The effects of price competition on firms' operations and market price: Evidence from a retail gasoline market

Abstract

We study the effects of price competition induced by entries of thrifty gas stations on incumbent gas stations' operational probabilities and gasoline prices. Using administrative panel data of the entire population of retail gas stations in South Korea, we document that entries of thrifty gas stations decreased incumbent gas stations' operational probability but marginally reduced gasoline prices. Our heterogeneity analysis indicates that the operational probability impacts were greater when the market competition was already intense or when the preentry profit margins were low. The previous studies mainly focused only on price impacts of market competition. This study provides novel evidence that price competition might not always decrease market prices if incumbent firms stop operating their business. The results imply that a more complete understanding of the effects of price competition can be possible by jointly estimating its impacts on incumbent firms' operational probabilities and product prices.