Krannert’s Federico Rossi discusses consumers’ price knowledge and retailers’ market power


hi my name is Federico Rossi and I’m an
assistant professor of marketing at the Krannert School of Management Purdue
University my research interest is at intersection between the area of
marketing which traditionally focuses on consumers and industry organization
whose focus is mainly on the behavior of firms and on interaction policies in a
recent paper together with my co-author we study how consumers’ uncertainty about
prices increases retailers’ market power the main purpose of that article is to
measure the level of market power that firms can acquire where consumers have
scarce information about prices market power in our research takes the form of
higher margins charge by gas stations to the final consumer to answer this
question we look at a mandatory price disclosure policy for gas stations that
was introduced few years ago by the Italian government following this policy
a number of price signs were installed on the Italian highway each signs
advertised the gasoline price of the next four gas stations on the road in
our research we use the daily price data before and after the introduction of
these price signs we also collect data on the different paths that
are traveled by drivers on the highway with this data on the demand side we
estimate a consumer model of price search and purchase behavior while on
the supply side we estimate a corresponding model of gas station
pricing using these models we find three interesting results first of all when
consumers have scarce price information gas stations are able to charge margins
30% higher than in the case when could when consumers know prices second even
after the introduction of price signs some consumers are still not informed
about prices because they access the highway at different points so they miss
the sign the price sign for this reason gas stations are able to keep margins
10% higher so our model suggests that a more
effective policy to eliminate these informational rents on the market would
be to introduce one price sign carrying the price of one station before
each station this policy would reduce information of rents down to zero
finally the third kind of no result is that we quantify the value of price
information and we find that price information is worth to consumer more
than 50 euro cents which means that when prices are known consumers have about 60
cents of dollar more in their pocket every time they travel on the highway so
this research is a particularly important because it shows the
direct relationship between price transparency and retailers’ price margins
and it provides insight to regulators who are considering reducing
informational rents in gasoline markets or in other markets where consumers are
not well informed about prices thank you


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