The effect of entry restrictions on price: evidence from the retail gasoline market

Abstract

I exploit a change in Spanish regulations to test the effect of the relaxation of entry restrictions on the equilibrium retail price of diesel. In February 2013, a Central Government reform permitted gasoline stations to operate in industrial and commercial areas. Over the following 2-year period, this deregulation led to a high number of new market entrants in these newly designated free entry areas. By isolating markets exposed to entry and markets unaffected by new entrants, and adopting a difference-in-difference approach, results show that gasoline stations exposed to a new market entrant within a one-mile radius lower their prices by an average 1.04%. This result is significant, representing almost one fifth of the average retail margin. Additionally, the results show that the reduction in the equilibrium price is caused by the first market entrant and that the effect decreases over time.