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Changing Market Structure and Evolving Ways to Compete: Evidence from Retail Gasoline

This paper examines the pricing behavior of sellers in a market undergoing a significant restructuring using data from the ongoing introduction of self-service technology in the Korean gasoline market in the 2000s. I provide evidence that the full-service premium (or equivalently, self-service discount) increased during the market transition. I show that a simple model of monopolistic competition is not enough to explain the increasing premium. I find that the pricing behavior of sellers differ by product position: self-service sellers compete for price-sensitive consumers, whereas full-service sellers differentiate their product by offering a variety of bundled products and services, such as coffee, carwash or even a nail salon, to compete for less-price-sensitive consumers. Taken together, the strategic choices of sellers evolve in different ways when market structure changes, each type of seller using its unique position, resulting in an increase in the full-service premium in this market.