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

GATE Working Paper Series No. 06-11

28 Pages Posted: 31 May 2007 Last revised: 14 Apr 2011

Robert Gagné

HEC Montreal - Institute of Applied Economics

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Bruno P. A. Versaevel

emlyon business school; GATE (Groupe d'Analyse et de Théorie Economique)

Date Written: October 1, 2006

Abstract

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.

Keywords: gasoline prices, Markov switching model, oligopoly supergame, price regulation

JEL Classification: C32, L13, L81

Suggested Citation

Gagné, Robert and van Norden, Simon and Versaevel, Bruno P. A., Testing Optimal Punishment Mechanisms Under Price Regulation: The Case of the Retail Market for Gasoline (October 1, 2006). GATE Working Paper Series No. 06-11. Available at SSRN: https://ssrn.com/abstract=988655 or http://dx.doi.org/10.2139/ssrn.988655

Robert Gagné (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

Simon Van Norden

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6781 (Phone)
514-340-5632 (Fax)

HOME PAGE: http://svannorden.org

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://svannorden.org

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Bruno P. A. Versaevel

emlyon business school ( email )

23, avenue Guy de Collongue
Economics, Finance, Control
Ecully, 69130
France

GATE (Groupe d'Analyse et de Théorie Economique) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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