TITLE:
Retail Pricing under Contract Self-Selection: An Empirical Exploration
AUTHORS:
Yuanfang Lin, Lianhua Li
KEYWORDS:
Retail Gasoline Markets; Marketing Channel; Pricing Strategy; Selection Bias; Switching Regression
JOURNAL NAME:
Technology and Investment,
Vol.4 No.1B,
January
17,
2013
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.