Demand cycles, traffic flows and regulation of retail gasoline markets
Final Report Abstract
Retail gasoline prices have a direct effect on many households, firms’ distribution networks and hence the entire economy. Competition authorities have expressed concerns about the well-functioning of this industry in several countries in the recent decade. In view of high and rising oil prices, possible policy interventions are frequently discussed; by the public, major media outlets, policy makers and academics alike. Additionally, the retail gasoline industry is bound to undergo considerable structural change soon, owing to an overall shift in climate policy, the geo-political situation of many oil-producing countries, and quickly emerging electric vehicles. The project delivered two main sets of findings, based on data from the German retail gasoline market. The first findings concern the effects of market entry. Consumers, on average, tend to benefit from entry. However, when not all consumers are equally informed about prices in the market, their gains of entry are potentially heterogeneous. We studied the effect of entry on the price distribution in the German retail gasoline market. Exploiting several hundred entries over five years in an event study design, we find that prices at the top of the distribution change moderately or not at all, but prices at the left tail decrease by up to 13% of stations’ gross margins. The Value of Information (VOI) increases by 29%, suggesting larger savings for consumers with easy access to information. The second set of findings concerns taxation in markets with imperfect information. Consumption taxes are among the most visible components of policy interventions, with an average standard VAT rate of 19.2% in OECD countries. At the same time, they are a major source of government finances, generating a total tax revenue of around 10% of GDP. Apart from transferring resources between consumers, firms, and the government, taxes also serve a redistributive role between different groups of consumers and households, e.g., through a progressive income tax schedule. We studied the distributive role of taxation in markets with imperfect consumer information by empirically investigating the effect of taxes in the German retail gasoline market. We found that informed consumers face higher effective pass-through rates, with important distributional implications for regulatory and tax policies. Lowering the VAT rate from 19% to 16% decreases transaction prices by 1.9% on average, but disproportionally benefits consumers in high-income markets. A tax-revenue-equivalent excise tax reduction would have benefited consumers more than a VAT cut. Finally, we also evaluated the distributional effects of CO2 taxes. In all these dimensions, we found that the role of traffic flows is small. The patterns described are very robust across different times of the day.
Publications
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Indirect taxation in consumer search markets: The case of retail fuel (joint work with Kai Fischer and Philipp Schmidt-Dengler), CEPR Discussion Paper No. 19095
Martin, Simon
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The Heterogeneous Effects of Entry on Prices (joint work with Kai Fischer and Philipp Schmidt-Dengler), CESifo Working Paper No. 10566
Martin, Simon
