The role of information in retail gasoline price dispersion

Collecting information on prices is a costly endeavor. The cost depends on the relative ease with which those prices can be collected, and in many retail gasoline markets, there is a substantial divide in the ease of collecting information with regular grade gasoline on one side of the divide and midgrade and premium grade gasoline on the other. Regular grade prices are prominently displayed on large signboards in front of gasoline stations while the prices of higher octane grades, except where required by law, are rarely displayed. In this article, the effects of differential-by-grade price information on search and gasoline price dispersion are examined. A rank reversal test is used to test whether the observed grade-specific price dispersion is consistent with search or non-search related causes and, finding the former, a series of tests are presented to test for the effect of price information and other leading hypotheses. A significantly concave curvature in the price dispersion coefficients across the three grades supports a price information hypothesis. Detailed socioeconomic data on consumers, spatially matched to the stations they are most likely to patronize, shows that income is a secondary factor. Implications for policy are discussed.