Empirical analysis demonstrates quality-based price discrimination in retail gasoline markets, indicating non-cost markups on full-service fuel.
The hypothesis that price discrimination based on willingness-to-pay for quality can occur in multifirm markets is confirmed using microdata on gasoline retailing. A test that discriminates between price structures associated with discrimination and with cost-driven, competitive differentials is developed and implemented with controls for variation in outlet and market characteristics. A second test based on profitability variation rejects a competitive, peak-load pricing explanation for the observed price dispersion. The data suggest that price discrimination at the retail level adds at least nine cents a gallon to the average price of full-service gasoline.
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Andrea Shepard (1991) studied this question.
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