively

influenced

by

the price of gasoline and travelcost. We findthatconsumersare willingto travelup to a milefora pricesaving

of $.03 perliter(whichtranslates

intoa savingof approximately$1.3 on a 40-litertankofgasoline).

RELATIONSHIPTO THE LITERATURE

The primary

contribution

of thisarticleis to developan

econometric

modelof locationand pricingdecisionsin the

gasolinemarket.We positionit in thecontextof previous

researchbothon gasolinemarkets

andon retailcompetition

models.

GasolineMarkets

Shepard(1991) and Iyerand Seetharaman(2003) estimatepricingmodelsforgasoline stationsthathave local

monopolypower. Their models are not applicable for

markets,as in thisarticle.Slade (1992) esticompetitive

matesa competitive

pricingmodelusingtime-seriesdata

on demandandpricesat 13 gasolinestationsin theGreater

Vancouverarea. In focusingonlyon a limitednumberof

firmsin the same geographicneighborhood,the model

Assumingthat

retaillocationdecisionsare exogenous,Png and Reitman

(1994) andIyerand Seetharaman

(2007) addressthepuzzle

ofwhyretailers

in thesamegeographicspace adoptsimilar

in certaincases and different

in others.

strategies

strategies

Pinkse,Slade,andBrett(2002) estimatea competitive

pricing modelthataccommodatestheeffectsof firms'spatial

locations.However,all thesestudiestakea reduced-form

approachto modelingthe effectsof location on price

competitionbetweenfirms.In contrast,we estimatean

economic-theoretic

modelof pricingbehaviorin thisstudy

noneof theprevi(see also Manuszak1999). Furthermore,

studiesattempt

to explainfirms'location

ouslymentioned

decisions.We believethatthecurrent

studyis thefirsteffort

to modellocationdecisionsin gasolinemarkets.

The institutionalrealitythattheSingaporegovernment

servesas a

socialplannerin determining

locationsof gasolinestations

makesourlocationmodelbothrealisticandmathematically

tractable.

RetailCompetition

Models

Models of firms'entryand exitdecisions,based on free

entryof firms(as opposedto a social plannerdetermining

the optimallocations),have been recentlyproposedby

Mazzeo (2002), who models hotels' local marketentry

decisions,andby Seim (2006), whomodelsvideoretailers'

local marketentrydecisions(fora reviewof theliterature

on entrymodels, see Dube et al. 2005). Our modeling

fromtheirsin thatwe modelthelocation

approachdiffers

decisions-ratherthantheentryand exitdecisions-of a

fixednumberof gasoline stationsin geographicspace,

of geodemousing the observedgeographicdistribution

graphicvariablesin thatspace.

A richliterature

existsin marketing

thatcastsfirmsand

consumerson a commonperceptualmap to analyzefirms'

decisions(Choi, Desarbo, and Harker

optimalmarketing

1990; Hauser 1988; Hauser and Shugan 1983; Moorthy

modelsof thistyperecognizethatbrands

1988). Marketing

different

occupy

positionson theperceptualmap in terms

of notonlytheirobjectiveattributes

butalso consumers'

whereasconsubjectiveevaluationsof these attributes,

sumershavedifferent

idealpoints(i.e.,mostpreferred

combinationsof attributes)

on thesame perceptualmap. Our

locationmodelcan be viewedin lightofthisliterature,

such

thatconsumers'ideal pointscorrespondto theirplaces of

residenceor work,whereasbrandpositionscorrespondto

thegeographiclocationsof stores.Consumers'ideal points

are inferred

as a function

of geographiccharacteristics

in

our case, unlikein the perceptualmap literature,

which

measuressubjectively

perceivedbrandpositionsand consumers'ideal pointsforattributes

research

usingmarketing

Notethatlocationis a horizontal

attribute

techniques.

(i.e.,

different

consumerswould disagreeon whatis the best

locationfora firmaccordingto wheretheirideal points

reside), as opposed to, for example,price and quality,

which are verticalattributes

(i.e., all consumerswould

to higherprice,higher

agreethatlowerpriceis preferable

to lowerquality,and so forth).

qualityis preferable

Thomadsen(2005) has developeda retailpricecompetitionmodelbased on theassumption

ofBertrand

pricecomretailchains.This modeluses a

petitionbetweenfast-food

multinomial

logitmodelof demandas an inputto thepricas a

ing equations.Demandforretailersis parameterized

All use subject to JSTOR Terms and Conditions

624

JOURNALOF MARKETING

RESEARCH,NOVEMBER2007

function

of observedgeographic

characteristics,

prices,and

traveldistancesof consumersto stores.Bothdemand-and

are inferred

supply-sideparameters

solelyfromobserved

because

demand

for

various

retailers

is notobserved

prices

in thedata. Because we also do not observedemandfor

gasoline retailersin our data, we adopt Thomadsen's

approachto model price competitionbetweenretailers.

However,unlikeThomadsen,who relies on the pricing

model only,we use a location model thatexploitsthe

observedgeographic

distribution

ofgasolinestationsacross

local markets

to inferthepotentialgasolinedemandat each

local market.

We organizetheremainder

of thisarticleas follows:We

developempiricalmodelsto estimatelocationand pricing

decisionsofgasolinestationsin Singapore,alongwithestimationtechniquesto estimatemodelparameters.

Then,we

describeourdata.Followingthis,we presenttheempirical

resultsof ouranalyses.We thendiscussthepolicyimplications of our results.Finally,we offersome concluding

remarks.

MODELOF LOCATION

ANDPRICINGDECISIONSOF

GASOLINE

STATIONS

IN SINGAPORE

We presentthissectionin twoparts.First,we developa

modelof gasolinestations'locationalchoicesby thegovofthe

ernment,

makingexplicittheparametric

specification

locationmodeland discussingestimation

details.Second,

we developa model of gasolinepricingdecisionsconditionalon theobservedlocationalchoices,presenting

a specificparameterization

of thepricingmodeland settingup

theestimation

procedure.

LocationModel

It is usefulto notethefollowing

twofeatures

ofthegasoline marketin Singapore(thatmakeit different

fromthe

in

market

the

United

States):

gasoline

1.Gasolinestations

canbe builton onlyspecified

plotsdetermined

Landis offered

ona publictender

bythegovernment.

in an open-bid

andanycompany

canbid.In other

system,

decisions

of oil companies

determine

words,bidding

only

whoownseachlocation,

notwherethelocations

themselves

toto

ought

2. Pricecompetition

in Singapore

is a

amonggasolinestations

recentphenomenon.

Beforethis,gasolineprices

relatively

on thebasisof a multilateral

weredetermined

agreement

between

theSingapore

and gasolineretailers.

government

theSingapore

assumed

Therefore,

government

pricesto be

optimallocationsforgasoline

equal whiledetermining

stations.

The supply

ofeachgasoline

station

exceedsitspotencapacity

tialdemand

doesnotexist).

(i.e.,anundercapacity

problem

We acknowledgethatstationcharacteristics

(e.g., conveniencestore,carwash)also affect

consumers'

choicesamong

stationsand,therefore,

consumers'welfarefunctions.

Howcannotknowa prioriwhich

ever,theSingaporegovernment

retailchainwill successfully

bid fora specificlocationand

thestationcharacteristics

thatthechainwillthenchoosefor

thatlocation.Therefore,

itis impossibleforthegovernment

to determine

locationsby accounting

forstationcharacteristicsat variouspossiblelocations.This underliesthethird

ourestimaassumption.(Consistentwiththisassumption,

tionresultsfromthepricingmodelshowthatstationcharacteristicsare not as important

as price or travelcost in

consumer

demandforgasolinestations;we disinfluencing

cuss thisfurther

subsequently.)

Managersat ExxonMobil,

Shell,and Caltex,thethreemajoroil companiesin Singathefinalassumption.

pore,confirmed

thetwo-dimensional

By discretizing

map of Singapore

intoN equallyspacedgridpoints,we definetheSingapore

government's

problemas one of choosingP gridpoints,

full

the

setofN availablegridpoints,to locategasoamong

line stationsto minimizethe sum of travelingdistances

across all consumerswho constitutepotentialgasoline

demand.Let Yiddenotea binaryoutcomethattakes the

valueof 1 ifconsumers

withingridpointi choosethegasoline stationin gridpointj and 0 if otherwise.On thebasis

of theprecedingdiscussion,we can thenwritetheSingaas follows(notethat

poregovernment's

objectivefunction

ourconversations

withgovernment

plannersindicatedthat

models of this kind are routinelyused in urban

development):

(1)

m

suchthat

(2)

(3)

(4)

N

Yii

(5)

(6)

forourlocationmodel.

assumptions

pointi, Zi is a vectorof all relevantfactorsthatexplain

potentialgasolinedemandat gridpointi, a is thecorreofgasolinestaIn empirically

observed

locations

explaining

spondingvectorof unknownparameters,dii is the geotionsinSingapore,

we assumethattheSingapore

government graphicdistancebetweengridpointsi andj, is an indicaXi

is thedecision

maker.

torvariablethattakesthevalue of 1 if a gasolinestation

Because gasolinepricesareconstant

acrossgasolinestations,

residesin gridpointj and0 ifotherwise,

andYii is a binary

model.

theydonotplaya roleinthelocation

of

if

outcome

that

takes

the

value

1

consumers

withingrid

locations

fortheP gasoline

The government

picksgeographic

i

choose

the

in

station

costs

of

all

stations

tominimize

thetotalexpected

point

gasoline

grid

point

j and 0 if

traveling

of theSinthetotalpotential otherwise.Equation1 is theobjectivefunction

consumers

in Singapore

whoconstitute

demand

forgasoline.

gapore government.

Equation 2 embodiesthe constraint

All use subject to JSTOR Terms and Conditions

thatconsumers

within

a gridpointi canchooseoneand

theconstation.

3 embodies

onlyonegasoline

Equation

inits

is working

with

P stations

straint

that

thegovernment

4 captures

decision.

thelogical

Equation

location-planning

condition

that

consumers

cannot

choose

togotogrid

j

point

fortheir

if

no

station

is located

gasoline

purchase gasoline

i will

atj. Equation

5 implies

that

consumers

atgridpoint

choose

either

totravel

togrid

point

j (Yii= 1) ornot(Yii=

6 implies

station

is

thata gasoline

0). Finally,

Equation

either

setupatgrid

j (Xi= 1)ornot(Xi= 0).

point

Wespecify

demand

ata grid

potential

gasoline

point

qi=

in

a

the

manner

multiq(Zi;a)

log-linear

using following

hasbeenextensively

model(which

usedtoestiplicative

mate

theeffects

ofmarketing-mix

variables

onbrand

sales;

andWittink

see,e.g.,VanHeerde,

2000):

Leeflang,

625

Inother

are

consumers

within

a given

words,

gridpoint

tochoosetheclosestgasoline

station

fortheir

assumed

Thisstems

from

ourassumption

that

purchases.

gasoline

acrossall

thegovernment

assumes

pricestobe constant

inSingapore

itslocation

stations

whilemaking

gasoline

decisions.1

To estimate

modelparameters,

we castthelocation

model

inestimable

form

asfollows:

econometric

(9)

where

ofstation

location

j, Ri(Z,P; a0)

N is theobserved

is thepredicted

of

location

theobjective

(basedonsolving

theSingapore

inEquation

as given

1) ofstagovernment,

tion

valueoftheunknown

vector

j, a0 isthetrue

parameter

a (thatis known

to theSingapore

but

government is

unknown

totheeconometrician),

andeiisthemeasurement

(7)

a meanofzero).Minimizing

error

thismeasurement

(with

error

in someway,usingan appropriate

lossfunction,

serves

as theestimation

torecover

of

estimates

ln(qi)

technique

a. Itisuseful

torecognize

herethat

XiandRi(Z,P; a0) are

bothtwo-dimensional

variables

because

stawhere

ofgridpointi,

they

represent

POPiis theresidential

population

tion

locations

in

two-dimensional

Euclidean

is

the

median

income

of

is

the

total

i,CARi

space.

INCi

grid

point

location

ofowned

number

carsingridpoint

is anindicator WecansolvetheSingapore

i,IiAIRi

government's

prob1-6andcalledtheP-median

variable

that

takesthevalueof1 ifgridpoint

i is nearthe lem,represented

byEquations

see

and0 ifotherwise,

is anindicator

variable

that problem,

(fordetails,

usingtheLagrangian

algorithm

airport

IipTi

itis possible

to

takes

thevalueof1 ifgridpoint

i is inthedowntown

area Daskin1995).2Fora givena, therefore,

thepredicted

locations

and0 ifotherwise,

andIiHwYi

is anindicator

variable

that compute

Ri(Z,P; ao) usingthis

Theestimation

istopickthevalueofa

takes

thevalueof1ifgrid

i isclosetoa highway

and algorithm.

objective

point

that

the

minimizes

In addition,

0 ifotherwise.

and

are

following

quasimeansquareerror

POP0,INCo, CARD

variables

fora reference

whose

(QMSE):

explanatory

gridpoint,

demand

levelgois fixed

at 1 (foridentification

potential

theexplanatory

variables

forallother

Therefore,

purposes).

areoperationalized

relative

tothecorresponding(10)

grid

points

variables

ofthisreference

Notethat

theparamegrid

point.

tersal, a2, anda3 ofthemultiplicative

modelcanbe

as theelasticities

ofpotential

directly

interpreted

gasoline

demand

tochanges

intherelative

values

oftheexplanatory QMSE(X,

variables

with

tothereference

Itis also

respect

gridpoint.

usefulto reiterate

herethatthough

potential

gasoline

demand

ata gridpoint

is a function

oflocaldemographic (11)

QMSE(X,

itdepends

neither

ontheprices

andstation

charvariables,

ofstations

acteristics

that

choose

to

locate

themselves

may

atornearthegridpoint

noronthetravel

distances

ofcon- (12)

sumers

within

thegridpoint.

Thisis consistent

withthe

Xjk

definition

ofpotential

market

sizeintheexisting

literature

(13)

Xjk

onchoice

models.

Weoperationalize

thegeographic

distance

between

grid where

X(x)andX(Y)denote

thex andycoordinates

ofX,

i andj, denoted

theEuclidean

distance

points

bydii,using

The

rationale

of

in

the

is as

respectively.

QMSE

using

measure.

data

from

the

New

York

State

Xjk

(Using

Department

After

X is obtained

theP-median

bysolving

probofTransportation,

Phibbs

andLuft[1995]find

a correlation follows:

topairupeachoftheP predicted

locaof.987between

distances

andtravel

times. lem,itis necessary

straight-line

tions

with

one

of

the

P

observed

locations

in

the

data

before

Other

studies

thatuseEuclidean

distances

as proxies

for

a meansquare

error.

there

arenumerHowever,

travel

times

include

Manuszak

Thomadsen

[1999],

[2005], computing

ous

to

undertake

this

task.

We

theone

ways

pairing

pick

Davis[2007],

andMcManus

In

other

words,

[2007].)

sup- thatminimizes

the

mean

error.

That

all

is,

square

among

that

and

are

the

Euclidean

coordinates

pose (xi,yi) (xi,yi)

oflocations

inX,andX,wepicktheone

=

possible

pairings

ofi andj; then,

dij 9211/2.

Weassume

that

theconsumer's

decision

ruleforchooslitispossible

tousea probabilistic

choice

suchasthemultifunction,

as perceived

is

station,

inga gasoline

bythegovernment,

nomial

instead

of

the

indicator

for

this

function,

logit,

binary

Y1.However,

=

thefollowing:

Given

allgrid

k suchthat

points

Xk 1,

renders

thegovernment's

decision

nonlinear

andcomputationally

problem

(8)

difficult

tosolve.

2Wepickthestarting

values

theexchange

using

algorithm.

All use subject to JSTOR Terms and Conditions

JOURNALOF MARKETING

RESEARCH,NOVEMBER2007

626

meansquareerror.

We achievethiscomthathas minimum

(fordetails,see

usingtheexchangealgorithm

putationally

Daskin 1995).3

The estimatorforet thatwe proposeis the value that

minimizestheQMSE. In otherwords,

(14)

a).

is to employan

The rationaleforthisestimation

algorithm

thatmatchestheobservedand predictedstation

estimator

locationsas closelyas possible.In thissense,ourproposed

estimatoris a minimumdistanceestimator,

just like the

We use Nelderand Mead's (1965)

leastsquaresestimator.

nonderivative

simplexmethodto searchforfor

Notethatourlocationmodelspecifiesthepotential

gasolinedemandat a gridpointusingall relevantdemographic

variables,suchas local residentialpopulation,numberof

cars owned,and medianincome.Previousentrymodels

have used onlylocal populationto characterizepotential

local demandfora product(see, e.g., Seim 2006). In these

models,firms'entryand exitdecisionsin givenlocal marketsare treatedas endogenous.In ourmodel,however,we

locationsof a givennumberoffirmsas

treatthegeographic

the

lies in understanding

interest

research

Our

endogenous.

the

observed

on

of

these

locations

geographic

dependence

variables.

ofdemographic

distribution

Our locationmodelis also uniquein thatit capturesthe

the

objectivesof a social welfaremaximizer-specifically,

retaillocations.It can be gendetermining

government-in

to retaillocaeralizedto otherdecisioncontextspertaining

or a centralcityplanneris the

tionin whichthegovernment

decisionmakerwhose objectiveis to increasesocial welIt can

consumers'inconvenience.

farebyreducingtraveling

also be generalizedto contextsthatinvolvegreaterdiscretionon thepartof firmsdecidingwhereto locate themlocationdecisionsin theUnited

selves,suchas supermarket

States.The objectiveof theP-medianproblemwouldthen

measureof

of somefirm-specific

involvethemaximization

such as profitor marketshare,across all chosen

interest,

locationsforstoresbelongingto thatchain,conditionalon

chosenlocationsof competingstores.Our modelcouldbe

extendedto a contextin whichfirms'pricingand service

decisions are also allowed to influencetheirlocational

choices. Such a model would entailthespecificationand

ofa simultaneous

estimation

systemofequationsgoverning

firms'locations,prices,and servicechoices. This is an

and challengingextensionof ourmodelforfurimportant

therresearch.

PricingModel

Givenrelativelocationsof P gasolinestations,as deterand represented

minedby theSingaporegovernment

using

the locationmodel discussedpreviously,we nextmodel

gasoline prices at the P gasoline stations.There are six

gasoline retailchains in Singapore:Shell, Caltex,Esso,

and SPC (SingaporePetroMobil,BP (BritishPetroleum),

leumCompany).The mergerof Exxon,calledEsso in Singapore,withMobil reducesthe numberof independent

chainsin Singapore.However,at thetimeof data collecWe retain

tion,thesestationsretainedtheiroriginalidentity.

this structurebecause it helps us illuminatebetterthe

valuesusingthemyopicalgorithm.

3Wepickthestarting

effectson retailcompetition

brand-specific

the exposition.More recently,BP and SPC have also

in the"Policy

ofthismerger

merged.We addresstheeffects

section.

Implications"

To gainan understanding

aboutthenatureof pricecornstations

in

the gasoline market,we run

petitionamong

reduced-form

(we reporttheseresultsin

pricingregressions

showthatthelocal prestheAppendix).These regressions

ence of otherstationsbelongingto thesame chainhas an

increasingeffecton priceat thefocal station,whereasthe

numberof stationsbelongingto competingchainshas a

decreasingeffect.This leads us to assumethateach chain

managersetsthepriceat all stationsbelongingto hisor her

chain.We also make the (standard)assumptionthatthe

at

observedpricesemergefromBertrand

pricecompetition

thechain level. An alternative

assumptionwould be that

each stationmanagermaximizessome weightedcombinationof theprofitsat his or her stationand theprofitsof

otherstations.Such a modelwouldallow forstation-level,

as opposedto chain-level,

(whentheestipricecompetition

matedweightsforotherstationsare zero). It would also

allow forcollusivepricingamongretailchains(whenthe

estimated

weightsforstationsbelongingto otherchainsare

sucha model,anditreducedto the

We

nonzero). estimated

we discuss

of

chain-level

case

profitmaximization

special

here.Underthechain-levelprofitmaximizationmodel,a

gasolineretailchain'sproblemis one of choosing(possibly

different)

gasolinepricesforall itsstationsto maximizethe

fromsellinggasolineat all itsstations.

totalvariableprofits

We can thenwriteretailchainm's objectivefunction(at

timet) as follows:

(15)

max

station

j duringtimet,Qitrefersto thedemandforgasoline

revenues

at stationj duringtimet,and .5525pitrepresents

a price

fromcharging

(aftertaxes)thataccrueto theretailer

pit.In Singapore,theexcisetaxratechargedforgasolineis

35%. Thereis an additionalcorporateincometax rateof

15%. Thisresultsin ($1 - .35 x $1) x (1 - .15) = $.5525 of

everydollarofpretaxrevenuesaccruingto theretailer:

(16)

Cit)c1Q11

forgasoline

demandfunction

We specifya reduced-form

as

follows:

time

t

at station

(i.e., Qit)

j during

(17)

(18)

Qijt

demandforgasolineat gridpointi (as we discussedin the

subsection"LocationModel"). Furthermore,

Siitis speci-

All use subject to JSTOR Terms and Conditions

An Econometric

ModelofLocationand Pricing

is

feedby meansof a multinomial

logisticfunction-which

consistent

withrandomutilitymaximization

on thepartof

individualconsumers

(McFadden1974)-as follows:

(19)

(numberof pumpingbays,pay-at-pump

facility,

presence

of convenience

andcar

store,specialtydeli,servicestation,

in termsofinfluencing

marketshare

wash)thatarerelevant

forgasolineat a station,13is thecorresponding

vectorof

parameters,dii is the geographicdistancebetweengrid

pointsi andj, pitrefersto thepriceof gasolineat stationj

duringtimet,and8 andy standforthetravelcostandprice

ofconsumers,

The probsensitivity

parameters

respectively.

abilisticchoice rule thatunderliesthe multinomiallogit

modelis notnecessarilyinconsistent

withthefixedchoice

ruledetermining

Yii in thelocationmodelwe discussedpreassumesthatprice

viously.This is becausethegovernment

andall otherrelevant

stationcharacteristics-both

observed

andunobserved-areidenticalacrossstationswhenmaking

locationdecisions.In sucha case, therandomutility

model

reducesto a deterministic

model(whichsetstheranutility

domnessin theconsumer'sutilityfunction

to zero) based

on travelcostsonly.

The precedingmarketsharespecification

includesa 1 in

thedenominator

to capturetheeffectof theoutsidegood

(i.e., consumers'optionnotto purchasegasolineat anyof

theavailablegasolinestations,

choosingto travelbybus or

taxi instead).Underthe conditionsof the marketshare

withina givengridpointare assumedto

model,consumers

allocatethemselves

betweengasolinestations(and theoutside good), if we taketwotypesof stationcharacteristics

intoaccount(Iyerand Seetharaman

2003, 2007): (1) horizontalcharacteristics

(i.e., geographiclocationsthatdeterminedid)and (2) verticalcharacteristics

(i.e., Wi and pit).

Ourdemandspecification

of bothunobignorestheeffects

servedpotential

demandshocksthatmaychangetotalmarketdemandforgasoline and unobservedstation-specific

demand shocks that may influencemarketshares for

chains. In this sense, our demand model predictsthat

demandforeach stationwillbe a deterministic

function

of

stationcharacteristics

and can be considereda reducedformdemandspecification.

We specifythemarginal

costoffirm

j at timet as follows

(as in Thomadsen2005):

(20)

Cjt

marginalcost of gasolinethatis assumedto be thesameacrossstationsandeitis

a randomshockthatrepresents

theeffectsof unobserved

variableson themarginalcost of

(by theeconometrician)

gasolineat a station.

PluggingEquations 17-20 intoEquation 16 yieldsthe

first-order

in matrixform,

conditions,

following

represented

forgasolinestation

that

to

chain

m:

j

belongs

(21)

.5525pt

ip

is a P x 1 vectorof ones, and S2(pt,0) is a P x P matrix

627

whosejthdiagonalelementis givenbyy....5T.,

iSiit(1 Siit)qi

andwhoseoff-diagonal

element(j, k) is equal to-y111_,

iSikt

Siitqiif stationsj and k belongto thesame chainand 0 if

otherwise.

Finally,0 = (138 y)' is thevectorof parameters

in themarketsharemodel,and Qt is a P x 1 vectorwhose

jthelementis givenbyIII,._.

iSiitqi.

Althoughthecost shocketcapturestheeffectsof unobservedvariablesfromtheeconometrician's

they

standpoint,

includevariables(e.g., rentalcost advantages[because of

superiorleasingterms]associatedwithspecificlocations)

thatare knownto retailchainmanagersand therefore

are

whenthemanagersmaketheirpricingdeciincorporated

sions.This introduces

an endogeneity

problemin theestimationbecauseof possiblecorrelation

betweenPtand etin

Equation21. This is thetypicalpriceendogeneity

problem

andPakes 1995). Furthermore,

Levinsohn,

(see, e.g.,Berry,

itis possiblethatretailchainmanagersincorporate

Etwhen

decisions

to

station

characteristics,

making

pertaining

Wi.

Thisleads to an additionalendogeneity

problemin theestimationbecauseof a possiblecorrelation

betweenWi and et

inEquation21. We refertothisas the"characteristics

endogeneityproblem."

Similar to Thomadsen (2005), we used generalized

methodof moments(GMM) to estimateEquation21. To

correctforpriceendogeneity,

we choosefourinstrumental

variablesforpit:(1) an indicatorvariablethattakes the

value of 1 if otherstationsbelongingto the same retail

chainas stationj existwithina one-mileradiusof stationj

and 0 if otherwise,(2) thelog of thenumberof stations

fromthatof station

belongingtoretailchainsdifferent

j that

existwithina one-mileradiusof stationj, (3) theaverage

estimatedpotentialgasoline demand(fromour location

model)perstationwithina one-mileradiusof station

j, and

the

demand

at

each

on

the

(4)

potential

gridpoint

Singaporemap dividedby its distanceto stationj and summed

overall gridpoints.The validity

ofthefirst

twoinstruments

relieson an assumptionthatthecost shocksare localized

and do not spill over to othernearbystationswithinthe

one-mileradius.(Another

in favoroftheseinstruargument

mentsgivenin Thomadsenis thatbecausecostshocksmay

be timevarying,

withstatheymayshowlittlecorrelation

tions'locationdecisions.)Forexample,supposethatstation

j's cost advantagearises fromits locationhavinglower

lease costs (e.g., because thestationnegotiatedforbetter

therealestate).In thiscase,neileasingtermswhilerenting

therthenumberof nearbystationsbelongingto thesame

chainnorthenumberof nearbystationsbelongingto comof sucha costadvanpetingchainsis likelyto be a function

1 and2 willbe

tageof station

j. In otherwords,Instruments

uncorrelated

withthecost shock.However,theseinstrumentswillbe highlycorrelated

withthepriceat stationj to

theextentthatstation

j willbe less aggressivewhensetting

pricein thepresenceofotherstations

belongingto thesame

chain (to avoid cannibalizingsales of the same chain's

stores)and moreaggressivewhensettingpricein thepresence of competitors.

Our reduced-form

priceregressions

(see theAppendix)showthatInstruments

1, 2, and 3 are

indeedhighlycorrelatedwiththeobservedprices.Similarly,because the average estimatedpotentialgasoline

demandat nearbystations(i.e., Instrument

3) dependsonly

on observeddemographic

characteristics

of theneighborhood (as specifiedunderthelocationmodel),Instrument

3

All use subject to JSTOR Terms and Conditions

628

JOURNALOF MARKETING

RESEARCH,NOVEMBER2007

withthecost shock.Finally,the

rationaleforthefourth

instrumental

variableis thatit is a

moreglobal measureof competitive

effectsthanthefirst

threeinstrumental

variablesthatcapturelocal effectsof

it accountsforboth how far

competition.Furthermore,

of gasoline

away a competingstationis and theintensity

demandin thatstation'sneighborhood.Suppose thatUt

denotesa P x 18 matrix,

in whicheachrowrepresents

a differentstationand the 18 columnsrepresent

one intercept,

twoindicator

variablesfortimet (representing

threewaves

ofdatacollection),fiveindicator

variablesforchain(represtation

sentingthesix chains),six variablesrepresenting

characteristics

(as we explain subsequently),and four

instrumental

variables(as we discussedpreviously);then,

thefollowingmomentconditionunderliestheGMM estimation(ignoring

characteristics

endogeneity):

(22)

E(EtlUt)=

Whenthestationcharacteristics

correlatewiththecost

in Equation22 is invalid.We

condition

shocks,themoment

to corareunableto findappropriate

additionalinstruments

we

rectforcharacteristics

Therefore, reestiendogeneity.

mateourproposedmodelby excludingthestationcharacteristicsas explanatoryvariables within Wi and as

concernsaboutposinstruments

withinUt,thusprecluding

We

sible endogeneity

of suchvariablesin theestimation.

ofthetravelcost(8) andpricesensicomparetheestimates

obtainedusingthismodifiedspecificativity

(y) parameters

tionwiththoseobtainedusingour originalspecification.

therobustnessof thesetwo

This enablesus to understand

or lack

parameterestimates-thatis, their sensitivity,

thereof,to the inclusionof possiblyendogenousstation

in theestimation.

characteristics

of thepricingmodel,observed

Underthisspecification

in

in

data

arisebecause of differences

variations

the

price

cost

across stations,time-varying

demandcharacteristics

changes(whichare equal acrossstations),and cost shocks

at thestationlevel.Finally,potentialgasolinedemandat a

gridpoint(i.e., qi) is notobservedin thedata.We use the

estimated

potentialgasolinedemandin gridpointi, which

we obtainedusingtheestimatesof thelocationmodel,as a

proxyforqi. This not only allows thepotentialgasoline

determined

demandto be simultaneously

by local population,medianincome,numberof cars owned,and presence

butalso allowstheweightsassoofhighwayanddowntown

estimated

from

tobe endogenously

ciatedwiththesefactors

of gasolinestations.Thus,we are

theobserveddistribution

relievedfromtheburdenof needingto estimatepotential

of thepricgasolinedemand(in additionto theparameters

data.

from

the

model)

price

ing

Issues and Caveats

Identification

issues.We identify

We now discusssomeidentification

all stationsand

across

from

the

costs

averageprice

marginal

the changes in this average price across periods (i.e.,

demandis notobservedin

waves). Althoughstation-level

theequilibthesameby invoking

thedata,we can identify

the

riumconditionsof demandand supply.Whatidentifies

in

variation

demandfunctionis the sufficient

systematic

in

resides

stations

that

in

across

the

data

neighborprices

levels of local potentialgasoline

hoods with different

levelsof local competitive

demandand different

intensity.

Proofof sufficient

variationin pricesis easilyobservedin

theresultsof ourreduced-form

(see the

pricingregressions

Appendix),in whichwe findthatthe effectsof all the

environment

factorsare significant.

For examcompetitive

that

a

station

that

faces

little

local

ple, suppose

competition

(i.e., fewnearbystations)priceshigherthananotherstation

thatfaceshigherlocal competition

(i.e., manynearbystations); for the same level of local potentialgasoline

for

demand,thiswouldserveas thesourceof identification

the travelcost and price sensitivityparametersin the

demandfunction.

Supposealso thattwostationsbelonging

to different

chainspricedifferently

withinthesame local

of

market;thiswouldserveas thesourceof identification

in thedemandfunction.

thebrandintercepts

Threecaveatsarein order.First,becausewe relyon price

data to inferbothcost-sideand demand-sideparameters,

ourestimatesof demandare likelyto be less efficient

than

estimates

obtainedusingdemanddata.Second,becausewe

suchas Bertrand

relyon specificassumptions,

pricecompetitionbetweenretailchainsand multinomial

logitdemand

forgasolinestations,

to achievethisidentification,

itis posare subjectto misspecification

bias.

siblethatourestimates

we allowforunobserved

demandshocksin

Third,although

potentialgasolinedemand,qit,we ignoresuchunobserved

demandshocksin themarketsharefunction,Sift.In this

thattheseassumptions

are dictatedby

regard,we reiterate

ourlackof access to demanddatain theproductcategory.

DESCRIPTION OF DATA

Our data pertainto the gasoline marketin Singapore,

whichis a good geographicalmarketforexaminingfirm

conductforvariousinstitutional

considerations.

First,itis a

self-contained

marketof substantialsize. For example,

gasoline sales in 2002 alone were in excess of a billion

liters,and moreinfamously,

Singaporerankssecond(next

to theUnitedStates)in globalcarbondioxideemissionper

unitof grossdomesticproduct(The Economist2003). Secand there

ond,all thedemandis suppliedby local refiners,

of supply-side

is no possibility

leakage.Beforecrossingthe

borderinto Malaysia (the only possible road transit),

motorists

are requiredby law to havetheirgas tanksfilled

to at least three-quarters.

Thus, supply-demand

leakages

do not

betweenthetwomarkets

due to thepricedifferences

viewedas a mature

is increasingly

hold.4Third,themarket

and competitivemarket.Gasoline demandis stable and

increase

expectedto growslowlybecauseof thecontrolled

retailcompetition

in automobileownership.

Traditionally,

has been conductedthroughnonpriceinstruments

(e.g.,

Pricepromotions

freebies,

loyaltyprograms).

sweepstakes,

are a recentaddition(past threeto fiveyears)to thismix

and are becomingincreasinglycommonand distributed

acrosstheentireisland.Currently,

upwardof 25% of gasoline stationsarerunning

rangingin depthfrom

promotions

5% to 15% on petroland/ordiesel. Fourth,theoil majors

to discontrolall elementsoftheirchannelfromproduction

to retailing.However,thelocationdecisionsfor

tribution

betweenthe two countriesis substantial.The

4The pricedifferential

priceof a literof 98-octanepetrolin May 2002 was S$1.244 in Singapore

and S$.630 in Malaysia.Industry

suggestedthatthesubstanparticipants

tial gasoline tax revenuewas one of the reasons forthe Singaporean

ordinance.

All use subject to JSTOR Terms and Conditions

629

foreachgasoline

station

retail

aredecided

Urban

outlets

17).We

(seeEquation

Redevelop- demand

bySingapore's

thelocation

model

alsoplugtheestimated

values

ofqifrom

ment

Authority.

of

thepricing

Weemploy

a cross-section

intoEquation18 whileestimating

data,representing

survey

directly

226gasoline

inSingapore

model.

Weallowthefollowing

station

characteristics

stations

late2001and

during

(Wi)

all

in

mainland

market

2002.

We

include

to

influence

shares

for

stations

stations

(i.e.,SO in

early

gasoline

gasoline

sta- Equation

of

inourempirical

19: (1) CHAIN,a five-dimensional

vector

analyses,

gasoline

Singapore

ignoring

tionsthatarelocated

onislands

coast. indicator

variables

which

ofsixdifferent

retail

offtheSingapore

representing

There

inmainland

are229gasoline

stations

We

thetotal

of

chains

station

number

to;(2)PUMPSi,

Singapore.

j belongs

stations

toMobilandoneto

instation

an

excluded

three

(twobelonging

gasoline

baysavailable

j; (3) PAYS,

pumping

locations

inthesurvey indicator

weremissing

variable

that

takes

thevalueof1 ifstation

BP)whose

geographic

j hasa

inmainland

data.Among

the226stations

75

and

0

if

otherwise;

(4) HOURSi,an

facility

Singapore,

pay-at-pump

stations

areowned

43areowned

are

39

indicator

variable

that

of

1 ifstation

takes

the

value

Mobil,

byShell,

by

j is

owned

29areowned

a dayand0 ifotherwise;

byEsso,32areowned

byCaltex,

(5)WASH,anindiby

open24hours

the cator

variable

that

takes

thevalueof1 ifstation

BP,and8 areowned

station,

bySPC.Foreachgasoline

j hasa car

datainclude

thepricesoffourgradesofpetrol washfacility

and0 ifotherwise;

survey

(6) SERVi,anindicator

98unleaded

that

takesthevalueof1 ifstation

[UL],95UL,and92UL),theprice variable

(Premium,

j hasa service

ofdiesel,

anda large

number

ofstation-specific

characteris- station

and0 ifotherwise;

and(7) DELIS,an indicator

tics(e.g.,number

ofpumping

ofconven- variable

that

takes

thevalueof1 ifstation

bays,presence

j hasa specialty

iencestore,

carwash,service

station, deliand0 ifotherwise.

pay-at-pump

facility,

automated

teller

store

ofgoodsat

Thevariable

ablePUMPS.a

varies

from

4 to20across

stations

machine,

hours,

prices

convenience

Ourdatasetalsocontains

indicator

variablesPAYS,

store).

demographic inourdataset.Theremaining

information

homeownership,

thevalueof1

.,WASH.'

(e.g., population,

age,

HOURS.)

JSERV.'

JandDELI-take.1

of

mode

for

and

22%

of

the

stations

inour

status,

69%,

50%,

88%,

income)

52%,

employment

transportation,

pertoeachgasoline

station's

Threewavesof

market.

dataset,respectively.

Inaddition

tothestation

characteristaining

datacollection,

allofwhich

usedthesamesurvey

instru- tics,themarket

share

model

includes

thepriceofgasoline

atthesamesetof226gasoline

wereundertaken

sta- atstation

ment,

distance,

j, PRICE,andtravel

dii,as explanatory

tionsduring

ofNovember

themonths

2001,December variables

(seeEquation

19).

2002.Thisyielded

time-series

variation Table1 provides

themeans

andstandard

deviations

of

2001,andJanuary

ingasoline

Because

98UL

is

the

most

of

98UL

at

various

retail

in

chains

prices.

popular

grade prices

gasoline

Singaofgasoline

inSingapore,

wereport

theestimation

results pore.Theaverage

of98ULgasoline

is approximately

price

forourpricing

model

basedonthisgrade

ofgasoline.

Esti- $.05lower

atSPCthan

attheother

retail

chains.

Thestanmation

results

fortheother

areconsistent

with

those darddeviation

ofpriceofgasoline

is $.03(formost

grades

grades

we obtained

forthe98UL gradeandareavailableon

andretail

which

ismuch

smaller

than

thestandard

chains),

ofpriceobserved

deviation

inU.S.markets

request.

(see,e.g.,Iyer

Forthelocation

wedivide

mainland

and

Seetharaman

variation

model,

2003;Shepard

Singapore

1991).Thisprice

intoa rectangular

of

1550

that

are

includes

variation

across

stations

within

a

chain

and

across

grid

gridpoints

equally

andthevertical

dimensions. time.

spacedinboththehorizontal

1550as opposed

toa smaller

number

ofgrid

Picking

points

EMPIRICALRESULTS

ensures

that

eachgridpoint

hasnomore

than

onegasoline

which

is

to

be

with

our

consistent

location

We

the

estimates

ofourproposed

location

station,

model

required

report

model

thelocation

model (calledPROPOS)inColumn

2 ofTable2. Wereport

the

(seeEquations

1-6).Estimating

enablesus to characterize

demand

standard

errors

associated

with

these

estimates

in

Column

potential

gasoline

ateachgrid

inSingapore.

Weallowthe 3.Weobtain

these

a bootstrapping

as folendogenously

point

using

procedure,

characteristics

toinfluence

local

lows:Onthebasisoftheestimate

following

demographic

a, using

9,we

Equation

demand

ateachgridpoint

theempirical

distribution

ofeias thedifference

potential

(i.e.,qi):(1)

gasoline

generate

within

between

theobserved

andthepredicted

locations.

i,

POPi,thelocalpopulation

represented

gridpoint

Using

as thetotalpopulation

ofthecensustract

to

thisempirical

distribution

oferrors

andtheestimate

computed

a, we

which

thegrid

divided

number

of

simulate

locations

forthegasoline

stations.

these

point

belongs

bythetotal

Taking

within

thatcensustract;

locations

as actuallocations,

wereestimate

the

gridpoints

(2) INCi,themedian simulated

income

ofthecensus

towhich

tract

i belongs;

location

model.

Wethen

thesame

(3)

point

grid

proposed

cyclethrough

thetotalnumber

ofcarsrepresented

within

CART,

grid

as thetotalnumber

ofcarswithin

the

pointi, computed

Table 1

census

tract

towhich

thegridpoint

divided

belongs

bythe

MEANS AND STANDARD DEVIATIONS OF 98UL GASOLINE

totalnumber

ofgridpoints

within

thatcensustract;

(4)

PRICES AT VARIOUS RETAIL CHAINS

an

indicator

variable

that

takes

thevalueof1 ifgrid

AIRi,

i is located

totheairport

and0 ifotherwise;

point

adjacent

Mean Price

StandardDeviation

variable

thattakesthevalueof1 if

(5) DTi,anindicator

Chain

($ per Liter)

ofPrice

i is located

within

thedowntown

areaand0 if

gridpoint

1.19

.03

and(6) HWYi,anindicator

variable

that

takes Shell

otherwise;

Caltex

1.18

.04

thevalueof1 ifgridpoint

i is located

a

to

adjacent major Esso

1.19

.03

and0 ifotherwise.

ExxonMobil

1.19

highway

.03

1.19

Forthepricing

.03

weusethesamesetof1550grid BP

model,

1.14

.03

modelto compute

pointsas in thelocation

aggregate SPC

All use subject to JSTOR Terms and Conditions

630

JOURNALOF MARKETING

RESEARCH,NOVEMBER2007

benchmark

model(calledBENCH)thatrestricts

potential

tobe equaltothelocalpopulation

gasolinedemand

(e.g.,

howwellwe areabletopredict

Seim2006).To understand

observed

locations

gasolinestation

usingourchosensetof

sixdemographic

we compare

thepredictive

abilvariables,

of

PROPOS

with

that

of

BENCH.

The

based

on

QMSE

ity

Parameter

M

SE

PROPOSis 7210,andthatbasedon BENCH is 15,199,

2.3425

.2042

POPi

thusindicating

morethan50% predictive

gainsfrom

using

INC

2.5327

.0995

variables

to

local

predict

potential

gasoline

demographic

.9462

.0975

CART

as inourproposed

location

model.

1.8075

.0900

demand,

AIRi

1.8394

.1063

theestimated

localpotential

DTi

Figure1 visually

represents

2.9434

.0332

HWYi

acrossgridpointsontheSingapore

gasolinedemand

map.

thedistribution

ofestimated

Overlaying

potential

gasoline

acrossgridpointsontopoftheobserved

demand

distribuprocedure

again.We do thisuntilwe have50 setsofa,

basedonwhichwe compute

thestandard

deviation.

As we

tionofgasolinestations

acrossthesamesetofgridpoints

theresults

showthatpotential

demand

at

enablesus to conveyvisuallythegovernment's

basisfor

expected,

gasoline

a gridpointis a positive

function

ofthepopulation,

median placing

a largenumber

ofgasoline

station

locations

atsome

andnumber

ofcarsownedinthelocalneighbor- geographic

andnotat others.

To facilitate

income,

neighborhoods

hood.Thisvalidates

ourprevious

contention

thatpopulawe code Figure1 intofour(equal-sized)

interpretation,

tionis onlyoneamongseveraldemographic

variables

that regionsof varyingshades(fromlightto dark) Low

localdemand

forgasoline.

influence

As expected,

we also

Demand(lightest

shade),MiddleDemand1 (lighter

shade),

findthatproximity

totheairport,

andhighways MiddleDemand2 (lightshade),andHighDemand(dark

downtown,

increases

localpotential

demand

andthatproxim- shade)-usingthequartiles

oftheestimated

distribution

of

gasoline

to

All

accounts

for

the

increase.

these

demand.

The

dense

cluster

of

observed

ity highways

largest

potential

gasoline

resultsare intuitively

sensibleand give excellentface

stations

inthenortheast

ofFigure1,along

gasoline

portion

to

our

location

model.

We

also

estimate

a

with

the

estimated

of

validity

proposed

highdegree potentialgasoline

Table2

ESTIMATEDPARAMETERS

OF THE LOCATIONMODEL:

EFFECTS OF LOCALMARKETCHARACTERISTICS

ON

POTENTIALDEMANDFOR GASOLINE

Figure1

ESTIMATEDPOTENTIALGASOLINEDEMANDINSINGAPORE

600

MostProfitable

Station

500

LeastProfitable

Station

400

300

200

LowDemand

100

Middle

DemandDemand

MiddleDemand21 HighDemand

GasolineStations

0

0

100

200

300

400

500

600

700

800

Notes:Higherdemandareasaredarkerthanlowerdemandareas.

All use subject to JSTOR Terms and Conditions

900

1000

An Econometric

ModelofLocationand Pricing

631

effects:thepresenceof downtownin the horizontalline

from(380, 380) to (620, 380), thepresenceofthe

spanning

close

to (700, 350), and the presenceof a major

airport

theregionfrom(700, 420) to (800, 400).

highwayspanning

Overallthereis a highdegreeof agreementbetweenthe

estimated

locationsand theactuallocationsof the226 stations.For example,ourestimatedlocationsare also highly

in thenortheast

concentrated

portionofFigure1.

In Table3, we presenttheresultsofthepricingmodelfor

98UL gasoline.Column2 excludesstationcharacteristics

as explanatory

variableswithinWi (to addresstheissue of

characteristics

as we discussedpreviously),

endogeneity,

and Column3 includessuchvariables.Understandably,

the

minimizedcriterion

function

value is lowerunderColumn

3 (becauseitincludesadditional

variables)than

explanatory

underColumn2, buttheestimatesof commonparameters

are similarto each other.The estimated

price-costmargins

fromColumns2 and 3 are 21.3% and 21.2%, respectively.

These are higherthan estimatedmarginsin the North

Americangasolinemarket.

For example,Manuszak(1999)

estimates

retailprice-cost

in Hawaiiangasolinestamargins

tionsat approximately

10%. This perhapsreflectslower

intensityof price competitionin the Singaporemarket.

Pricepromotions

werelongabsentin theSingaporemarket

andbecamea prevalent

retailactivity

as disonlyrecently,

cussedin theEuromonitor

(2004) report.In termsof consumers'intrinsicbrandpreferences

(reflectedin theestimatedbrandintercepts

in thedemandmodel), we allow

themto have two components:(1) one thatis common

across all brands(called CONSTANT in Table 3), repreconsumers'

baselinepreferences

forgasolinebrands

senting

relativeto the outsidegood, and (2) one (reportedseparatelyundereach brandname in Table 3) thatrepresents

POLICY IMPLICATIONS

Table3

ESTIMATED PARAMETERS (STANDARD ERRORS) OF THE

PRICING MODEL: EFFECTS OF STATION CHARACTERISTICS

ON STATION-LEVEL DEMAND FOR GASOLINE

Parameter

Model 1

Cost

Constant

Wave2

Wave3

.415

-.019

.000

Demand

Constant

Shell

Caltex

Esso

Mobil

BP

.115 (22.402)

-.062 (.038)

.052 (.022)

.063 (.027)

.039 (.028)

.116 (.023)

PUMPSJ

PAY.

1

HOURSi

WASH.

J

SERVi

DELI.J

PRICE.J

DIST..u

(.009)

(.001)

(.002)

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

-2.845 (.086)

-.103 (.003)

Criterion

function

value

Notes:N.A. = notapplicable.

foreach brandrelativeto

consumers'additionalpreference

SPC (foridentification

purposes).The componentthatis

sharedby all brands(CONSTANT)-and mustbe interforeach brandrelativeto

pretedas thebaselinepreference

theoutsidegood-is notsignificantly

fromzero.

different

Withthehighestestimatedintercept,

BP appearsto be the

The coefficients

brandin themarketplace.

associstrongest

ated withbothpriceand traveldistanceare negativeand

(-2.845 and-.103 underTable3, Column2, and

significant

-2.808 and -.106 underTable 3, Column3). This implies

thatbothpriceand traveldistanceare important

considerationsforconsumerswhentheychoose betweengasoline

stations,whichis intuitively

pleasingbecause thisunderscorestheimportance

of locationsin firms'pricingdecisions.The pricesensitivity

and travelcostestimatestranslate into the followingsubstantiveinterpretation

(under

bothpricingmodels):Consumerswill be willingto travel

an extramileto save approximately

$.03 perliterof gasoline.Assumingthatan averagepurchaseof gasolinein Singaporeinvolves40 litersof gasoline,thisimpliesthatconsumerswould save approximately

$1.3 by travelingthat

extramile. Underthesame assumption,thehighestestimatedbrandintercept

forBP translates

intothefollowing

substantive

with

SPC, BP would

interpretation:

Compared

be able to commanda pricepremium

of $.04 perliterwhile

betweenthetwobrands.

keepingtheconsumerindifferent

We findthatincludingstationcharacteristics,

as in Table 3,

Column3, does notsubstantively

changeanyof theestimatesreportedin Column2. However,on accountof our

issues

inabilityto addressexplicitlypotentialendogeneity

to stationcharacteristics

in thepricingmodel(as

pertaining

discussed previously),we do not attemptto interpret

directlythe estimatedparametersassociated with such

characteristics.

.0028

Model2

.417

-.020

-.001

(.027)

(.000)

(.001)

.049 (9693.489)

-.058

(.023)

.057

(.020)

.069

(.025)

.049

(.024)

.127

(.028)

.002

.002

-.032

.005

-.009

-.012

-2.808

-.106

(.000)

(.001)

(.004)

(.001)

(.001)

(.002)

(.381)

(.014)

.0021

Estimated

MarketSharesand Profits

On thebasis of theestimatedparameters,

we compute

theweeklymarketsharesand,therefore,

profits

(computed

at observedprices)of thesix retailchainsin ourdata set.

For themarketsharecomputation,

we use thepricedata

collectedfromthefirstwave. For theprofitcomputation,

we assumethatthetotalweeklydemandforpetrolis 18

millionliters.We arrivedat thisas follows:The reported

annualretailsales of petrolin Singaporefor2001 were

S$1.149 billion,whichis equivalentto S$22 millionper

week.If we assumean averageretailpriceof S$1.234 per

into18 millionliters.The resultsappear

liter,thistranslates

in Table 4. The estimatedmarketsharesagreeremarkably

Table4

ESTIMATED MARKET SHARES, ACTUAL 2002 MARKET

SHARES, AND ESTIMATED PROFITS OF FIVE RETAIL CHAINS

IN SINGAPORE

Chain

Shell

Caltex

ExxonMobil

BP

SPC

Estimated

Share

(%)

32.9

14.5

36.1

12.6

3.9

All use subject to JSTOR Terms and Conditions

ActualShare

(%)

33.0

14.2

35.2

13.7

3.9

Estimated

Profit

($)

7.13 million

3.13 million

7.83 million

2.73 million

.85 million

632

JOURNALOF MARKETING

RESEARCH,NOVEMBER2007

well withcorresponding

reportedmarketsharesof 33.0%

(Shell), 14.2% (Caltex), 35.2% (Exxon Mobil), 13.7%

(BP), and 3.9% (SPC) for2002. This lendsexcellentface

validityto our parameterestimates.Amongthesix retail

chainis estimatedto be Shell,

chains,themostprofitable

withan estimatedprofitof S$7.13 millionperweek,and

is SPC, withan estimated

ofS$.85

theleastprofitable

profit

million.

themostandleastprofitable

In Figure1,we also identify

in Singapore(on thebasis oftheestimated

stations

paramestationis runby Shell,withestiters).The mostprofitable

matedweeklyprofitsof S$30,000, and is located in the

in Singaporein termsof potential

densestneighborhood

gasolinedemand,whichsuggeststhatcompetitive

pressures

of "primerealestate."This

do notdissipatetheprofitability

lendsfurther

evidenceto thepopularemphasisin retailing

station

of"location,location,location!"The leastprofitable

is runby SPC, withestimatedweeklyprofits

of S$23,000,

in Singaporethat

and is locatedin a remoteneighborhood

is estimatedto have low potentialgasolinedemand.The

staestimated

weeklysales forthemostandleastprofitable

tions are S$138,000 and S$92,000, respectively.These

numbersare in thevicinityof publiclyavailable weekly

[2004]) of

averagesales figures(reportedby Euromonitor

S$114,000and S$85,500forlargeand smallpetrolstations

in Singapore.Accordingto theEuromonitor

average

report,

weeklyretailsales oflargeandsmallstationsfor2002 were

S$140,000andS$105,000,respectively;

gasolineaccounted

for81.5% of retailsales.This yieldsweeklyaveragepetrol

One reason

sales of S$114,000and S$85,500,respectively.

ourestimatednumbersare higherthanthereportednumbersmaybe thatwe used a premium(i.e., higher-priced)

gradeof gasoline(98UL) in ourcomputations.

MergerSimulation

In July2004, SPC announcedthatit would acquireall

petrolstationsfromBP afterthelatterdecidedto exitthe

petrolretailmarketin Singapore.In September2004, SPC

announcedthatthe acquisitionwas completeand thatit

wouldcontinueto retaintheBP brandnamefortheBP stations,graduallychangingthe names of these stationsto

SPC in phases overtime.We considertheeffectsof this

simulation

an appropriate

using

mergerscenariobyrunning

our estimatedparameters.Specifically,we simulatethe

equilibriummarketshares and, therefore,equilibrium

pricesof the226 stationsafterassumingthatthe8 stations

ownedby SPC mergewiththe29 stationsownedby BP,

thusbelongingto a singlechainthatmaximizesthesumof

profitsacross 37 stations.Because our estimationresults

brandand thatSPC is

showthatBP is themostpreferred

brandsin the Singaporepetrol

one of theleast preferred

in

market(as evidencedby theestimatedbrandintercepts

sceTable 4) and to be consistentwiththe"postmerger"

nario described previously,we make two alternative

assumptions:(1) Each stationretainsits previouslyheld

brandname (i.e., SPC or BP), or (2) all BP stationsare

renamedwiththeSPC brandname.We referto thesetwo

assumptions as SCENARIO 1 and SCENARIO 2,

respectively.

We face a technicalissue in conductingthis policy

We mustcalculateequilibriumpricesof 226

experiment.

firmsfollowingthemerger.This involvesa "fixed-point"

condition:

(23)

.5513,

The dimensionality

of the fixedpointsis too largeto be

with

conventional

computed

"hill-climbing"derivative

methodsor thesimplexmethod.To solve theproblem,we

contraction

employthefollowing

mappingalgorithm:

(24) fin

numberandA E [0, 1] is a

wheren = 0, 1, ... is theiteration

contraction

factor.The iterative

algorithm

convergeswhen

do< E,wheredo= Max ipn+1 _ pnlandE is a predetermined

tolerancelevel.The algorithm

convergesquicklyto within

thetolerancelevel,as longas A < 1. We experimented

with

severalvaluesof A in the[0, 1] rangeand initialvaluespO

to ensurethatthecomputedfixedpointswereuniqueand

to ourchoiceof A and initialvalues.The algoinsensitive

rithmalwaysconverged

to a uniquefixedpoint,as longas

A < 1.

Table 5 presentstheequilibriumprices,marketshares,

and profits

underthepremerger

scenario,as well as under

thetwopostmerger

scenarios(i.e., SCENARIO 1 and SCENARIO 2). Averagepricesat all chainsincreasefrom$.02

to $.07 underthemerger

scenarios),

(underbothpostmerger

of

whichsuggeststhatthemergerwill reducetheintensity

The

in

market.

the

price

Singapore

price competition

scenariosis roughlythe

increaseunderbothpostmerger

same forall chains,except forBP, forwhichthe price

increaseunderSCENARIO 2 is muchsmaller(i.e., $.01, or

.6%) thanthatunderSCENARIO 1 (i.e., $.06, or 4.7%).

brandprefThe reasonforthisis thatbecausetheestimated

erenceforBP is higherthanthatof SPC, BP stationsstand

brand

to lose somepricingpowerby forfeiting

thestronger

name afterthe mergerand adoptingthe weaker name

instead.This also leads to decreasedprofitsforBP under

SCENARIO 2. BecauseBP stations

pricelowerunderSCENARIO 2 thanunderSCENARIO 1, theotherchainsalso

pricesomewhatless thantheywouldunderSCENARIO 1

theincreases

becauseofcompetitive

Specifically,

pressures.

in equilibrium

pricesforShell,Caltex,Esso, andMobil are

underSCE3.7%, 2.2%, 4.8%, and 3.0%, respectively,

NARIO 1 and 4.1%, 2.6%, 5.2%, and 3.4%, respectively,

underSCENARIO 2. Profitsincreaseforall chainsunder

SCENARIO 1, and theyincreaseforall chainsexceptBP

under SCENARIO 2. Market shares for BP and SPC

decreaseafterthemerger.However,theincreasein their

froma profit

thiseffect

standpoint.

pricesmorethanoffsets

The profitdecreaseforBP underSCENARIO 2 is due to

BP stationsdisadoptingtheir(strong)brandname and

adoptingtherelativelyweak brandnameof SPC. Indeed,

is strongenoughto decreasethecomthisdecreasedprofit

binedprofitof SPC and BP comparedwithits premerger

Overall,theseresultssuggestthatthemerger

counterpart.

and decreasedpricecompetiwill lead to increasedprofits

Givenour

tionamongall thefirmsin thepetrolindustry.

2

about

under

SCENARIO

profitsdecreasingfor

findings

itis wisethatSPC is notchangingthenameof

BP stations,

afterthemerger.

existingBP stationsto SPC immediately

All use subject to JSTOR Terms and Conditions

633

An Econometric

ModelofLocationand Pricing

Table5

PRICE-FITTING ERRORS

Measure

Shell

Premerger

Scenario1

Scenario2

Price

($)

Market

share

(%)

Profit

($000)

1.23

30.45

1560.84

1.28

30.52

1692.61

1.27

30.74

1691.37

Price

($)

Market

share

(%)

Profit

($000)

1.21

14.74

742.39

1.24

14.84

805.00

1.24

14.94

804.34

Price

($)

Market

share

(%)

Profit

($000)

1.23

17.86

921.69

1.29

17.96

998.61

1.29

18.09

997.90

Price

($)

Market

share

(%)

Profit

($000)

1.22

19.30

989.18

1.26

19.39

1072.12

1.26

19.53

1071.33

Price

($)

Market

share

(%)

Profit

($000)

1.23

13.89

720.71

1.29

13.74

782.97

1.24

13.09

687.64

Price

($)

share

Market

(%)

Profit

($000)

1.16

3.76

174.98

1.24

3.55

193.52

1.23

3.61

193.00

Caltex

Esso

Mobil

BP

SPC

ofthe

Ourpolicy

assumes

that

thecoststructure

experiment

and consumers'

brandpreferences

remain

industry

after

themerger.

Itispossible

that

these

unchanged

parameterscouldchange

inthelongrunafter

themerger.

For

consumers'

fortheSPCbrand

name

example,

preferences

as SPCgainsa larger

in

maystrengthen

gradually

presence

theSingapore

market.

gasoline

Atthispoint,

a caveatis inorder.

Ourdemand

model

doesnotallowforthenotion

that

SPCbuyers

maybemore

thanbuyers

ofother

brands

ofgasoline.

If

pricesensitive

thisis indeed

thecase,thepostmerger

of

SPC

prices

may

belower

thanwhatis predicted

inourpolicy

simulations.

thisissueisbeyond

thescopeofour

However,

investigating

article

because

wehaveaccesstoneither

consumer

demand

datanorlong-time-series

data(withsignificant

temporal

ongasoline

variations)

prices.

leveldemand

ateachlocalneighborhood

inSingapore

asan

wethen

estimate

ourproposed

model

input,

pricing

using

dataonactual

ofgasoline

atvarious

staempirical

prices

tions.

Wefind

that

retail

for

are

margins gasoline approxi21% andthat

market

share

fora gasoline

station

is

mately

influenced

andtravel

negatively

bythepriceofgasoline

cost.Wefindthatconsumers

arewilling

totravel

uptoa

milefora pricesaving

of$.03perliter(which

translates

intoa savings

ofapproximately

tankof

$1.3ona 40-liter

gasoline).

Weuseourestimates

tocalculate

therelative

profitability

ofvarious

retail

themostandleastprofchains,

identify

itable

stations

inSingapore,

a policy

andperform

gasoline

tothemerger

related

ofSPCandBPduring

the

experiment

latter

ofall

partof2004.Wefindthatpricesandprofits

in theSingapore

firms

willincrease

in

petrol

industry

tothismerger.

Webelieve

thatoureffort

atestiresponse

CONCLUSIONS

costanddemand

from

mating

parameters

pricedata,using

Inthisarticle,

wepropose

andestimate

aneconometric an econometric

modelofpricing,

is valuable

from

the

model

oflocation

andpricing

decisions

ofgasoline

stations standpoint

ofobtaining

a preliminary

ofthe

understanding

intheSingapore

market.

Ourlocation

thefirst

ofits

market.

Taken

withourlocamodel,

Singapore

gasoline

together

kindandthefirst

tobeestimated

forgasoline

is

tionmodel,

ourestimation

andtheresults

can

markets,

methodology

built

onthepremise

that

theSingapore

deter- beusedtoanswer

ofinterest

tobothfirms

and

government

questions

mines

retail

locations

forgasoline

stations

tomaxi- policymakers.

Forexample,

ourresults

the

optimal

highlight

mizesocialwelfare

ofSingapore

residents

of

factors

such

as

to theairport,

byminimizing importance

proximity

their

Thisis animportant

travel

costs.

con- downtown,

andhighways

interms

ofinfluencing

methodological

potential

tribution

ofourwork.

Ourconditional

model

isbuilt gasoline

demand.

ourmethodology

canbe

Furthermore,

pricing

onthepremise

ofBertrand

between

onhowgasoline

atvarious

stations

competition

gasoline usedtoshedlight

prices

retail

chains.

willchange

inresponse

tomergers

andacquisitions.

We

our

location

model

that

our

workspursfurther

research

on gasoline

Byestimatingproposed

using

empiri- hope

caldataonactual

locations

ofgasoline

stations, markets.

geographic

wecanquantify

theexplicit

oflocalpotential

Atthispoint,

somecaveats

areinorder.

weusethe

dependence

First,

onthefollowing

demand

localdemographic

char- current

censusdata,andthedemographic

information

gasoline

acteristics

of the neighborhood:

median therein,

tounderstand

thedemographic

drivers

oftheSinpopulation;

of cars;andproximity

number

to theairport, gapore

decisions

income;

togasoline

stagovernment's

pertaining

andhighways.

locations

that

weremadeovera longperiod.

downtown,

Usingtheestimated

category- tions'

Locating

All use subject to JSTOR Terms and Conditions

634

andemploying

thecensusdatafromseveralperiodswould

be usefulto checktherobustness

of ourestimation

results.

that

Second,ourlocationmodelis builton theassumption

the Singapore governmentdecides the locations and

assumes prices to be equal across gasoline stations.

Althoughthisseemsreasonablein ourcase (based on our

conversations

withpublicpolicyplannersin Singapore),it

would be of researchinterestto investigatethe consequences of relaxingthese assumptions.For example,in

some cases (e.g., supermarketretailingin the United

States),retailchainsmaychoose locationsfortheirstores

withthe objectiveof maximizingtotalprofitsacross all

theirstores.This may involveconsideringthe strategic

impact of the firm'slocation decisions on competing

chains'locationdecisions.Althoughsuchan extensionof

nontrivial

ourmodelposes a computationally

challenge,it

is an important

avenueforfurther

researchbecauseitwould

usefullyapplyto manybusinessproblems.Third,ourpricofretailpricesto

adjustment

ingmodelassumesimmediate

costchanges,thoughempiricalfindingssuggestthatgasoline prices respondslowlyto cost changes (Borenstein,

and Shepard2002).

Cameron,andGilbert1997;Borenstein

We are unableto addressthisissue because of thelimited

in

timeseries(i.e.,threewaves)ofpricesthatis represented

our data set. It is difficultto accommodatethe lagged

effectsof cost changesusingjust threetemporalobservationsat thestationlevel.Fourth,ourpricingmodelignores

unobserveddemandshocksin

theeffectsof firm-specific

themarketsharefunction.Given thatwe have access to

pricingdata onlyand do nothave demanddata,relaxing

The GMM methodology

willbe

is difficult.

thisassumption

difficult

to applybecausethedemandshockswill enterthe

pricingequationnonlinearly.

APPENDIX

in the

ofmarketstructure

Fora qualitative

understanding

Singaporegasoline market,whichin turnallowed us to

our strucwhilespecifying

makeappropriate

assumptions

turalpricingmodel,we ranthefollowinglinearregression

model(in thespiritof Goolsbeeand Petrin[2004]), which

uses the observedprices fromthe 226 gasoline stations

acrossthreewaves of data collectionas 678 independent

realizationsof thedependentvariable(conditionalon difsetsofcovariates):

ferent

(Al)

Pjt

indicatorvariablethattakesthevalue of 1 if otherstations

j existwithina

belongingto thesameretailchainas station

one-mileradiusof stationj and 0 if otherwise(hereinafter,

we referto thisas SAME), (2) thelog ofthenumberof stafromthatof station

tionsbelongingtoretailchainsdifferent

of

station

one-mile

radius

exist

within

a

that

j (hereinafter,

j

we referto thisas OTHER), and (3) theaveragepotential

gasolinedemandperstationwithina one-mileradiusofstawe referto thisas DEMAND).5 We also

tionj (hereinafter,

locationmodel.

includeappropriate

controlsin thelinearregression,

thatis,

time-specificand brand-specificfixed effects,and the

effectsof stationcharacteristics.

The resultsof thispricing

regression

appearin TableAl. AlthoughColumn2 ofTable

Al excludesstationcharacteristics

as controlsin theregression,Column3 does not.

Substantiveresults are strikinglysimilar between

Columns2 and 3 of Table A1. We findthatSAME has a

positiveeffecton prices.This impliesthatpricesat stations

are higherif otherstationsbelongingto the same retail

chainare nearby,whichimpliesthatretailchainsmaybe

theprofitsof thechainas a whole

engagedin maximizing

(ratherthancompetingamongthemselvesin maximizing

individualstationprofits).

We findthatOTHER has a negativeeffecton prices.This suggeststhatas thenumberof

stationsbelongingto competingchains increasesin the

vicinity,

pricesat thestationare lowered.This impliesthat

chains may be engaged in price competitionwith one

another,

thoughstationswithina chainaccommodateone

another.We findthatDEMAND has a negativeeffecton

prices.This suggeststhatstationsin denserneighborhoods

tryto lure moreconsumersto theirstationsby lowering

theirprices(withtheresultant

impacton marginsnotbeing

make

toomuch),whereasstationsin sparserneighborhoods

it is possible that

profitsofftheirmargins.Alternatively,

low-coststationsself-selectintodenserneighborhoods

by

for

biddinghigherforthoselocations,whichis responsible

thelowerpricesobservedin suchneighborhoods

(Syverson

2004).

The estimation

resultssuggestthat(1) thereis pricecompetitionamongretailchainsin theSingaporegasolinemarketand (2) gasolinestationstryto avoidcannibalizing

sales

thatbelongto thesameretailchainbynot

at nearbystations

loweringpricestoo much.On thebasis of theseresults,we

assumein ourstructural

pricingmodelthatretailchainsare

witheach other,suchthat

competition

engagedin Bertrand

fromall itsstaeach chainmaximizesthecombinedprofits

Table Al

ESTIMATED PARAMETERS (STANDARD ERRORS) OF

REDUCED-FORM PRICING MODELS: EFFECTS OF STATION

CHARACTERISTICS ON STATION-LEVELPRICES

Parameter

Wave2

Wave3

Shell

Caltex

Esso

Mobil

BP

SPC

PUMPS

PAY.

HOURS

WASH

SERVE

DELI.

SAME

OTHER

DEMAND

Model 1

Model2

-.0500 (.0018)

-.0502 (.0018)

1.2280 (.0024)

1.2201 (.0029)

1.2294 (.0028)

1.2279 (.0028)

1.2327 (.0032)

1.1832 (.0043)

N.A.

N.A.

N.A.

N.A.

N.A.

N.A.

.0037 (.0020)

-.0029 (.0013)

-5.4e-6 (2.4e-6)

-.0500 (.0018)

-.0502 (.0018)

1.2290 (.0043)

1.2211 (.0043)

1.2311 (.0047)

1.2304 (.0048)

1.2348 (.0045)

1.1839 (.0053)

.0004 (.0003)

-.0003 (.0020)

-.0058 (.0024)

.0013 (.0016)

-.0016 (.0017)

-.0026 (.0023)

.0039 (.0019)

-.0026 (.0013)

-4.6e-6 (2.4e-6)

Notes:N.A. = notapplicable.

All use subject to JSTOR Terms and Conditions

635

AnEconometric

ModelofLocationand Pricing

tionsin Singapore.6This is a standardassumptionthatis

widely used in the empirical industrialorganization

literature.

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