1. Ethanol and Non-Ethanol Gasoline Price Dynamics Jade E
Ethanol and Non-Ethanol Gasoline Price Dynamics Jade E. Davis, College of Business
Abstract
This study measures gas prices in the Oklahoma City area from stations that sold only ethanol-blended, only non-blended regular gasoline, and both ethanol-blended and 100% gasoline. The data suggests that stations that sell 100% gas do so at a higher premium than expected when compared to wholesale and ethanol prices. These price discrepancies are slightly less at stations that sell both ethanol blended and pure gas simultaneously.
Introduction
The implementation of the Renewable Fuels Standard Program in 2005 has made ethanol blended gasoline more accessible than ever before. It is directly due to this increased availability that ethanol blended gasoline has become a substitute product for pure 100% gas. However, the two products seem to have price points that vary in ways that are inconsistent with traditional substitute goods thus indicating the possibility of a 2nd degree price discrimination. Price discrimination is a difficult concept to measure due to the inherent differences in even the most homogenous of products. Mcmanus and Shepard both researched this phenomena using coffee and gasoline retailing, respectively. Both found potential evidence of price discrimination in seemingly competitive markets.
Implications
The increased production of crude oil and natural gas in the United States will have a great impact on our country and the prices consumers pay for gasoline products.
Without dependence on foreign oil, the United States can supply gas at lower and more stable prices. However, I believe these finding will not deviate. As long as consumers believe that pure gas is a superior product to ethanol blended gas, firms will be able to charge a premium for essentially similar goods.
Data
Data for this project was collected from two sources. Oil Price Information Servicers (OPIS) provided prices for stations that sold only regular 100% gas and only ethanol blended gas. The price points from stations that sold both types of gasoline were hand collected everyday over a six week period by both visitation and telecommunication.
Sample
Yellow: E10 only, Red: Regular only, Blue: Both
Model
I also control for zip code fixed effects and day of the week fixed effects.
Definitions
In this study, I examine two separate hypotheses:
Do stations that sell regular non-blended gasoline have market power?
Do stations that sell both blends together price discriminate?
Market Power – A firm’s ability to raise prices above competitive level due to “monopoly power”.
Price Discrimination – When a good is sold at a premium compared to its substitutes without justification by differences in wholesale prices.
Conclusion
The existence of ethanol-blended and 100% gasoline leads to very interesting price dynamics for both types of fuel. Even though the two products are near- perfect substitutes, non-ethanol blended gasoline consistently has a higher mark-up than ethanol-blended gasoline. Interestingly, this difference is less drastic at stations that sell both types simultaneously.
Variable
Coef.
Std. Err. t
P>t
Regular
0.1338
0.0068
19.78
0.00
Both
0.0088
0.0050
1.76
0.09
Regular*Both
0.0092
-1.95
0.07
Branded
0.0259
0.0087
2.98
0.01
Wholesale
0.7878
0.0253
31.14
R-Squared
0.8510
Number of Obs
40,181
Notes: Clustered robust standard errors shown
References:
Mcmanus, Brian. "Nonlinear Pricing in an Oligopoly Market: The Case of Specialty Coffee." The RAND Journal of Economics 38, no. 2 (2007)
OPIS
Shepard, Andrea. "Price Discrimination and Retail Configuration."Journal of Political Economy (1999)