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Edgeworth Price Cycles: Evidence from the Toronto Retail Gasoline Market

  • Noel, Michael
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    In this article, I exploit a new station-level, twelve-hourly price dataset to examine the strong retail price cycles in the Toronto gasoline market. The cycles are visually similar to the theoretical Edgeworth Cycles of Maskin & Tirole [1988]: strongly asymmetric, tall, rapid, and highly synchronous across stations. I test a series of predictions made by the theory about how firm behaviors would differentially evolve over the path of a cycle. The evidence is consistent with the existence of Edgeworth Cycles and inconsistent with competing hypotheses. One finding is that smaller firms are more likely than larger firms to initiate rounds of price undercutting but the reverse is true for rounds of price increases. While the cycles are an interesting phenomenon for study in their own right, the evidence has important implications for understanding market power in both cycling and non-cycling gasoline markets.

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    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt64j579g9.

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    Date of creation: 01 Jan 2004
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    Handle: RePEc:cdl:ucsdec:qt64j579g9
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    1. Slade, Margaret E, 1987. "Interfirm Rivalry in a Repeated Game: An Empirical Test of Tacit Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 499-516, June.
    2. 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.
    3. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
    4. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April.
    5. Cosslett, Stephen R. & Lee, Lung-Fei, 1985. "Serial correlation in latent discrete variable models," Journal of Econometrics, Elsevier, vol. 27(1), pages 79-97, January.
    6. Slade, Margaret E, 1998. "Strategic Motives for Vertical Separation: Evidence from Retail Gasoline Markets," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 84-113, April.
    7. Slade, Margaret E, 1989. "Price Wars in Price-Setting Supergames," Economica, London School of Economics and Political Science, vol. 56(223), pages 295-310, August.
    8. Slade, Margaret E, 1992. "Vancouver's Gasoline-Price Wars: An Empirical Exercise in Uncovering Supergame Strategies," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 257-76, April.
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