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

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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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  • Robert Gagné & Simon van Norden & Bruno Versaevel, 2006. "Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline," Cahiers de recherche 06-12, HEC Montréal, Institut d'économie appliquée.
    • Handle: RePEc:iea:carech:0612
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    Cited by:

    1. Etienne Billette de Villemeur & Laurent Flochel & Bruno Versaevel, 2013. "Optimal collusion with limited liability," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(3), pages 203-227, September.
    2. Etienne Billette de Villemeur & Laurent Flochel & Bruno Versaevel, 2009. "Optimal Collusion with Limited Severity Constraint," Post-Print halshs-00375798, HAL.
    3. Flochel, Laurent & Versaevel, Bruno & de Villemeur, Étienne, 2009. "Optimal Collusion with Limited Liability and Policy Implications," TSE Working Papers 09-027, Toulouse School of Economics (TSE), revised Jul 2011.
    4. Juan Esteban Carranza & Robert Clark & Jean-François Houde, 2015. "Price Controls and Market Structure: Evidence from Gasoline Retail Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 152-198, March.

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    More about this item

    Keywords

    price regulation; oligopoly supergame; Markov switching model; gasoline;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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