Local gasoline industry : a study of the relationship between capacity constraints and gasoline prices in Singapore.

Abstract

Increasing attention has been paid to gasoline prices due to the growing affluent population of car owners in Singapore. Academic literatures have attributed the fluctuations in gasoline prices to location and pricing decisions of gasoline firms. However, firms in Singapore are not able to maximize profits by engaging in spatial differentiation as an expansion in operation (increasing number of stations) is only possible if the government allocates more land sites to gasoline firms. This has led to the notion of capacity constraints, which is an important consideration in pricing decisions of gasoline.

Based on observations of monthly gasoline prices from November 2008 to March 2013, we aim to establish a relationship between capacity constraints and gasoline prices. Based on the results of the fixed effects model, we managed to validate the claims made by the gasoline firms in Singapore that capacity constraints are impeding price competition in the industry. In addition, we conducted an analysis of de-trended gasoline prices and suspect that there is a presence of Edgeworth cycle. Thus led to our conjecture that firms experience weak capacity constraints and low product differentiation.

Hence our results concluded that there is presence of a competitive market and absence of tacit collusion in the gasoline market of Singapore. Therefore, we can discount the need for more government intervention in the industry. More importantly, the findings of this paper would serve as a good basis for future studies of gasoline prices in Singapore.