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Flex Cars and Competition in Ethanol and Gasoline Retail Markets

Author

Listed:
  • Juliano Assuncao
  • Joao Paulo Pessoa
  • Leonardo Rezende

Abstract

In Brazil, gasoline and ethanol coexist as automotive fuels and are becoming closer substitutes as flex cars become more widely adopted. We employ this source of variation in a large panel of weekly prices at the station level to show that fuel prices have fallen in response to this change. This finding is evidence of market power in fuel retail and indicates that innovations that increase consumer choice benefit even those who choose not to adopt them. We also propose a model of price competition in this market and use it to estimate demand from price response functions.

Suggested Citation

  • Juliano Assuncao & Joao Paulo Pessoa & Leonardo Rezende, 2013. "Flex Cars and Competition in Ethanol and Gasoline Retail Markets," CEP Discussion Papers dp1251, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1251
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    References listed on IDEAS

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    1. Anderson, Soren T., 2012. "The demand for ethanol as a gasoline substitute," Journal of Environmental Economics and Management, Elsevier, vol. 63(2), pages 151-168.
    2. Carlson, John A & McAfee, R Preston, 1983. "Discrete Equilibrium Price Dispersion," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 480-493, June.
    3. Joris Pinkse & Margaret E. Slade & Craig Brett, 2002. "Spatial Price Competition: A Semiparametric Approach," Econometrica, Econometric Society, vol. 70(3), pages 1111-1153, May.
    4. Scott K. Shriver, 2010. "Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol," Working Papers 10-20, NET Institute.
    5. Corts, Kenneth S., 2010. "Building out alternative fuel retail infrastructure: Government fleet spillovers in E85," Journal of Environmental Economics and Management, Elsevier, vol. 59(3), pages 219-234, May.
    6. Matthew Lewis, 2008. "Price Dispersion And Competition With Differentiated Sellers," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 654-678, September.
    7. Alberto Salvo & Cristian Huse, 2011. "Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of Flexible-Fuel Technology," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 119-148.
    8. Ferreira, Alex Luiz & de Almeida Prado, Fernando Pigeard & da Silveira, Jaylson Jair, 2009. "Flex cars and the alcohol price," Energy Economics, Elsevier, vol. 31(3), pages 382-394, May.
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    Cited by:

    1. Antonina Kalinichenko & Valerii Havrysh & Igor Atamanyuk, 2019. "The Acceptable Alternative Vehicle Fuel Price," Energies, MDPI, vol. 12(20), pages 1-20, October.

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    More about this item

    Keywords

    Flex-fuel vehicles; Gasoline; Ethanol; Price competition; Spatial Competition; Discrete equilibrium price dispersion;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels

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