Discussion Paper

Supermarkets and Gasoline: An Empirical Study of Bundled Discounts

Sep 30, 2015 | Zhongmin Wang

Summary

How do supermarkets’ grocery-gasoline bundled discount programs affect competition in gasoline markets? The answer depends on the scale of the program, the time horizon, and the characteristics of the gasoline site.

Key Findings

  • Grocery-gasoline bundled discounts can have a competitive impact on retail gasoline prices, though the effect depends on several subtle factors.
  • The weight of the evidence suggests that supermarkets offer gasoline price discounts as a “loss leader” advertising strategy—using the discounted price of gasoline to attract buyers to purchase groceries, on which retailers earn their profits.

Abstract

Many supermarkets offer grocery-gasoline bundled discounts, whereby a supermarket customer whose grocery purchase exceeds a certain dollar amount is offered a gasoline price discount. I use the difference-in-differences method and an ideal gasoline price data set to study such programs’ effects on retail gasoline competition in a specific market. A program’s effect on a gasoline station depends on the features of the program, whether the site is operated by a supermarket, its distance from the nearest supermarket, and the time horizon. How the estimated effects vary with program features and station characteristics helps explain why such programs are offered.