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Testing Optimal Punishment Mechanisms Under Price Regulation: the Case of the Retail Market for Gasoline

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  • Robert Gagné

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  • Simon van Norden

    ()

  • Bruno Versaevel

Abstract

We analyse the effects of a price floor on price wars in the retail market for gasoline. Our theoretical model assumes a Bertrand oligopoly supergame in which firms initially collude by charging the monopolistic price. Once firms detect a deviation from this strategy, they switch to a lower price for a punishment phase (a "price war" before returning to collusive prices. In 1996, the introduction of a price floor regulation in the Quebec retail market for gasoline serves as a natural experiment with which to test our model. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results show that the introduction of the price floor reduces the intensity of price wars but raises their expected duration. Nous analysons les effets de la présence d'un prix plancher dans le marché de la vente au détail de l'essence. D'un point de vue théorique, nous supposons un modèle à la Bertrand où au départ les firmes font implicitement collusion en demandant le prix de monopole. Lorsqu'une firme dévie de cette stratégie, les firmes concurrentes modifient également leur stratégie en punissant la firme déviante par des prix plus bas (guerre de prix) avant de retourner au prix de collusion. L'introduction d'une réglementation de type prix plancher dans le marché de la vente au détail de l'essence au Québec en 1996 procure une expérience naturelle pour tester le modèle théorique. Nous utilisons un modèle de type «Markov Switching» avec deux états latents afin d'identifier simultanément les périodes de prix collusifs et de guerres de prix et d'estimer les paramètres caractérisant chacun de ces états. Les résultats montrent que l'introduction d'un prix plancher réduit l'intensité des guerres de prix mais accroît leur durée anticipée.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2003s-57.

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Date of creation: 01 Sep 2003
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Handle: RePEc:cir:cirwor:2003s-57

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Keywords: price regulation; oligopoly supergame; Markov switching model; gasoline prices; réglementation des prix; jeu à la Bertrand; modèle de Markov; prix de l'essence;

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Cited by:
  1. Flochel, Laurent & Versaevel, Bruno & de Villemeur, Étienne, 2009. "Optimal Collusion with Limited Liability and Policy Implications," IDEI Working Papers 547, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2011.
  2. Etienne Billette de Villemeur & Laurent Flochel & Bruno Versaevel, 2013. "Optimal collusion with limited liability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(3), pages 203-227, 09.
  3. Etienne Billette De Villemeur & Laurent Flochel & Bruno Versaevel, 2009. "Optimal Collusion with Limited Severity Constraint," Post-Print halshs-00375798, HAL.

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