Markets Take Breaks: Dynamic Price Competition with Opening Hours
63 Pages Posted: 4 Dec 2016 Last revised: 28 Jul 2017
Date Written: July 27, 2017
We develop a model of dynamic price competition in which the intraday interaction among retailers is paused at regular closing times and resumed the next day. In this non-stationary market environment, there exists a Nash equilibrium with repeating price cycles of deterministic length. The equilibrium is salient in the sense that is is a repeated version of the unique subgame perfect equilibrium of the daily stage game and, as such, does not require collusive behavior. We test and verify the equilibrium prediction as well as a number of additional model predictions using an extensive dataset on the German retail gasoline market. Furthermore, we perform a structural estimation of the model to evaluate several policy counterfactuals. At the estimates, regulatory interventions such as price setting restrictions or increased market transparency lead to higher average retail prices and harm consumer welfare.
Keywords: Spatial competition, Dynamic pricing, Edgeworth cycle, Gasoline
JEL Classification: D43; L11; L13; L81
Suggested Citation: Suggested Citation