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
Date Written: October 1, 2006
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: Suggested Citation