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

  • Robert Gagné

    (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université de Montréal)

  • Simon Van Norden

    (CIRANO - Centre interuniversitaire de recherche en analyse des organisations - Université de Montréal)

  • Bruno Versaevel

    ()

    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

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 HAL in its series Post-Print with number halshs-00142516.

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Date of creation: Oct 2006
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Handle: RePEc:hal:journl:halshs-00142516
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  1. 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.
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  9. Lambertini, L. & Sasaki, D., 1998. "Non-Negative Quantity Constraints and the Duration of Punishment," Department of Economics - Working Papers Series 630, The University of Melbourne.
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  14. 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.
  15. Severin Boreinstein & Andrea Shepard, 1996. "Dynamic Pricing in Retail Gasoline Markets," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 429-451, Autumn.
  16. Hackner, Jonas, 1996. "Optimal symmetric punishments in a Bertrand differentiated products duopoly," International Journal of Industrial Organization, Elsevier, vol. 14(5), pages 611-630, July.
  17. Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics 1999:9, Stockholm University, Department of Economics.
  18. 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.
  19. Porter, Robert H., 1983. "Optimal cartel trigger price strategies," Journal of Economic Theory, Elsevier, vol. 29(2), pages 313-338, April.
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  21. Segerstrom, Paul S., 1988. "Demons and repentance," Journal of Economic Theory, Elsevier, vol. 45(1), pages 32-52, June.
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  23. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
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  25. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
  26. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
  27. 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.
  28. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
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