Analysis of Spatial Interaction Effect of Retail Gasoline Price in Seoul: A Spatial Econometric Approach

Abstract

There has been a continued criticism that the retail gasoline market shows a typical impaired market due to the lack of price competition and that local gas stations maintain their shares based on inelastic demand of oil products. Accordingly, several policy measures have been suggested to reduce likely market distortions and finally to lower retail price. Taking such circumstances into consideration, this paper attempts to investigate existence of competitive pricing mechanism and regional interconnections in the price discovery process. Spatial econometrics models are adopted to capture regional interaction effects on retail gasoline price and to identify pricing mechanism. An empirical analysis of spatial fixed effects model based on monthly data of retail gasoline prices in Seoul, Korea shows that the regional interaction effect exists as a reaction in response to the price changes of adjacent regions and that a pricing mechanism is thus associated with geographical location. The paper concludes that the price formation could be affected by the direct and indirect effects caused by their locations which property is important in establishing related policy measures for retail gas prices.