About AMA

Executive Summary
In this article, the authors propose and estimate an econometric model of location and pricing decisions of gasoline stations in the Singapore market. This location model, the first of its kind and the first to be estimated for gasoline markets, is built on the premise that the Singapore government determines optimal retail locations for gasoline stations on the basis of maximizing social welfare of Singapore residents by minimizing their travel costs. This is an important methodological contribution of this work. The authors' conditional pricing model is built on the premise of Bertrand competition between gasoline retail chains.

By estimating their proposed location model using empirical data on actual geographic locations of gasoline stations, the authors quantify the explicit dependence of local potential gasoline demand on the following local demographic characteristics of the neighborhood: population; median income; number of cars; and proximity to the airport, downtown, and highways. Using the estimated category-level demand at each local neighborhood in Singapore as an input, the authors estimate their proposed pricing model using empirical data on actual prices of gasoline at various stations. The authors find that retail margins for gasoline are approximately 21%, and that market share for a gasoline station is negatively influenced by both the price of gasoline and travel cost. The authors find that consumers are willing to travel up to a mile for a price saving of $.03 per liter (which translates to a saving of approximately $1.3 on a 40-liter tank of gasoline).

The authors use their estimates to calculate the relative profitability of various retail chains, identify the most and least profitable gasoline stations in Singapore, and perform a policy experiment related to the merger of BP (British Petroleum), and SPC (Singapore Petroleum Company) during the latter part of 2004. The authors find that prices and profits of all firms in the Singapore petrol industry will increase in response to this merger. The authors' effort to estimate cost and demand parameters from price data, using an econometric model of pricing, is valuable from the standpoint of obtaining a preliminary understanding of the Singapore gasoline market. Taken together with the proposed location model, the authors' estimation methodology and results can be used to answer policy questions of interest to both firms and policy makers. For example, the results highlight the importance of factors such as proximity to highways, the airport, and downtown in terms of influencing potential gasoline demand. Furthermore, the authors' methodology can be used to throw light on how gasoline prices at various stations would change in response to mergers and acquisitions.

Biography
Tat Y. Chan is Associate Professor of Marketing in the Olin Business School at Washington University in St. Louis. He received a PhD in Economics at Yale University in 2001. His research interests are in modeling consumer demand and firms' strategies using econometric methodologies that include both traditional and dynamic optimization techniques. His recent research also includes evaluating the impact of effectiveness and side effects on prescription decisions, analyzing the optimal nonlinear pricing strategies (e.g., three-part tariff, product bundling) for firms, and identifying the impacts of pre- and postprice expectations on consumer purchase decisions

V. Padmanabhan is the INSEAD Chaired Professor of Marketing at INSEAD, Singapore. This article is the first in a line of research that explores the implications of the differences in institutional practice, institutions, infrastructure, and so forth, in Asian economies relative to the West for marketing theory and practice.

P.B. (Seethu) Seetharaman is Professor of Marketing in the Jesse H. Jones Graduate School of Management at Rice University, Houston. Seethu engages in applied econometric research spanning the following industries: packaged goods, energy, direct marketing, movies, automotive, and durable goods, among others. Seethu received his PhD in Marketing from Cornell University in 1998 and his MS and BTech in Chemical Engineering from the University of Utah (in 1993) and the Indian Institute of Technology, Madras (in 1991), respectively. Seethu served on the faculty in the John M. Olin School of Business at Washington University in St. Louis for six years and has been at Rice University for three years.