Question

Suppose a study found that gasoline prices are lower in markets in which certain gas stations are present (call them CheapGas stations). What possibilities can you think of that would explain this correlation?

Answer 1

Usually, markets where few firms are operating tend to have a higher price because there is less competition. As far as gasoline is concerned, there are no variations so it is identical at all stations. Now that product is identical, every station has an incentive to either cooperate and maintain a high price or compete. Cooperation is not possible because each station will try to increase sales at the committed price to increase revenue. Ultimately they will compete for prices and will charge a relatively lower price.