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A Theory of Quality-Related Differences in Retail Margins: Why There Is a "Premium" on Premium Gasoline

Author

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  • Barron, John M
  • Taylor, Beck A
  • Umbeck, John R

Abstract

This paper develops a theory of vertical and horizontal product differentiation to explain observed price-cost margin differentials for goods that differ in quality. The difference in price-cost margins between the high- and low-quality goods is shown to depend positively on consumers' average valuation for incremental increases in quality and positively on the distance to each competitor's closest rival. These predictions are largely supported using an extensive station-level data set of premium and regular unleaded gasoline prices from the Los Angeles Basin area from 1992-95. Copyright 2000 by Oxford University Press.

Suggested Citation

  • Barron, John M & Taylor, Beck A & Umbeck, John R, 2000. "A Theory of Quality-Related Differences in Retail Margins: Why There Is a "Premium" on Premium Gasoline," Economic Inquiry, Western Economic Association International, vol. 38(4), pages 550-569, October.
    • Handle: RePEc:oup:ecinqu:v:38:y:2000:i:4:p:550-69
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    Citations

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    Cited by:

    1. Silvio Sticher, 2013. "Competitive Market Segmentation," Diskussionsschriften dp1313, Universitaet Bern, Departement Volkswirtschaft.
    2. Daniel Albalate & Jordi Perdiguero, 2012. "“Entry Regulation Asymmetries and Gasoline Competition in a Mixed Motorway Network”," IREA Working Papers 201218, University of Barcelona, Research Institute of Applied Economics, revised Nov 2012.
    3. George Deltas & Thanasis Stengos & Eleftherios Zacharias, 2011. "Product line pricing in a vertically differentiated oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 44(3), pages 907-929, August.
    4. Alessandro Bonanno & Rigoberto A. Lopez, 2004. "Private Labels, Retail Configuration, and Fluid Milk Prices," Food Marketing Policy Center Research Reports 082, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    5. Hosken, Daniel S. & McMillan, Robert S. & Taylor, Christopher T., 2008. "Retail gasoline pricing: What do we know?," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1425-1436, November.
    6. Hammoudi Abdelhakim & Giraud-héraud Eric, 2009. "On the Existence and uniqueness of Price Equilibrium with Multi-Store Firms," Economics Bulletin, AccessEcon, vol. 29(2), pages 873-882.
    7. Eckert, Andrew & West, Douglas S., 2005. "Price uniformity and competition in a retail gasoline market," Journal of Economic Behavior & Organization, Elsevier, vol. 56(2), pages 219-237, February.
    8. George Deltas & Donna Ramirez Harrington & Madhu Khanna, 2013. "Oligopolies with (Somewhat) Environmentally Conscious Consumers: Market Equilibrium and Regulatory Intervention," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 640-667, September.
    9. Eric E. Giraud-Heraud & Abdelhakim Hammoudi, 2009. "On the existence and uniqueness of price equilibrium with multi-store firms," Post-Print hal-02659530, HAL.
    10. repec:dgr:rugsom:14027-eef is not listed on IDEAS
    11. Jens‐Peter Loy & Dieter Pennerstorfer & Daniela Rroshi & Christoph Weiss & Biliana Yontcheva, 2022. "Consumer Information and Price Transmission: Empirical Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 70(3), pages 631-683, September.
    12. Cheng Yi-Ling & Peng Shin-Kun & Tabuchi Takatoshi, 2011. "Multiproduct Duopoly with Vertical Differentiation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-29, August.
    13. Frondel, Manuel & Horvath, Marco & Vance, Colin & Kihm, Alexander, 2019. "Increased market transparency in Germany's gasoline market: What about rockets and feathers?," Ruhr Economic Papers 810, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    14. Remer, Marc, 2015. "An empirical investigation of the determinants of asymmetric pricing," International Journal of Industrial Organization, Elsevier, vol. 42(C), pages 46-56.
    15. Mehlum, Halvor, 2016. "Another model of sales. Price discrimination in a differentiated duopoly market," Memorandum 12/2016, Oslo University, Department of Economics.
    16. Andrew Eckert & Douglas West, 2006. "Exit and Upgrading in Response to Entry: The Case of Gasoline Retailing," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(3), pages 351-372.
    17. Pieniadz, Agata & Hockmann, Heinrich, 2004. "Pricing behaviour in the Polish pork market during transition," Cahiers d'Economie et de Sociologie Rurales (CESR), Institut National de la Recherche Agronomique (INRA), vol. 71.
    18. Pieniadz, Agata & Hockmann, Heinrich, 2002. "Product Differentiation on the Polish Pig Meat Market," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24959, European Association of Agricultural Economists.
    19. Barron, John M. & Taylor, Beck A. & Umbeck, John R., 2004. "Number of sellers, average prices, and price dispersion," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1041-1066, November.
    20. Benjamin Atkinson & Andrew Eckert & Douglas S. West, 2009. "Price Matching And The Domino Effect In A Retail Gasoline Market," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 568-588, July.
    21. John M. Barron & Beck A. Taylor & John R. Umbeck, 2004. "Will Open Supply Lower Retail Gasoline Prices?," Contemporary Economic Policy, Western Economic Association International, vol. 22(1), pages 63-77, January.

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