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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 (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université de Montréal)
Simon Van Norden (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université de Montréal)
Bruno Versaevel () (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

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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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Paper provided by HAL in its series Post-Print with number halshs-00142516_v1.

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Date of creation: Oct 2006
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Related research
Keywords: gasoline prices ; Markov switching model ; oligopoly supergame ; price regulation;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  7. Eckert, Andrew, 2003. "Retail price cycles and the presence of small firms," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 151-170, February. [Downloadable!] (restricted)
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  15. Hackner, Jonas, 1996. "Optimal symmetric punishments in a Bertrand differentiated products duopoly," International Journal of Industrial Organization, Elsevier, vol. 14(5), pages 611-630, July. [Downloadable!] (restricted)
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  20. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January. [Downloadable!] (restricted)
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  21. Lee, Lung-Fei & Porter, Robert H, 1984. "Switching Regression Models with Imperfect Sample Separation Information-With an Application on Cartel Stability," Econometrica, Econometric Society, vol. 52(2), pages 391-418, March. [Downloadable!] (restricted)
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  26. Lambertini, L. & Sasaki, D., 1998. "Non-Negative Quantity Constraints and the Duration of Punishment," Department of Economics - Working Papers Series 630, The University of Melbourne.
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  27. Lambson, Val Eugene, 1987. "Optimal Penal Codes in Price-Setting Supergames with Capacity Constraints," Review of Economic Studies, Blackwell Publishing, vol. 54(3), pages 385-97, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Etienne Billette de Villemeur & Laurent Flochel & Bruno Versaevel, 2009. "Optimal Collusion with Limited Severity Constraint," Working Papers 0909, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
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