Price effects of spatial competition in retail fuel markets: the impact of a new rival nearby

Our main goal in this paper is to understand the fuel market's spatial price competition. While most of the literature uses the density of gas stations and proximity to rivals as proxies for spatial competition, we measured the marginal increase in spatial competition by the entrance of a new rival nearby. The empirical results indicate that a new firm's entrance reduces prices, and the reduction is more significant the closer the new rival is. A new rival less than 100 meters away is related to a reduction of 2.6% on the typical incumbent firm price. When the new rival is located farther than 250 meters, the incumbent response is lower than 1%. For even greater distances, the effects were significant only when incumbents are unbranded. The extent of spatial competition matters for the outcome; while firms that already faced intense spatial competition are not impacted by having an entrant seller nearby, those facing low spatial competition had a significant price reduction. The pattern, entry of rivals closer matters more, remains when investigating the gasoline price, the ethanol price, and the gasoline wholesale-retail margins in Brazil.

Automated summary

The extent of spatial competition significantly impacts price competition in the fuel market, with the closeness of new rivals playing a crucial role in determining the magnitude of price changes.