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Edgeworth Price Cycles: Evidence from the Toronto Retail Gasoline Market

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  • Noel, Michael
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    Abstract

    In this article, I exploit a new station-level, twelve-hourly price dataset to examine the strong retail price cycles in the Toronto gasoline market. The cycles are visually similar to the theoretical Edgeworth Cycles of Maskin & Tirole [1988]: strongly asymmetric, tall, rapid, and highly synchronous across stations. I test a series of predictions made by the theory about how firm behaviors would differentially evolve over the path of a cycle. The evidence is consistent with the existence of Edgeworth Cycles and inconsistent with competing hypotheses. One finding is that smaller firms are more likely than larger firms to initiate rounds of price undercutting but the reverse is true for rounds of price increases. While the cycles are an interesting phenomenon for study in their own right, the evidence has important implications for understanding market power in both cycling and non-cycling gasoline markets.

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    Bibliographic Info

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt64j579g9.

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    Date of creation: 01 Jan 2004
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    Handle: RePEc:cdl:ucsdec:qt64j579g9

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    Keywords: Edgeworth Cycles; Price Wars; Retail Gasoline;

    References

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    1. Slade, Margaret E, 1992. "Vancouver's Gasoline-Price Wars: An Empirical Exercise in Uncovering Supergame Strategies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 59(2), pages 257-76, April.
    2. Eckert, Andrew, 2003. "Retail price cycles and the presence of small firms," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 21(2), pages 151-170, February.
    3. Cosslett, Stephen R. & Lee, Lung-Fei, 1985. "Serial correlation in latent discrete variable models," Journal of Econometrics, Elsevier, Elsevier, vol. 27(1), pages 79-97, January.
    4. Slade, Margaret E, 1989. "Price Wars in Price-Setting Supergames," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 56(223), pages 295-310, August.
    5. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
    6. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 14(1), pages 84-113, April.
    7. Slade, Margaret E, 1987. "Interfirm Rivalry in a Repeated Game: An Empirical Test of Tacit Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 499-516, June.
    8. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April.
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    Cited by:
    1. Leon Bettendorf & Stephanie van der Geest & Gerard Kuper, 2005. "Do Daily Retail Gasoline Prices adjust Asymmetrically?," Tinbergen Institute Discussion Papers 05-040/2, Tinbergen Institute.
    2. Weibull, Jörgen, 2006. "Price competition and convex costs," Working Paper Series in Economics and Finance 622, Stockholm School of Economics, revised 23 Feb 2006.

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