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Austrian-style gasoline price regulation: How it may backfire

  • Obradovits, Martin

In January 2011, a price regulation was established in the Austrian gasoline market which prohibits firms from raising their prices more than once per day. Similar restrictions have been discussed in New York State and Germany. Despite their intuitive appeal, this article argues that Austrian-type policies may actually harm consumers. In a two-period duopoly model with consumer search, I show that in face of the regulation, firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged. This implies that, as some consumers find it optimal to delay their purchase due to expected price savings, but find it inconvenient to do so, a friction is introduced that decreases net consumer surplus in the market.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42529.

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Date of creation: 08 Nov 2012
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Handle: RePEc:pra:mprapa:42529
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  4. Lewis, Matt, 2004. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Competition Policy Center, Working Paper Series qt9pv2d9fn, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
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  12. Haucap, Justus & Müller, Hans Christian, 2012. "The Effects of Gasoline Price Regulations: Experimental Evidence," DICE Discussion Papers 47, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  13. Zhongmin Wang, 2009. "(Mixed) Strategy in Oligopoly Pricing: Evidence from Gasoline Price Cycles Before and Under a Timing Regulation," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 987-1030, December.
  14. Dewenter, Ralf & Heimeshoff, Ulrich, 2012. "Less pain at the pump? The effects of regulatory interventions in retail gasoline markets," DICE Discussion Papers 51, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  15. Armstrong, Mark & Vickers, John & Zhou, Jidong, 2008. "Consumer protection and the incentive to become informed," MPRA Paper 9898, University Library of Munich, Germany.
  16. Arteaga, Julio Cesar & Flores, Daniel, 2010. "Regulation, competition and fraud: evidence from retail gas stations in Mexico," MPRA Paper 34187, University Library of Munich, Germany.
  17. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  18. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, vol. 79(4), pages 700-712, September.
  19. Huanxing Yang & Lixin Ye, 2008. "Search with learning: understanding asymmetric price adjustments," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 547-564.
  20. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
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