The Effects of Competition in the Retail Gasoline Industry

We estimate the effect of competition on incumbent firm pricing by using high-frequency price data and the precise geographic location for all gas stations in California. Using an event-study design, we find that the entry of a new station is associated with an immediate, persistent 2.7-cent decrease in prices at incumbent stores, which equates to a 7% reduction in estimated retail markups. In contrast, nearby exit results in precisely estimated null effects on prices. We do not find that observable differences in station characteristics explain the asymmetry. Rather, we find that selective exit from more competitive markets and less heavily-trafficked stations explains the null results for exit. We discuss the relevance of our estimates to current environmental policy related to the decarbonization of light-duty transportation and zoning and environmental restrictions on gasoline stations.