Retail Pricing under Contract Self-Selection: An Empirical Exploration
- 1 School of Business, University of Alberta, Edmonton, Canada
- 2 School of Business, University of Alberta, Edmonton, Canada
Abstract
Using cross-sectional survey data on prices, station and market characteristics for 730 gasoline stations in the Greater Saint Louis area, we estimate a switching regression model of station decisions. We employ a binary probit choice model to study a station’s decision to enter a contract relationship with greater control from the upstream refinery, or a contract relationship with greater degree of independence, as a function of market and station characteristics. We then estimate stations’ pricing decisions with self-selectivity corrections for the station’s contract decision. We show that incorrect inferences about retail gasoline station’s pricing behavior would result if the endogeneity in the choice of con-tract type were treated as exogenous condition in the estimation.
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