Selling Costs and Switching Costs: Explaining Retail Gasoline Margins

Recent theoretical work has shown that price discrimination can take place in imperfectly competitive, as well as monopoly, markets. The persistence of higher retail margins on unleaded than on leaded gasoline during the 1980s suggests that discrimination may occur even in very competitive markets. This article studies a number of cost-based explanations for such gasoline pricing, as well as the possibility of price discrimination. The analysis indicates that gas stations discriminate against groups of customers who are less likely to switch to another station. The conclusions highlight the influence of shopping or search costs on pricing decisions, even in markets thought to be quite competitive.