Learning to Coordinate: A Study in Retail Gasoline
30 Pages Posted: 27 Feb 2015 Last revised: 14 Oct 2017
Date Written: October 12, 2017
This paper studies equilibrium selection in the retail gasoline industry. We exploit a unique dataset that contains the universe of station-level prices for an urban market for 15 years, and that encompasses a coordinated equilibrium transition mid-sample. We uncover a gradual, three-year equilibrium transition, whereby dominant firms use price leadership and price experiments to create focal points that coordinate market prices, soften price competition, and enhance retail margins. Our results inform the theory of collusion, with particular relevance to the initiation of collusion and equilibrium selection. We also highlight new insights into merger policy and collusion detection strategies.
Keywords: Price Leadership; Focal Points; Experimentation; Learning; Communication; Collusion; Retail Gasoline
JEL Classification: D22, D43, D83, L12, L41
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