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Does Protecting Smaller Firms Result in Lower Prices? Evidence from Canadian Gasoline Markets

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  • Anindya Sen

    (Department of Economics, University of Waterloo)

Abstract

Some recent policy initiatives aimed at preserving the market share of smaller gasoline retailers have been proposed in Canada. These measures are grounded in the belief that strengthening such firms will enhance competition and result in lower prices, which is consistent with the implications of the dominant firm/competitive fringe model. Using monthly data on average retail prices and market shares across eleven Canadian cities between 1991 and 1997, I find the opposite to be true. Specifically, increased market concentration on the part of independent retailers is in fact, significantly correlated with higher retail prices. This may be due to an enhanced ability to set prices as well as higher marginal costs of production experienced by these retailers, relative to corresponding costs incurred by larger and more efficient vertically integrated firms.

Suggested Citation

  • Anindya Sen, 2002. "Does Protecting Smaller Firms Result in Lower Prices? Evidence from Canadian Gasoline Markets," Working Papers 02002, University of Waterloo, Department of Economics, revised Jan 2002.
    • Handle: RePEc:wat:wpaper:02002
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