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An Econometric Model of Location and Pricing in the Gasoline Market

Author(s): Tat Y. Chan, V. Padmanabhan and P. B. Seetharaman


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

and performof retailcompetition


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

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623

An EconometricModel of Locationand Pricing


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

ignorestheroleof locationon competition.


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

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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)

In lightof these two features,we make the following


forourlocationmodel.
assumptions

whereq(Zi; a) is thepotentialdemandforgasolineat grid


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

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An EconometricModel of Locationand Pricing

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.

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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

and also eases


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

whereCitrefersto themarginalcost of sellinggasolineat


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)

whereQiitis thedemandin gridpointi forgasolineat stationj duringtimet andis specifiedas follows:


(18)

Qijt

whereSiitdenotesthemarketsharein gridpointi forgasoline at stationj duringtimet and qi denotesthepotential


demandforgasolineat gridpointi (as we discussedin the
subsection"LocationModel"). Furthermore,
Siitis speci-

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An Econometric
ModelofLocationand Pricing
is
feedby meansof a multinomial
logisticfunction-which
consistent
withrandomutilitymaximization
on thepartof
individualconsumers
(McFadden1974)-as follows:
(19)

whereWi standsfor a vectorof stationcharacteristics


(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

whereCt refersto thetime-varying


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

wherePtis a P x 1 vectorofretailpricesat theP stations,


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

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628

JOURNALOF MARKETING
RESEARCH,NOVEMBER2007

will also be uncorrelated


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.

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An EconometricModel of Locationand Pricing

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

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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.

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900

1000

An Econometric
ModelofLocationand Pricing

631

demandin thispartof themap,is a consequenceof three


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

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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"

computationthatis based on the followingequilibrium


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

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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

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634

JOURNAL OF MARKETING RESEARCH, NOVEMBER 2007

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

whereWitincludesthe followingkey covariates:(1) an


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,

5Thisis based on theestimatesof potentialgasolinedemandfromthe


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.

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635

AnEconometric
ModelofLocationand Pricing
tionsin Singapore.6This is a standardassumptionthatis
widely used in the empirical industrialorganization
literature.
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