Third decimal place odd prices trigger competition: evidence from the Italian retail gasoline market

ABSTRACT

Recent literature shows that in the US gasoline prices are higher in locations using more odd prices (particularly those ending in five and nine digits), since they coarse the pricing grid and act as a focal collusive point. We replicate this analysis for the Italian market, obtaining the opposite result. Since the rightmost digit of the retail gasoline prices in Italy is the third and not the second decimal place, coarsening the pricing grid is not sufficient to support a collusive behaviour.

KEYWORDS:

• Odd pricing
• pricing grid
• focal point
• collusion

JEL CLASSIFICATION:

• L10
• L81
• Q31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ More precisely, Italian gasoline retailers have to communicate each time they increase prices and no more than seven days after the previous communication.

² Descriptive statistics are not reported but are available upon request.

³ We define percentage price step as the average minimum increase in price that a gas station can apply due to discretization of the unit price of one gallon or litre of gasoline.

⁴ In US gasoline market, the retail price for one gallon is about $2.5, and the average minimum increase is one cent or five cents depending whether odd prices are applied or not.

⁵ This practice emerged with the introduction of the euro. In 1 January 2002, euro became the official currency in Italy, and the conversion rate was fixed at 1 euro for 1936.27 Italian lira. At the date of conversion, the average retail gasoline prices for one litre was about 1930 Italian lira and was changed in about 0.997 euro per litre. In that occasion, therefore, all the apparels were modified to display the new prices in euros, including three decimal places. In the Italian gasoline market, the average retail price of one litre in 2015 was €1.535.

Note that in the US, gasoline prices are also charged with three decimal places, but the last digit is ubiquitous a nine tenths of a cent per gallon. Gasoline station apparels display the third decimal place (the nine digit) with a smaller font and it cannot be modified (i.e. it is printed).