The Supply Network and Price Dispersion in the Canadian Gasoline Market

Abstract

This paper examines the impact of variation in transportation options – what I denote the “supply network” – on observed price differences between locations for a specific good, retail gasoline. I use a unique data set of weekly gasoline prices across 44 Canadian cities to analyze how the existence of variation in the available modes of transportation for gasoline between cities (via pipeline, marine tanker, rail or truck) accounts for observed price differences across locations. I find that the supply network is significant – cities connected by lower cost-per-unit methods like pipelines or seaports exhibit smaller mean- and weekly-price differences than those connected only by road or rail, after controlling for distance, regional effects and market size. A pipeline connection results in a reduction in weekly price dispersion equivalent to a 53% reduction in distance between cities, while a maritime connection has the equivalent effect of a 38% reduction in distance between cities.