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Dynamic Pricing in Retail Gasoline Markets

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  • Severin Boreinstein
  • Andrea Shepard

Abstract

Supergame models of tacit collusion show that supportable price-cost margins increase with expected future collusive profits, ceteris paribus. As a result, collusive margins will be larger when demand is expected to increase or marginal costs are expected to decline. Using panel data on sales volume and gasoline prices in 43 cities over 72 months, we find behavior consistent with tacit collusion in retail gasoline markets. Controlling for current demand and cost, current margins increase with expected next-month demand and decrease with expected next-month cost. The results are not consistent with intertemporal l inkages due to inventory behavior or customer loyalty.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 27 (1996)
Issue (Month): 3 (Autumn)
Pages: 429-451

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Handle: RePEc:rje:randje:v:27:y:1996:i:autumn:p:429-451

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  1. Gilbert, Richard J. & Newbery, David M., 1988. "Regulation Games," Department of Economics, Working Paper Series qt50s6h8c6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, vol. 13(3), pages 203-210, July.
  3. Porter, Robert H, 1985. "On the Incidence and Duration of Price Wars," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 415-26, June.
  4. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
  5. Jeffrey D. Karrenbrock, 1991. "The behavior of retail gasoline prices: symmetric or not?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 19-29.
  6. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
  7. John Haltiwanger & Joseph E. Harrington Jr., 1991. "The Impact of Cyclical Demand Movements on Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 89-106, Spring.
  8. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
  9. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
  10. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn.
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