Supermarkets and Gasoline: An Empirical Study of Bundled Discounts
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.
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.
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.
