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

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Author Info

  • Robert Gagné

    (HEC Montréal, CRT and CIRANO)

  • Simon van Norden

    (HEC Montréal, CIRANO and CIREQ)

  • Bruno Versaevel

    ()
    (EM Lyon, GATE CNRS)

Abstract

We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. 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 support the prediction that price floors reduce the intensity of price wars but increase their expected duration.

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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0611.

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Length: 28 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:gat:wpaper:0611

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Keywords: gasoline prices; Markov switching model; oligopoly supergame; price regulation;

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References

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Cited by:
  1. Flochel, Laurent & Versaevel, Bruno & de Villemeur, Étienne, 2009. "Optimal Collusion with Limited Liability and Policy Implications," TSE Working Papers 09-027, Toulouse School of Economics (TSE), 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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