RESI assumed the following when analyzing the changes in retail prices of gas stations.
Infrastructure changes did not occur during the period. The period reviewed in the annual analysis is too short to determine if there were major infrastructure improvements in an area, but RESI can determine that the stations’ locations have been in existence for quite some time. RESI assumes that to change infrastructure would take longer than the current study period, and therefore did not add a variable for this into the analysis.
Gas stations have perfect information about competitors’ prices. RESI assumes, since prices are posted for the public to view and information is available about gas prices in a region through website such as AAA and GasBuddy, that retailers in an area have perfect information about what their competitors’ prices are on a given day or time.
Rack prices are reported before the next period, and retailers will have a chance to change their prices accordingly. In the 2012 cross-sectional model, RESI assumes that the change is very instantaneous but that the declining prices may hinder changes in retail prices as retailers may worry about sudden shocks and price reversals to the higher historical values.
Gas stations’ competitors and locations are known. RESI assumes that any new placement of gas stations will do so with zoning restrictions and adhere to an optimizing Hotelling location model.36Hotelling proposed that, given two firms located at separate ends of a line, one firm’s potential for sales to consumers would depend on the distance between that firm and its competitor, as well as which way consumers traveled. For example, take the line below with two gas stations.
β
α
B
A
Hotelling stated that if the firms are unable to change position and the distances are recorded as α and β, then those distances times the cost to transport the good (or in this case search for the good) must not exceed the price offered by either A or B.37If the good is homogenous, consumers will tend to go to the closest firm to avoid extra costs, but if the distance is equal, then they will choose whatever firm is cheapest.38
A.2 Results
Figure : Annual Analysis Regression on Margin for 2002–2012
