Modelling how much extra motorists pay on the road? A cross-sectional study of profit margins of unleaded petrol in Australia

• We examine the profit margin for petrol across 108 retail locations in Australia.
• No evidence of excessive profiteering was found in 76 out of 108 retail locations.
• There are 13 locations in which the likelihood of abnormal margins is quite high.
• Regulatory bodies have limited resources so they should target these locations.

Gross profitability margin (difference between retail and wholesale prices) for unleaded petrol exhibits substantial variations across 108 cities, towns and regional centres in Australia. This paper examines if such variations (averaged during 2007–2012) can be explained by (a) transport costs proxied by the distance between retailers and wholesalers; (b) the size of the retail market; (c) market competition proxied by the number of cars in the vicinity of the retailers; (d) dummy variables capturing other qualitative attributes associated with the retailers’ locations. Three cross-sectional regressions are estimated but only one successfully passes all diagnostic tests. By identifying a number of locations exhibiting excessive profit margins, the results of this paper enhance the efficiency and transparency of petrol pricing in the retail market. It is found that the extent of excessive profiteering in Western Australia (WA) and South Australia (SA) were lower than other Australian states and territories. This important finding can be explained by a strong presence of independent petrol stations in SA and the successful price-monitoring performance of FuelWatch in WA.