Strategic competition in the retail gasoline market

This paper studies the price formation process in the retail gasoline market, in a framework of vertical relationships between firms. Although the product in question is homogeneous, it differs in one attribute that determines vertical differentiation between varieties. This attribute is the perceived product quality associated with the brand name displayed at the outlets where it is sold. Price competition in the vertically differentiated market is modeled as a two-stage game in which, first, refinery R-1 sets the wholesale price and the fixed fee it will charge service station E-1. In the second stage, given the wholesale price set by the refinery in the first stage and the price at which the gasoline can be purchased by service station E-2 in the competitive market, service stations E-1 and E-2 simultaneously and non-cooperatively set the final prices. Predictions based on the model are empirically tested in the retail gasoline market.