How to drive down gas prices
Consumers pay less at the pump when regulators force more transparency
- Gas stations make their prices transparent by posting them outside on large signs, but passersby on the hunt for cheap gas might not have a readily available point of comparison unless they consult gas-price comparison websites such as GasBuddy. Research by Chicago Booth’s Pradeep K. Chintagunta and Federico Rossi of Bocconi University finds that when consumers can easily compare prices, firms respond by lowering them.
- Chintagunta and Rossi analyzed the effects of a mandatory price-posting law at instituted along an Italian highway. In 2007, regulators began requiring highway gas stations to display their prices on large electronic signs beside those of several competitors.
- The researchers find that from January 2008 to September 2010, the average price of gasoline decreased by 1 euro cent per liter, or about 20 percent of the stations’ margins, after prices were posted. About half of the decrease appeared when a station’s own prices went public on a sign. A further price decrease followed when nearby stations posted their prices on the signs.
- The signs didn’t cause prices to converge entirely.Moreover, by examining customer transaction data from one oil company, the researchers find that only a small percentage of customers, mainly frequent shoppers, used the posted prices effectively.