Demand cycles, traffic flows and regulation of retail gasoline markets

• Applicant: Dr. Simon Martin
• Subject Area: Economic Policy, Applied Economics
• Term: from 2022 to 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 504715884

Retail gasoline markets typically exhibit highly volatile prices. The average station in German adjusts its price 5-7 times per day. These price adjustments seem to follow certain patterns during the day, which however are not yet very well understood. I propose a novel measure based on publicly available traffic flow data for entire Germany. This data is provided by the German Bundesanstalt für Straßenwesen (BASt, Federal Highway Research Institute). BASt operates over 2000 traffic counting stations on German highways and freeways and makes hourly traffic flow data publicly available. To the best of my knowledge, this data has not yet been used in economic research projects. Using this measure, I first seek to explore the relationship between observable traffic flows and gasoline station price setting. Based on this analysis, I aim to contribute to ongoing policy debates concerning the regulation of retail gasoline markets, concerning (i) taxation and (ii) regulation of frequency of price adjustment, by conducting counter-factual policy simulations. In particular, I want to address the following research questions: How do observed intra-day price cycles depend on observable high-frequency demand fluctuations (traffic flows)? What is the price elasticity of consumers, and how does it vary over the day or across geographical markets? What would be the optimal composition of VAT, excise tax, and CO2 tax in order to achieve certain policy goals, e.g., reducing CO2 emissions or distributional objectives, subject to total revenue neutrality? What are the effects of regulations that limit firms’ ability to adjust prices? Such regulations are already in place, e.g., in Austria and Western Australia, and repeatedly discussed in Germany.Since exogenous variation across countries for straightforward estimation of these effects is not available, I propose to estimate a structural model of the German retail gasoline market, and subsequently conduct counter-factual policy simulations.I propose a model based on consumer search models in the spirit of Varian (1980). This approach allows simultaneously estimating the demand- and supply parameters of the model by exploiting the continuum of firms’ indifference conditions in the mixed strategy equilibrium of the game. I already demonstrated feasibility of that approach in a first set of Monte Carlo simulations. The structural model can then be used to conduct counter-factual policy simulations. For instance, expected prices, total demand, tax revenue and total CO2 emissions can be computed under different counter-factual tax regimes or counter-factual restrictions on price adjustments. An understanding of these aspects is key in order to regulate an industry that will face several structural changes in the near future, e.g. due to climate change and the emergence of electric vehicles.

• DFG Programme: Research Grants
• International Connection: Austria
• Cooperation Partner: Professor Philipp Schmidt-Dengler