Determinants of fuel prices: dominant firms, local monopolies and ‘captive’ demand

Abstract

This paper analyses the effect on retail fuel prices of factors such as belonging to dominant firms, the position of a local monopoly or oligopoly, and service station location. We study the effect of belonging to the dominant firms in the market, Repsol and Cepsa, of enjoying a local natural monopoly or oligopoly in rural areas, and of being located in places with captive demand, such as highways and motorways, as well as in the city centre. We apply this study to service stations in the province of Seville (Spain). The main findings are that the two main distributors, Repsol and Cepsa, set a higher price. We also find market power at a local level, which appears through monopoly or duopolies in rural areas, and which also results in higher prices, albeit to a much lesser degree. In addition, we see that stations servicing users on high-capacity roads as well as stations located in Seville city centre also set higher prices.

Keywords

• service stations
• fuel price
• market dominance
• captive demand