The Impact of the Refiners' Discount Program on the Korean Gasoline Market
Dae-Wook Kim, Soongsil University, daekim@ssu.ac.kr
Jong-Ho Kim, Pukyong National University, kimjongho@pknu.ac.kr
Junjie Zhang, UC San Diego, junjiezhang@ucsd.edu
Overview
The refiners’ discount program in South Korea provides an interesting case to study the impact of the governmentguided "voluntary" price reduction. As the global oil prices rose considerably in early 2011, the South Korean
government pushed big oil refiners to reduce gasoline prices in order to tame inflation. Instead of cutting gasoline
taxes, the government asked the refiners to take their own losses. SK Energy (SK), the largest refiner in Korea,
announced unexpectedly on April 3, 2011 that it would lower prices of gasoline and diesel fuel between April 7 and
July 6, 2011. The discount would be 100 won per liter (about 9 U.S. cents), or roughly 5 percent of the then retail
prices. Other three major refiners, including GS Caltex (GS), Hyundai Oilbank (HO) and S-Oil (SO), followed suit
under political and competitive pressures. However, the public is cynical about whether the program eased the pain
at the pump since it is difficult to verify whether these refiners walked the talk or just talked the talk.
Our first empirical question asks how much refiners reduced their wholesale gasoline prices. Similar to some
voluntary environmental programs (Khanna1999), the discount offered by the refiners was not out of self interests
but rather under the pressure of the government. To avoid a harsher regulation on the gasoline market, the refiners
participated in the program universally. Although the refiners claimed to offer the same amount of discount, the
compliance could differ since there was no enforcement. In addition, refiners used different marketing strategies. The
market leader SK offered direct cash back to consumers using credit card or membership card. The other refiners
lowered their wholesale prices at the same amount. Therefore, we expect that the discount program had a
heterogeneous effect on the wholesale gasoline prices because of differing compliance and discount strategies.
Secondly, this program enables us to estimate the fraction of the discount passed on to consumers. The discount
offered by the refiners might be seized partially or fully by retail gas stations. The rate of pass-through depends on
the price elasticities of demand and supply as well as the market competitions (Fullerton2002). This paper is related
to the emerging empirical literature on gas tax incidence (Doyle2008; Alm2009; Marion2011). Although the
discount program may achieve the same effect in reducing gas prices for consumers as the suspension of gas taxes,
they have different distributional effects. Gas tax moratorium can benefit both consumers and suppliers (refiners and
gas stations) while the refiners’ discount can only benefit consumers and retail stations.
Last but not least, we are interested in the impact of the wholesale discount on the retail gasoline price dispersion.
Gasoline is sold at different prices in the same market. Price differences may be attributed to heterogeneous
convenience and amenities provided by gas stations. In this case, gas stations have local market power and they can
price discriminate customers with high switching costs (Borenstein1991; Chandra2011). The gas stations with higher
local market power can retain a larger fraction of the discount, which increases price dispersion. In this case,
consumers can be better off by increasing searching for low-price gasoline.
Methodology
We have assembled a unique data set for the empirical study. First, the station-level regular gasoline prices are
collected by the Korea National Oil Corporation (KNOC). The prices were recorded monthly, weekly or biweekly
from May 2008 to February 2012. We focus on the 729 retail gas stations in Seoul, in which a random sample of 443
stations are geocoded in order to spatially define markets for each gas station and its competitors. Second, weekly
wholesale gas price for four major refiners are also obtained from KNOC. The wholesale price data set covers the
same time span. Third, the observable station-specific attributes, such as ownership, services and land prices, are
obtained from the Korea Gas Station Association (KOSA). Finally, crude oil prices are reported by the Mean of
Platts Singapore (MOPS) that is the most relevant driver to the Korean oil market.
This paper employs a Regression Discontinuity (RD) design to evaluate the impact of the refiners’ discount program
on the gasoline market. Regular gasoline prices, margins and dispersion for retail gas stations or refiners are
compared before and after the program. The gap at the cutoff is the causal effect of the discount program. Because
the discount program was temporary, the starting and ending of the program created two treatment variables. Time is
the assignment variable. The refiners and gas stations could not precisely manipulate the timing of the program for
the following reasons. First, because the discount was under the pressure of the government, the timing was totally
unexpected so it was not tied to the market condition. Second, refiners could not predict the exact oil market trend
and game this information.
The RD design addresses the endogeneity concern by considering an arbitrarily narrow window of time around the
cutoffs under mild assumptions (Hahn2001). The sharp RD can identify the treatment effect as long as the
conditional mean of the unobservables is continuous. In our case, the determinants of gasoline prices before and after
the cutoffs were evolving "smoothly" except for the discount program. In particular, we control for crude oil price
since it is the dominant driver of the gasoline price. Although Korea was the 5th largest oil importer in the world in
2011, its oil consumption only accounted for about 2.6% of the world total consumption (BP2012; Eni2012).
Therefore it is reasonable to assume exogenous oil price because Korea’s impact if limited. In addition, the quantity
demanded for gasoline does not change dramatically because its short-run elasticity is close to zero (Hughes2008).
Results and Conclusions
Our preliminary empirical results suggest that refiners and retail stations responded to the discount program
heterogeneously. The benchmark model shows that refiners cut wholesale prices by 37-88 won/liter during the
discount period at the cost of their profit margins. The market leader SK slashed its price the most. As for the retail
market, gas stations increased their profit margins by 20-76 won/liter. In particular, the SK coops increased margins
by 76 won. It suggests that vast majority of the discount was captured by the gas stations especially those coops
affiliated with refiners. We also find that price differences widened during the discount period, which might suggest
that gas stations have local market power. In addition, we also observed asymmetric responses to the starting and
ending of the program, which is consistent with the finding by Borenstein1997. Given that the discount program was
known to be temporary, our estimates shall be interpreted as the short-run effect. We have conducted extensive
robustness checks and the main conclusions still hold well.
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