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Dynamic Pricing in Retail Gasoline Markets

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Author Info
Severin Borenstein
Andrea Shepard

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Abstract

This paper tests for price patterns in retail gasoline markets consistent with those predicted by models of implicit collusion among firms. Recent supergame models show that the highest supportable collusive price is a function of today's profit relative to expected future profit: collusive prices are higher when predictable changes in demand or cost lead firms to expect that collusive profits are increasing rather than declining. Ceteris paribus, collusive profits will be expected to increase when demand is expected to increase and/or costs are expected to decline. Using panel data on sales volume, and retail and wholesale prices in 59 cities over 72 months, we find results consistent with these predictions. Controlling for current demand and input price, the elasticity of current retail margins with respect to expected next-month demand is about 0.37. The elasticity of current margins with respect to next-month wholesale price is about -0.37. The results are inconsistent with inventory effects.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4489.

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Date of creation: Oct 1993
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Handle: RePEc:nbr:nberwo:4489

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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.:
  1. 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. [Downloadable!]
  2. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February. [Downloadable!] (restricted)
  3. Gilbert, Richard & Newbery, David M G, 1988. "Regulation Games," CEPR Discussion Papers 267, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Porter, Robert H, 1985. "On the Incidence and Duration of Price Wars," Journal of Industrial Economics, Blackwell Publishing, vol. 33(4), pages 415-26, June. [Downloadable!] (restricted)
  7. Severin Borenstein & A. Colin Cameron, 1992. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," NBER Working Papers 4138, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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