Empirical investigation of retail fuel pricing: The impact of spatial interaction, competition and territorial factors

Abstract This paper explores the determinants of fuel prices by proposing an empirical framework that integrates three kinds of influencing factors: spatial interaction, competition and territorial factors. For competition, we define a general variable, the presence of competing stations within a radius, and two specific variables, the presence of low-cost stations and the presence of same-brand stations. We proceed with a step-wise adjustment of the radius, by gradually increasing it, to evaluate the spatial scope of different competition effects. Using data on prices of fuel stations in Rome, Italy, we estimate spatial econometric models that provide evidence of spatial dependence in price between stations. We also find that competition affects prices, but the relevance of its impact depends on radius length. Finally, the territorial factors remarkably influence prices. If these factors are introduced in the model, the magnitude of spatial parameters weakens, allowing to accurately assess the intensity of spatial dependence.