Inequality and gasoline competition in Australia

BRIEFING NOTE
Concentration, gasoline and inequality

Source:

Ormosi, P., Bokhari, F., Ennis, S., and Mariuzzo, F. (2025) "Does Increasing Concentration Hit Poorer Areas More? A Study of Retail Petroleum" The Journal of Industrial Economics. 73(1):70-123. https://doi.org/10.1111/joie.12403

Executive Summary
This Australian study examines whether increased concentration in the retail gasoline market affects areas of different income levels differently . By analyzing price data over a long period, the authors found that low-income areas experience larger price increases when competing gas stations close , while the arrival of new competitors does not bring them proportionally greater benefits than wealthier areas. This research suggests that market concentration can have significant distributional effects , impacting low-income consumers more severely and highlighting the importance of considering this heterogeneity in competition policies.
Keywords:

Market concentration
Effects on income
Oil market
Entrance and exit
Consumer engagement
Australian gasoline station concentration

Main Themes:

This research paper examines whether increasing or decreasing market concentration affects consumers differently depending on their income level. The study focuses on the homogeneous retail gasoline market in Western Australia, using long-term (2001–2019) station-level price data from the price comparison website FuelWatch. The main objective is to analyze the impact of competitor entry and exit on the price margins of the remaining stations, distinguishing between the effects on low- and high-income areas.

Heterogeneity of Concentration Effects:

The study challenges the notion that changes in market concentration affect all consumers equally. Drawing on the literature on costly search and willingness to pay, the authors posit that differences in consumers' engagement with the market (e.g., the propensity to search for the lowest prices) may lead to different responses to changes in concentration.

Retail Petroleum Market Focus:

The petroleum market was chosen due to the relative homogeneity of the product and the availability of pricing data via FuelWatch. The study notes the structure of the Australian market, characterized by a few large vertically integrated players and numerous niche players, with a growing market share for independents and supermarkets over the study period.

Quasi-Experimental Design:

The study uses a quasi-experimental design focusing on petrol station entry and exit events within 1, 2, and 5 miles of existing petrol stations. The impact of these events on the price margins of the remaining petrol stations is analyzed by considering local socioeconomic characteristics, obtained at the statistical area (SA2) level and linked to Australian census data.

Impact Differences by Income Level:

One of the most important findings is that low-income areas experience a larger increase in the gasoline price margin when a competitor exits. Conversely, the entry of a new competitor does not result in a significantly larger margin reduction in low-income areas compared to high-income areas.

Role of Consumer Engagement:

The authors suggest that these differences may be attributable to different levels of engagement with the market between low- and high-income groups, potentially linked to higher search costs or different price sensitivity. Although individual-level data on consumer purchases and information are not available, the study uses local variations in socioeconomic characteristics as proxies for consumer information (e.g., commuting distance, internet access).

Controlling for Confounding Factors:

The study takes steps to ensure the exogeneity of entry and exit events and to control for other potential confounding factors, such as the type of gas station brand, the level of existing competition, and local demographics. Gas stations located on highways or those with very high traffic intensity are excluded to better target local consumers.

Advanced Econometric Methodology:

The study uses robust econometric methods to estimate heterogeneous effects, including linear regression models with fixed effects and causal forests, a nonparametric machine learning method suitable for estimating conditional treatment effects.

Asymmetry between Entry and Exit:

The study observes an asymmetry between the impact of entry and exit, with entry leading to a larger price decrease on average than the price increase due to exit. The authors suggest that this may be related to the fact that entry tends to occur in initially more concentrated markets, where the impact of a new competitor is more pronounced.

Policy Implications:

The findings highlight the need for policies that focus more on improving low-income consumers' engagement with the market, to enable them to benefit more from competition and be less negatively affected by increased concentration.

Contribution to the Literature:

This study contributes to the existing literature on retail gasoline price dispersion and retrospective merger effects, specifically focusing on distributional effects and income-based response heterogeneity. It supports theoretical models that predict that consumer heterogeneity leads to price dispersion and differential competition effects.

Main Conclusion:
The study demonstrates that increased market concentration due to competitor exit has a more negative impact on low-income areas by leading to a greater increase in gasoline price margins. Conversely, the benefits of increased competition through entry are not significantly greater for these same areas. These results suggest that market concentration can have important distributional effects and highlight the need to consider consumer heterogeneity in market analysis and competition policy design. The research argues for greater attention to distributional effects in retrospective evaluations of mergers and acquisitions.


Quotes:

"Our interest shifts away from these average effects to breaking down the effects by income group. We ask the question: does increasing or falling market concentration affect everyone the same way?"

"Our quasi-experimental design allows us to look at how the retail margin of the petroleum stations that remain in the market change, after one petroleum station exits from their proximity."

"...low-income areas experience a larger (and significant) increase in the price margin with exit. At the same time, they do not benefit from a higher drop in the margin with entry."

"Entry, on average led to a larger drop in prices. Our interpretation of the asymmetry between exit and entry is to do with the level of market concentration in markets where we observed exit and markets where we were sampling instances of entry..."

"These results add support to earlier findings that heterogeneity in the level of engagement with the market can lead to price dispersion even in homogeneous goods. Our results also that lower-income areas experience higher post-exit increase in the margins imply that increasing market concentration can have distributional effects."


Paper Summary Initial Draft By NotebookLM