Price Transparency and Retail Prices: Evidence from Fuel Price Signs in the Italian Highway System

Federico Rossi and Pradeep K. Chintagunta
Article Snapshot
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Key Takeaways

Price transparency initiatives are often undertaken by third parties to ensure that consumers can compare the price of competing offers.

We investigate the effect of mandatory price posting (on large electronic signs) by competing gas stations on their pricing behavior in the Italian motorway.

The increase of fuel price information on the market due to the introduction of a new price transparency policy induces gas stations to reduce their prices significantly.

Article Snapshot​s: Executive Summaries from the Journal of Marketing Research​​

The increase of fuel price information on the market due to the introduction of a new price transparency policy induces gas stations to reduce their prices significantly.



​Research

Price transparency has become a widespread phenomenon. Independent parties, have setset up websites that allow consumers to discover and compare the prices of similar products across multiple options. How do firms respond to such information? On the one hand, increasing the availability of price information lowers consumers’ search costs, which in turn induces competing firms to lower their prices. On the other hand, the transparency medium might serve as a platform for rival firms to coordinate their prices and soften competition. The goal of our research is motivated by such theoretical ambiguity.

Method

We exploit the introduction of a mandatory price disclosure policy in the Italian highways. A number of large electronic signs have been installed along the road posting the fuel prices of nearby competing stations. We use price data from these and other stations to measure the effect of the introduction of the signs on fuel prices. We also use customer transaction data to investigate the purchase behavior of consumers before and after the introduction of price signs.

 

 This is an example of a price sign installed following the transparency policy

Findings

We find that enhancing transparency by posting prices decreases fuel prices by one euro cent per liter, which corresponds to 20% of gas stations' margins. These findings are consistent with the theory on lower search costs stemming from the installation of the signs. Despite the price reduction, however, both the analysis on price dispersion and on customers' transactions suggest that price uncertainty persists even after the policy is implemented.

 This graph shows how the price difference between treated stations (their prices have been posted on price signs) and control stations (their prices have not been posted) changes after the introduction of the policy​


Implications

Our study provides evidence of its potential effectiveness. The results from this research are of practical value for third parties, such as independent firms or policy makers, who might be considering implementing similar policies. They also speak more largely to the potential effectiveness of this policy in other markets, such as healthcare or education, where price uncertainty is high and the cost of introducing a price posting mechanism is relatively low.


  • Questions for the Classroom
  • Why the introduction of a transparency policy could potentially increase prices?
  • What is the difference between a station's own sign and cross-sign?
  • Which stations are more affected by own signs and which are more affected by cross-signs?


Full Article
Federico Rossi and Pradeep K. Chintagunta (2016), “Price Transparency and Retail Prices: Evidence from Fuel Price Signs in the Italian Highway System.” Journal of Marketing Research, Vol. 53, No. 3, pp. 407-423.
doi: http://dx.doi.org/10.1509/jmr.14.0411

Federico Rossi is Assistant Professor of Marketing, Bocconi University (e-mail: rossife@unibocconi.it).

Pradeep Chintagunta is Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing, Booth School of Business, University of Chicago (e-mail: pradeep.chintagunta@chicagobooth.edu).


Author Bio:

 
Federico Rossi and Pradeep K. Chintagunta
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