Fuel Price Signs on Motorways Allow Us to Save 15 Million Euros
Italian motorway drivers save €15 mln per year thanks to the mandatory fuel price posting system introduced in 2007 with the use of electronic signs that advertise the price of gasoline and diesel of the four following service areas. The effect is however driven more by service stations' behavior than by consumers' ability to effectively use the information.
Federico Rossi (Department of Marketing) and Pradeep Chintagunta (Booth School of Business) in Price Transparency and Retail Prices: Evidence from Fuel Price Signs in the Italian Motorway (forthcoming in Journal of Marketing Research, doi: 10.1509/jmr.14.0411) reckon that, when prices are posted, the average price of gasoline decreases by 1 eurocent per liter, which adds up to €15 mln savings in one year for motorway consumers. If the effect may seem small, the authors explain, it nonetheless represents about 20% of stations' margins.
The authors can observe the effect of price transparency by exploiting the gradual introduction of the electronic signs. They can thus divide service stations in two groups (those affected and those not affected by the price posting) and compare the difference in their behavior both before and after the policy change takes place.
Only half of the station's total price reduction is due to the presence of a sign posting its price (own sign). The other half is instead due to the presence of other signs posting the price of competing stations (cross signs), which induce higher price competition in the market. Furthermore, the own sign effect seems to have a strictly local dimension, visibly affecting the first two stations after the sign, but not the third and the fourth. More signs, suggest the authors, would then translate into a stronger effect and larger savings for the consumer.
"Despite the price reduction, however", Rossi and Chintagunta write, "the introduction of signs seems to have little impact on price dispersion, suggesting that price uncertainty persists even after the policy is implemented". That is: prices are lower but differences between service stations remain notable.
A consumer behavior analysis conducted sifting through transaction data from a rewards program of a major oil company shows that, in the period immediately after their introduction, less than 10% of consumers use the electronic signs effectively. Motorway drivers' price elasticity increases by 50% but still remains half the elasticity registered outside motorways.
The new policy, the authors conclude, is cost-effective (about €2 mln were spent for its implementation) and both its extension and the adoption of price transparency policies in other industries appear to effectively increase competition and reduce prices.