Odd Prices at Retail Gasoline Stations: Focal Point Pricing and Tacit Collusion

This study empirically investigates the theory that odd numbered pricing points can be used as focal points to facilitate tacit collusion. Odd ending prices are heavily used in many retail markets. While the demand e ects of odd pricing points are commonly studied, their potential role in the coordination of prices is rarely discussed. I show that gasoline stations in the U.S. disproportionately sell at prices ending in odd digits. Station prices tend to be higher and change less frequently in locations where more odd prices (particularly those ending in 5 or 9) are observed. These price di erences remain even after controlling for other observable market characteristics commonly associated with higher retail gasoline prices. The results suggest that the use of pricing points may be an e ective mechanism for tacitly coordinating prices, and that this motivation may help explain the widespread use of odd prices in retail markets. ∗I would like to thank Jason Blevins, David Blau, Severin Borenstein, PJ Healy, Ryan Kellogg, Dan Levin, Howard Marvel, Steve Puller, and Bruce Weinberg as well as the editor, co-editor, and anonymous referees for helpful comments and suggestions.