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Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline

  • Robert Gagné

    (HEC Montréal, CRT and CIRANO)

  • Simon van Norden

    (HEC Montréal, CIRANO and CIREQ)

  • Bruno Versaevel

    ()

    (EM Lyon, GATE CNRS)

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 Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0611.

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Length: 28 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:gat:wpaper:0611
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