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Dynamic Pricing in Retail Gasoline Markets

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  • Severin Borenstein
  • Andrea Shepard

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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Publication status: published as Rand Journal of Economics, Autumn 1996, Vol. 27, no. 3, pp. 429-451
Handle: RePEc:nbr:nberwo:4489

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  1. Porter, Robert H, 1985. "On the Incidence and Duration of Price Wars," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 33(4), pages 415-26, June.
  2. Gilbert, Richard J. & Newbery, David M., 1988. "Regulation Games," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt50s6h8c6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. 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.
  4. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, Elsevier, vol. 13(3), pages 203-210, July.
  5. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 390-407, June.
  6. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 301-314, Autumn.
  7. 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.
  8. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 30-53, February.
  9. Jeffrey D. Karrenbrock, 1991. "The behavior of retail gasoline prices: symmetric or not?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 19-29.
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