edgeworth price cycles cost based pricing and sticky pricing in retail gasoline markets abstract this paper examines dynamic pricing behavior in canadian retail gasoline markets i find three distinct pricing patterns cost based pricing sticky pricing and sharp asymmetric retail price cycles that resemble the edgeworth cycles of maskin and tirole 1988 i use a markov switching regression to estimate the prevalence of the regimes and the structural characteristics of the cycles themselves i find cycles are more prevalent when there are more small firms and are accelerated and amplified with very many small firms in markets with few small firms sticky pricing dominates the findings are consistent with the theory of edgeworth cycles

submarkets and the evolution of market structure we construct a model of industry evolution in which the central force for change is the creation and destruction of submarkets firms expand when they are able to exploit new opportunities that arrive in the form of submarkets they contract and ultimately exit when the submarkets in which they operate are destroyed this simple framework can transparently explain a wide range of well known regularities about industry dynamics most notably the subtle relationships between size age growth and survival data on the laser industry where submarkets are prominent further illustrate the ability of the model to explain distinctive patterns in the evolution of industries and firms

experimental gasoline markets abstract zone pricing in wholesale gasoline markets is a contentious topic in the public policy debate with a controlled laboratory experiment we investigate the competitive effects of zone pricing on consumers retail stations and refiners vis a vis the proposed policy prescription of uniform wholesale pricing to retailers we also examine the issue of divorcement and the rockets and feathers phenomenon the former is the legal restriction that refiners and retailers cannot be vertically integrated and the latter is the perception that retail gasoline prices rise faster than they fall in response to random walk movements in the world price for oil

temporary wholesale gasoline price spikes have long lasting retail effects the aftermath of hurricane rita abstract i study u s gasoline prices following hurricane rita to show that short lived geographical differences in the severity of wholesale gasoline price spikes are associated with long lasting geographical differences in retail prices in most u s cities wholesale prices spiked significantly for roughly 2 weeks following the hurricane however in cities where this spike was particularly large retail margins remained higher than in other cities for nearly 2 months high retail margins dissipated more quickly after the hurricane in cities where competition between stations tends to generate cyclical retail price fluctuations independent of wholesale cost movements i discuss why prices may have fallen faster in cities exhibiting retail price cycles and present additional results identifying differences in market characteristics between cities with and without price cycles i find that cycling cities tend to have higher population density and have independent nonrefinery brand stations that are mor

rationing by waiting and the value of time results from a natural experiment the authors analyze data from a natural experiment with rationing by waiting in the situation motorists were confronted with a choice between waiting in line for low priced gasoline or purchasing at a higher price without waiting they view this as a revealed preference experiment and use their choices to estimate the value of time spent waiting as a function of individual characteristics in most cases the estimates of the value of time are quite similar to individuals after tax wages 13 references 7 tables

rules communication and collusion narrative evidence from the sugar institute case detailed notes on weekly meetings of the sugar refining cartel show how communication helps firms collude and so highlight the deficiencies in the current formal theory of collusion the sugar institute did not fix prices or output prices were increased by homogenizing business practices to make price cutting more transparent meetings were used to interpret and adapt the agreement coordinate on jointly profitable actions ensure unilateral actions were not misconstrued as cheating and determine whether cheating had occurred in contrast to established theories cheating did occur but sparked only limited retaliation partly due to the contractual relations with selling agents jel l13 l41 this paper reexamines the cartel problem by studying the private discussions within one cartel while we find much that is in accord with george j stigler s 1964 basic insight that firms would structure an agreement conscious of their later incentive to cheat on it we also uncover puzzles for established theory and identify elements that a richer theory should encompass especially regarding the role of communication in collusion our window into the inner workings of a cartel is a remarkable series of notes on the weekly meetings of the sugar institute this trade association was formed in december 1927 in the wake of several years of falling margins and excess capacity by 14 firms comprising nearly all the cane sugar refining capacity in the united states it operated until 1936 when the supreme court ruled its practices illegal among the top executives in regular attendance at the meetings was louis v place vice president of mccahan a midsize refinery in philadelphia place who was in charge of all activities of the company except production and raw sugar purchases wrote over 500 pages of single spaced detailed

edgeworth price cycles and intertemporal price discrimination in a retail gasoline market exhibiting edgeworth price cycles prices change asymmetrically with many small decreases interrupted by occasional large increases the result is a de facto menu of prices from which consumers can choose based on exactly when they buy this article introduces four classes of purchase timing strategies designed to systematically shift consumer purchases towards the cycle troughs it shows in the study market of toronto canada the monetary gains to consumers from optimized timing strategies are as high as 3 9 markups earned from these consumers fall up to 82 in spite of the gains from timing strategies surprisingly few consumers use them evidence is presented that a main reason is that consumers are not well informed about the cycles policy implications are discussed

investment and the current account in the short run and the long run theoretical models of the relationship between investment and the current account impose restrictions on the joint dynamic behavior of these variables these restrictions come in two forms one imposes causal orderings on investment and the current account the other restriction concerns the permanent responses of these variables to different shocks we use these restrictions to identify empirically structural shocks from vector autoregressions of investment and the current account for canada under certain identifications our results support the implications of the intertemporal small open economy model however these results are sensitive to perturbations of the identifications

retail price cycles and the presence of small firms abstract in many canadian cities retail gasoline prices remain unchanged for weeks at a time while in other cities retail prices cycle increasing sharply and declining slowly in maskin and tirole econometrica 56 1988 571 both price cycles and rigid prices can exist in equilibrium in this article i demonstrate that the existence of these equilibria is dependent on the number of retail outlets operated by the firms constant price equilibria are found to exist only when firms are of similar size however cycle equilibria can be constructed for a wide range of relative sizes

empirical studies of gasoline retailing a guide to the literature abstract this paper surveys the empirical literature on gasoline retailing which has been growing rapidly over the last three decades possibly in response to antitrust and regulatory concerns and increased availability of pricing data studies of both pricing and non price decision variables are considered in general it is found that crude oil prices are the primary driver of national price movements over time however market structure has been identified as playing a role in price dynamics equilibrium selection and price differentials across markets and stations the economic literature emphasizes the importance of heterogeneity across stations and coordination problems faced by retailers several directions for future work are suggested including the development of theory and demand estimation using high frequency station level data

edgeworth cycles with partial price commitment abstract the price commitment model of maskin and tirole 1988 provides an extensively cited foundation for edgeworth cycles we examine the viability of edgeworth cycles when price commitment is partial in the sense that a subset of firms are committed to price in each period if multiple firms are not committed in each period then the existence of edgeworth cycle equilibria requires a demanding convexity condition on the profit function

do rockets rise faster and feathers fall slower in an atmosphere of local market power evidence from the retail gasoline market this study explores the possibility that local market power influences the observed asymmetric relationship between changes in wholesale gasoline costs and changes in retail gasoline prices i exploit an original data set of weekly gas station prices in southern california from september 2002 to may 2003 and take advantage of detailed station and local market level characteristics to determine the extent to which geographic and product differentiation influence price response asymmetry i find that brand identity proximity to rival stations and local market features and demographics each influence a station s predicted price response asymmetry

on the fisher effect abstract we use post war quarterly data for belgium canada denmark france germany greece ireland japan the netherlands the united kingdom and the united states to examine the fisherian link between inflation and short term nominal interest rates in doing so we apply the king and watson 1997 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful fisher effect tests critically depend on such properties we conclude that the data are generally rejecting the fisher effect

do auctions and forced divestitures increase competition evidence for retail gasoline markets to foster competition governments can intervene by auctioning licenses to operate or by imposing divestitures the dutch government has done exactly that organizing auctions to redistribute tenancy rights for highway gasoline stations and imposing divestitures of such stations on the four major companies we evaluate this policy experiment and find that the auctioning of licenses without an obligation to divest has no discernible effect on prices an obligation to divest lowers prices by 1 3 2 3 at divested sites moreover prices decrease by 0 9 1 2 at sites nearby this suggests that the observed price decreases are at least partly due to competitive spillovers

international evidence on the neutrality of money the authors use the backus and kehoe 1992 long low frequency data on real gnp gdp and money for australia canada denmark germany italy japan norway sweden the united kingdom and the united states to examine the long run neutrality and superneutrality of money propositions in doing so they applied the king and watson 1992 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful neutrality tests critically depend on such properties

testing mixed strategy equilibria when players are heterogeneous the case of penalty kicks in soccer the concept of mixed strategy is a fundamental component of game theory and its normative importance is undisputed however its empirical relevance has sometimes been viewed with skepticism the main concern over the practical usefulness of mixed strategies relates to the indifference property of a mixedstrategy equilibrium in order to be willing to play a mixed strategy an agent must be indifferent between each of the pure strategies that are played with positive probability in the mixed strategy as well as any combination of those strategies given that the agent is indifferent across these many strategies there is no bene t to selecting precisely the strategy that induces the opponent to be indifferent as required for equilibrium why an agent would in the absence of communication between players choose exactly one particular randomization is not clear of course whether agents in real life actually play nash equilibrium mixed strategies is ultimately an empirical question the evidence to date on this issue is based almost exclusively on laboratory experiments e g barry o neill 1987 amnon rapoport and richard b boebel 1992 dilip mookherjee and barry sopher 1994 jack ochs 1995 kevin a mccabe et al 2000 the results of these experiments are mixed o neill 1987 concludes that his experimental evidence is consistent with nash mixed strategies but that conclusion was contested by james n brown and robert w rosenthal 1990 with the exception of mccabe et al 2000 which looks at a three person game the other papers generally reject the nash mixedstrategy equilibrium while much has been learned in the laboratory there are inherent limitations to such studies it is sometimes argued that behavior in the simpli ed arti cial setting of games played in such experiments need not mimic real life behavior in addition even if individuals behave in ways that are inconsistent with optimizing behavior in the lab market forces may discipline such behavior in the real world finally interpretation of experiments rely on the assumption that the subjects are maximizing the monetary outcome of the game whereas there may be other preferences at work among subjects e g attempting to avoid looking foolish that distort the results tests of mixed strategies in nonexperimental data are quite scarce in real life the games played are typically quite complex with large strategy spaces that are not fully speci ed ex ante in addition preferences of the actors may not be perfectly known we are aware of only one paper in a similar spirit to our own research using data from classic tennis matches mark walker and john wooders 2001 test whether the probability the player who serves the ball wins the point is equal for serves to the right and chiappori department of economics university of chicago 1126 east 59th street chicago il 60637 levitt department of economics university of chicago groseclose graduate school of business stanford university 518 memorial way stanford ca 94305 the paper was presented at games 2000 in bilbao and at seminars in paris and chicago we thank d braun j m conterno r guesnerie d heller d mengual p reny b salanie and especially j l ettori for comments and suggestions and m mazzocco and f bos for excellent research assistance any errors are ours 1 the theoretical arguments given in defense of the concept of mixed strategy equilibria relate either to puri cation john c harsanyi 1973 or to the minimax property of the equilibrium strategy in zero sum games for recent elaborations on these ideas see authur j robson 1994 and phil reny and robson 2001 2 the ultimatum game is one instance in which experimental play of subjects diverges substantially from the predicted nash equilibrium robert slonim and alvin e roth 1998 demonstrate that raising the monetary payoffs to experiment participants induces behavior closer to that predicted by theory although some disparity persists

the effect of explicit communication on pricing evidence from the collapse of a gasoline cartel we study the collapse of collusion in quebec s retail gasoline market following a competition bureau investigation and show that it involved two empirical regularities high margins and asymmetric price adjustments using weekly station level prices we test whether collusion was successful and whether asymmetric adjustments were part of the cartel s strategy we do so in the markets targeted by the investigation and in markets throughout the province with similar pre collapse pricing cyclical markets our results suggest that stations in both target and cyclical markets adjusted pricing following the announcement margins fell by 30 15 in target cyclical markets and adjustments became more symmetric

long run neutrality high inflation and bank insolvencies in argentina and brazil abstract using long low frequency data on money and output over 1884 1996 for argentina and over 1912 1995 for brazil it is found that money is long run neutral but not long run superneutral with regard to real output a rise in money growth is associated with a decline in output the opposite of the tobin effect the introduction of dummy variables for 1930s or to capture recent periods of financial disruption associated with bank insolvencies does not restore long run superneutrality for either country however results indicate that bank insolvency episodes have a distinct and negative influence on output

price controls and market structure evidence from gasoline retail markets in this paper we study the effect of price floor regulations on the organization and performance of markets the standard interpretation of the effects of these policies is concerned with short run market distortions associated with excess supply since price controls prevent markets from clearing they lead to higher prices while this analysis may be correct in the short run it does not consider the dynamic equilibrium consequences of price controls we demonstrate that price floor regulations can have important long run effects on the the structure of markets by crowding them and creating endogenous barriers to entry for low cost retailers moreover we show that these factors can indirectly lower productivity and possibly even prices we test this in the context of an actual regulation imposed in the retail gasoline market in the canadian province of quebec and show that the policy led to more competition between smaller less efficient stations this resulted in lowered sales and despite the reduction in efficiency did not increase prices

retail price cycles and response asymmetry weekly retail gasoline prices in windsor ontario from 1989 to 1994 appear to respond faster to wholesale price increases than to decreases but exhibit a cyclic pattern inconsistent with a common explanation of response asymmetry i reconcile these observations through a model of price cycles prices on the downward portion of the cycle appear insensitive to costs compared with price increases supporting the theory that price decreases result from battles over market share this pattern resembles a faster response to cost increases than to decreases and the conclusion that asymmetry indicates a role for competition policy may be inappropriate jel classification l13 l71 cycles des prix de detail et reponse asymetrique les prix de detail hebdomadaires de la gazoline a windsor ont entre 1989 et 1994 semblent reagir plus vite aux accroissements qu aux chutes des prix de gros mais suivent un pattern cyclique qui ne semble pas consistant avec l explication traditionnelle en termes de reponse asymetrique l auteur reconcilie ces observations a l aide d un modele de cycle de prix les prix dans la portion descendante du cycle semblent insensibles aux variations de couts par comparaison avec les accroissements de prix ce qui supporte la theorie que les chutes de prix resultent de luttes pour les parts de marche le pattern ressemble a celui declenche par une reponse plus rapide aux augmentations qu aux chutes de couts et la conclusion qui voudrait qu on puisse attribuer le tout a l asymetrie des reponses et que donc une intervention de la politique de la concurrence s impose peut etre inappropriee

submarket dynamics and innovation the case of the us tire industry beginning in 1922 the rate of exit of us tire producers increased sharply and the industry began a severe and protracted shakeout just 5 years earlier the tire industry experienced a surge in entry that led to a rise of over 80 in the number of producers we propose an explanation for this episode based on the idea of industry submarkets which we incorporate in a model of shakeouts we test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire a key innovation we feature in our theory our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and in the process reinforce the advantages of the leading incumbents accentuating the shakeout of producers copyright 2010 the author 2010 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

an empirical study of an auction with asymmetric information this paper examines federal auctions for drain age leases on the outer continental shelf from 1959 to 1969 these are leases that are adjacent to tracts on which a deposit has been discovered the authors find that the data strongly support the hypotheses that neighbor firms are better informed about the value of a lease than nonneighbor firms that neighbor firms coordinate their bidding decisions and that both types of firms bid strategically in accordance with the bayesian nash equilibrium model for first price sealed bid auctions with asymmetric information

a new model for cycles in retail petrol prices abstract this paper explores the way that retail petrol prices may vary in a cyclical way as a result of competitive behavior by petrol retailers when some drivers choose to fill up early when a low petrol price is available we include a stochastic model for an individual driver s use of petrol and consider what happens as the expected future price of petrol is adjusted either according to observed prices or in anticipation of cyclical behavior this model is different from most previous work on petrol price cycles that has focussed on edgeworth cycles

professionals play minimax the implications of the minimax theorem are tested using natural data the tests use a unique data set from penalty kicks in professional soccer games in this natural setting experts play a one shot two person zero sum game the results of the tests are remarkably consistent with equilibrium play in every respect i winning probabilities are statistically identical across strategies for players ii players choices are serially independent the tests have substantial power to distinguish equilibrium play from disequilibrium alternatives these results represent the first time that both implications of von neumann s minimax theorem are supported under natural conditions during the last few decades game theory has contributed to a reshaping of important aspects of the methodology of economics and other social sciences in a large part this is because the language concepts and techniques of non cooperative game theory have become central to many areas of the discipline undoubtedly studying the interaction of ideally rational players greatly aids our understanding of the behaviour of real individuals firms and other agents moreover as kreps 1991 remarks studying the former should aim at understanding the latter the point of game theory is to help economists understand and predict what will happen in economic social and political contexts theoretical contributions should thus feed back to empirical analysis however testing the implications of the theory has proven extremely difficult in the literature the primary reason is that many predictions often hinge on properties of the utility functions and the values of the rewards used even when predictions are invariant over classes of preferences data on rewards are seldom available in natural settings moreover there is often great difficulty in determining strategy sets and in measuring individuals choices effort levels and the incentive structures they face as a result even the most fundamental predictions of game theoretical models have not yet been supported empirically in real situations in view of the substantial problems associated with testing theoretical predictions using natural data many authors have been compelled to test them in experimental settings interestingly enough despite the controlled structure of experiments the results of many experiments during the last few decades typically reject the assumption that subjects are playing according to the theoretical implications of equilibrium play for instance a number of experiments have evaluated the empirical validity of von neumann s minimax theory for two person zero sum games a theory that occupies a central position in our understanding of strategic situations the results have been mixed and are often rather negative see for instance brown and rosenthal 1990 rapoport and boebel 1992 camerer 2003 and the references therein

demand heterogeneity and technology evolution implications for product and process innovation the evolution of technology has been a central issue in the strategy and organizations literature however the focus of much of this work has been on what is essentially the supply side of technical change the evolution of firm capabilities we present a demand based view of technology evolution that is focused on the interaction between technology development and the demand environment in which the technology is ultimately evaluated we develop a formal computer simulation model that explicitly considers the influence of heterogeneity in market demand the presence of consumers with different needs and requirements on firms innovation choices the model is used to examine the dynamics of product and process innovation utterback and abernathy 1975 the analysis reveals that demand heterogeneity offers an alternative to supply side explanations of the technology life cycle further by considering the implications of decreasing marginal utility from performance improvements the model highlights the role of technologically satisfied consumers in shaping innovation incentives and suggests a rationale for a new stage in the technology life cycle characterized by increasing performance at a stable price the stage has not yet been treated formally in the literature but is widely observed most prominently in digital and information based technologies

a simple spatial model for edgeworth cycles abstract maskin and tirole 1998 formalise edgeworth s 1925 model of a dynamic equilibrium between two players where prices increase sharply and decrease slowly the edgeworth cycle here we present an application of the model showing how edgeworth cycles might arise in a marketplace where spatial competition is important we illustrate the approach using the example of retail gasoline markets where edgeworth cycles have been widely observed

shell shocked the impact of foreign entry on the gasoline retail market in china abstract since joining the wto in 2001 restrictions on foreign entry into china s energy sector have been steadily reduced we investigate the impact of royal dutch shell s entry on the pricing behavior of three varieties of gasoline in the retail market of china using a difference in difference pairwise estimator we show that a year after entry the average absolute price differential of gasoline between two cities increased by around 1 4 before falling the following year in other words shell s entry caused prices to diverge but only for a short period of time the largest price effect was found for highly refined fuels in western cities similar results are found when we examine the effect of entry of the top four foreign retailers policy implications are discussed

monetary aggregation and the neutrality of money zisimos koustas this article tests the long run neutrality of money proposition using quarterly u s data over the period from 1960 1 to 1996 2 and the methodology suggested by king and watson 1997 paying particular attention to the integration and cointegration properties of the variables comparisons are made among simple sum divisia and currency equivalent ce monetary aggregates using the anderson et al 1997a 1997b series of divisia and ce monetary aggregates jel e40 e50 c32 i introduction the aim of this article is to investigate a long run question about the role of money in monetary policy whether changes in the conduct of monetary policy influence the growth rate of output as lucas 1996 p 661 puts it so much thought has been devoted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago but this is not the case in fact recently fisher and seater 1993 and king and watson 1997 contribute to the literature on testing quantity theoretic propositions by developing tests using recent advances in the theory of nonstationary regressors and show that meaningful long run neutrality and superneutrality tests can only be constructed if both nominal and real variables satisfy certain nonstationarity conditions and that much of the older literature violates these requirements in this paper in the spirit of serletis and koustas 1998 and koustas and serletis 1999 we test the long run neutrality and superneutrality of money using the king and watson 1997 methodology paying particular attention to the gains that can be achieved by rigorous use of microeconomic and aggregation theoretic foundations in the construction of money measures this is accomplished by making comparisons among simple sum divisia and currency equivalent ce monetary aggregates using the anderson et al 1997a 1997b data see anderson et al 1997a 1997b for more details we also pay attention to the integration and cointegration properties of the variables because meaningful neutrality and superneutrality tests critically depend on such properties the organization of the article is as follows the next section briefly discusses the problem of the definition aggregation of money in section iii we investigate the univariate time series properties of the variables as these properties are relevant for some problems of potential importance in the practical conduct of monetary policy as well as for estimation and hypothesis testing in section iv we test the long run neutrality and superneutrality of money propositions using the king and watson 1997 structural bivariate autoregressive methodology paying particular attention to the integration and cointegration properties of the data the final section concludes ii the many kinds of money the monetary aggregates currently in use by the federal reserve are simple sum indices in which all monetary components are assigned a constant and equal unitary weight this index is m in 1 m sigma sup n sub i 1 x sub i where x sub i is one of the n monetary components of the monetary aggregate m this summation index implies that all monetary components contribute equally to the money total and it views all components as dollar for dollar perfect substitutes there is no question that such an index represents an index of the stock of nominal monetary wealth but cannot in general represent a valid structural economic variable for the services of the quantity of money over the years there has been a steady stream of attempts at properly weighting monetary components within a simple sum aggregate with no theory however any weighting scheme is questionable barnett 1980 derived the theoretical linkage between monetary theory and aggregation and index number theory he applied economic aggregation and index number theory and constructed monetary aggregates based on diewert s 1976 class of superlative quantity index numbers

retail gasoline price dynamics and local market power using monthly data from the 48 contiguous states except nevada for the 1988 2002 period it is shown that retail gasoline prices respond faster to wholesale price increases than to equivalent wholesale price decreases moreover markets with high average retail wholesale margins experience a slower adjustment and a more asymmetric response since gasoline is the only variable input average margins in a state likely reflect the degree of retail market power this suggests that sticky prices and response asymmetries in the gasoline market are at least partially a consequence of retail market power

demand as a source of entry and the survival of new semiconductor firms the performance of new companies coming from the demand side of the semiconductor industry is examined and compared with the performance of entrants coming from the semiconductor industry itself and with other types of entrants by using a dataset of more than 1000 start ups founded between 1997 and 2007 around the world the article shows that start ups with a background in application sectors survive longer than spin offs from the semiconductor industry itself or than inexperienced firms founded by people previously active in university or other industries these results point strongly to the major role of demand not just as a source of innovations but also as a major driver of entry into an industry and of successful performance of new firms copyright 2010 the author 2010 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

identifying and characterising price leadership in british supermarkets price leadership is a concept that lacks precision we propose a deliberately narrow falsifiable definition then develop it illustrate its feasibility and test it using the two leading british supermarket chains we find both firms engaging in leading prices upward over a range of products with the larger being initially more dominant but the smaller increasing leadership activity to take overall leadership over time however more price leadership events are price reductions than price increases consistently led by the smaller firm nevertheless the increases are of larger monetary amounts than the falls so average basket price increases over time

high frequency quoting short term volatility in bids and offers at subsecond horizons bids and offers in u s equity markets are more volatile than what would be implied by long term fundamentals to assess costs and consequences this paper suggests that traders random delays latencies interact with quote volatility to generate execution price risk and relative latency costs analysis of the behavior of quote setters suggests that this volatility is more likely to arise from recurrent cycles of undercutting similar to the edgeworth cycles found in product markets rather than mixed strategies of limit order placement

a theory of dynamic oligopoly ii price competition kinked demand curves and edgeworth cycles we provide game theoretic foundations for the classic kinked demand curve equilibrium and edgeworth cycle we analyze a model in which firms take turns choosing prices the model is intended to capture the idea of reactions based on short run commitment in a markov perfect equilibrium mpe a firm s move in any period depends only on the other firm s current price there are multiple mpe s consisting of both kinked demand curve equilibria and edgeworth cycles in any mpe profit is bounded away from the bertrand equilibrium level we show that a kinked demand curve at the monopoly price is the unique symmetric renegotiation proof equilibrium when there is little discounting we then endogenize the timing by allowing firms to move at any time subject to short run commitments we find that firms end up alternating thus vindicating the ad hoc timing assumption of our simpler model we also discuss how the model can be enriched to provide explanations for excess capacity and market sharing keiiwords tacit collusion markov perfect equilibrium kinked demand curve edgeworth cycle excess capacity market sharing endogenous timing

price uniformity and competition in a retail gasoline market abstract the purpose of this paper is to examine the price uniformity prediction of the competitive market model of retail gasoline pricing using station specific data on gasoline prices from vancouver bc the specified econometric model also generates results that describe the actual pricing pattern in the market and that permit an assessment of tacit collusion and imperfectly competitive non collusive competition as possible alternative explanations for the results contrary to the competitive model variables measuring brand effects spatial and product characteristics local market structure and time series variation do affect the probability that a station matches the market mode price

estimating retail gasoline price dynamics the effects of sample characteristics and research design the study shows that much of the variation in the findings of the literature on retail gasoline price dynamics is systematic rather than sample variation from using different data estimates of pass through rates depend systematically on research design and features of the data such as the sampling frequency the choice of upstream price whether taxes are included or not the sample length and the postulated lag structure in addition there are systematic differences between time periods and countries using a 20 year long dataset of 28 european union countries we quantify the extent of estimate variation that arises from the choice of data structure from that arising from temporal and country heterogeneity and sampling variation we also show that country heterogeneity itself has systematic components with wealthier countries experiencing slower adjustments our results inform the interpretation of results on pass through rates derived from error correction models they are also of relevance for the broader literature estimating the transmission of price shocks in the economy

a theory of dynamic oligopoly iii cournot competition abstract we study the markov perfect equilibrium mpe of an alternating move infinite horizon duopoly model where the strategic variable is quantity we exhibit a pair of difference differential equations that when they exist differentiable mpe strategies satisfy for quadratic payoff functions we solve these equations in closed form and demonstrate that the mpe corresponding to the solution is the limit of the finite horizon equilibrium as the horizon tends to infinity we conclude with a discussion of adjustment costs and endogenization of the timing

gas wars retail gasoline price fluctuations this paper examines the retail gasoline price fluctuations known as gas wars weekly prices for the los angeles area were examined for the period from january 2 1968 through december 23 1975 the observed fluctuations were remarkably regular and apparently large ly predictable the data appear consistent with the recent game theory model of e maskin and j tirole in which competing firms produce edgeworth cycles by undercutting each other and eventually relenting copyright 1993 by mit press

edgeworth price cycles evidence from the toronto retail gasoline market i exploit a new station level twelve hourly price dataset to examine the strong retail price cycles in the toronto gasoline market the cycles appear similar to theoretical edgeworth cycles strongly asymmetric tall rapid and highly synchronous across stations i test a series of predictions made by the theory about how firm behaviors would differentially evolve over the path of a cycle the evidence is consistent with the existence of edgeworth cycles and inconsistent with competing hypotheses while the cycles are an interesting phenomenon for study in their own right the evidence has important policy and welfare implications

marginal reductions in vehicle emissions under a dual blend ethanol mandate evidence from a natural experiment among the many reasons policy makers across the world have sought to supplement fuel supplies with ethanol blended fuels are the cited environmental benefits that come with replacing a fossil fuel with a cleaner burning alternative dual blend ethanol mandates in which multiple ethanol blends are simultaneously available are one way policy markers can move forward with more aggressive mandates more quickly the recent ethanol mandate in the state of new south wales australia offers a unique natural experiment to quantify the potential environmental benefits and costs of a dual blend ethanol policy this paper estimates the impact on carbon dioxide co2 emissions from road activity that are attributable to the implementation of the new south wales ethanol requirements we find that there was a decrease in emissions due to the policy but that the decrease is relatively minor given the size of the market and that it comes at a high cost the cost was over 1200 per ton of carbon to reduce gasoline emissions by just 1 2

asymmetric price adjustments in us gasoline markets impacts of spatial dependence on the rockets and feathers hypothesis gasoline retail prices show sometimes wild asymmetric fluctuations over time we explore the impact of spatial dependence on gasoline retail price formation by using for the first time an asymmetr

gasoline price dispersion and consumer search evidence from a natural experiment the vast majority of empirical studies examining the link between consumer search and price dispersion focus on how changes in consumer search impact price dispersion this article does the reverse it examines how a shock to price dispersion impacts consumer search a direct measure of search is used and an exogenous shock to price dispersion is found in a refinery fire that caused decades old retail gasoline price cycles and the nonlinear high frequency price dispersion pattern generated by them to stop identifying effects from this shock the results show a substantial response of consumer search to changes in price dispersion

austrian style gasoline price regulation how it may backfire in january 2011 a price regulation was established in the austrian gasoline market which prohibits firms from raising their prices more than once per day similar restrictions have been discussed in new york state and germany despite their intuitive appeal this article argues that austrian type policies may actually harm consumers in a two period duopoly model with consumer search i show that under the regulation firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged this implies that as some consumers find it optimal to delay their purchase due to expected price savings but find it inconvenient to do so a friction is introduced that decreases net consumer surplus in the market

an alternating move price setting duopoly model with stochastic costs abstract this paper examines an alternating move price setting duopoly model in which marginal costs are stochastic without persistence it is shown that provided marginal costs do not fluctuate excessively equilibria in which firms match the current monopoly price do not exist by contrast equilibria in which firms always match their rival along the equilibrium path do exist in these equilibria deviations off of the equilibrium path result in extended price wars in which firms repeatedly undercut each other finally examples in which such price wars are observed in equilibrium are constructed

when do consumers search this paper provides empirical evidence relating search to price movements we measure consumer search directly from traffic statistics for web sites that report gasoline prices we show empirically that consumers search more as prices rise than they do when prices fall asymmetric search patterns have consequences for price behavior our findings indicate that retail margins are squeezed by increased search in addition we show that there is more price dispersion when prices are falling than when prices are either stable or rising our results provide a search based explanation for the rockets and feathers phenomenon of asymmetric price adjustment

consumer and competitor reactions evidence from a field experiment abstract in response to a price change by a single seller it is common for the density of sellers in the market to influence both the quantity response of consumers and the price response of other sellers using field experiment data collected around a series of exogenously imposed price changes we find that an individual retailer with a larger number of competitors faces a more responsive demand this finding is fundamental to a predicted inverse relationship between market prices and the number of competitors we also examine the reaction of rival stations to exogenous price changes and find that the magnitude of a competitor s response is inversely related to the density of stations in the market

the 1 5th mover advantage there has been much discussion about the timing of moves in games however one assumption usually goes unquestioned namely that of an irrevocable commitment of the first mover in many cases this is not realistic since final commitments are often preceded by actions that are binding only to a limited degree partial commitments an example is the announcements of price changes i analyze a game in which the degree of a partial commitment is endogenized in the case of strategic complements a player profitably makes use of the possibility to commit partly she chooses a role somewhere between first and second mover which gives her a 1 5th mover advantage

divisia monetary aggregates the great ratios and classical money demand functions king et al 1991 evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar u s macroeconomic data they find a common stochastic trend in a three variable system that includes output consumption and investment but the explanatory power of the common trend drops significantly when they add money balances and the nominal interest rate in this paper we revisit the cointegration tests in the spirit of king et al using improved monetary aggregates whose construction has been stimulated by the barnett critique we show that previous rejections of the balanced growth hypothesis and classical money demand functions can be attributed to mismeasurement of the monetary aggregates

forecasting gasoline prices in the presence of edgeworth price cycles abstract forecasting is a central theme in economics the ability to forecast prices enables economic agents to make optimal decisions for the present and future in this article we investigate if and how gasoline prices can be forecast in retail gasoline markets that are subject to high frequency asymmetric price cycles known as edgeworth price cycles we examine a series of purchase timing decision rules and a series of feasible forecasting algorithms for updating those rules over time we find that in the presence of cycles agents in our five australian markets can systematically reduce purchase prices below market average the equivalent of 11 to 15 u s cents per gallon using simple decision rules and feasible forecasting algorithms

a comparison of regular price cycles in gasoline and liquefied petroleum gas abstract regular and asymmetric gasoline price cycles are observed in a number of countries while most studies found that such price cycles are well characterized by the theoretical edgeworth price cycle some studies suggest alternative explanations this paper contributes to this literature by being the first to compare regular price cycles in a nongasoline product liquefied petroleum gas lpg with gasoline price cycles our main finding is that lpg price cycles in the perth area of western australia are much longer and more asymmetric than gasoline price cycles in the same market this finding is consistent with noel s 2008 prediction that edgeworth cycles are longer and more asymmetric when aggregate demand is more elastic the aggregate demand for lpg is presumably more elastic than the demand for gasoline

aggregate pattern of time dependent adjustment rules ii strategic complementarity and endogenous nonsynchronization abstract this paper provides an explanation for an important institutional feature of staggered time dependent adjustment rules assumed in a number of macroeconomic models it identifies strategic complementarity as the crucial factor leading to nonsynchronized decisions in a game theoretic framework the paper first shows that nonsynchronization is the equilibrium outcome in an infinite horizon game in which strategic complementarity is present whether the players choose predetermined or fixed actions by pursuing the interpretation of a nonsynchronized move dynamic game as a series of games with symmetric stackelberg leadership it is further suggested that the relationship between strategic complementarity and the benefit to the stackelberg follower provides the insight to the game theoretic explanation of nonsynchronization the results of this paper reveal a link between strategic complementarity and nonsynchronization two important macroeconomic features journal of economic literature classification numbers e30 l16

the speed of gasoline price response in markets with and without edgeworth cycles retail gasoline prices are known to respond fairly slowly to wholesale price changes this does not appear to be true for markets with edgeworth price cycles recently many retail gasoline markets in the midwestern u s and in other countries have been shown to exhibit price cycles in which competition generates rapid cyclical retail price movements we show that cost changes in cycling markets are passed on 2 to 3 times faster than in markets without cycles we argue that the constant price movement inherent within the edgeworth cycle eliminates price frictions and allows firms to pass on cost fluctuations more easily

do edgeworth price cycles lead to higher or lower prices abstract a recent literature seeks to understand the causes of the high frequency asymmetric retail price cycles observed in many retail gasoline markets however much less attention has been given to the effects of the cycles in particular whether the cycles lead to higher or lower prices and margins the leading theory for the underlying cause of the price cycles edgeworth price cycles is silent on the issue the challenge in addressing this most important question has been the difficulty in isolating cycle effects from other confounding factors especially market structure in this article i exploit a unique natural experiment to isolate the effect of cycles a refinery fire that in a matter of days halted cycles that had previously persisted for decades i find that edgeworth price cycles lead to lower prices and lower margins i conclude with implications for competition policy

mixed strategy in oligopoly pricing evidence from gasoline price cycles before and under a timing regulation this paper studies oligopoly firms dynamic pricing strategies in a gasoline market before and after the introduction of a unique law that constrains firms to set price simultaneously and only once per day the observed gasoline pricing behavior both before and under the law is well captured by the edgeworth price cycle equilibrium in the maskin and tirole dynamic oligopoly model my results highlight the importance of price commitment in tacit collusion i also find evidence that the price leadership outcome under the law is better predicted by mixed strategies play than by alternative hypotheses

asymmetric responses in the timing and magnitude of changes in australian monthly petrol prices to daily oil price changes abstract this article investigates whether uncompetitive pricing tactics are being employed in the retail petrol market in australia through examining the effect of a change in daily oil prices on monthly petrol prices to do so we incorporate asymmetry into the coefficients of a normalised beta weighting function within an asymmetric mixed data sampling amidas framework this enables us to examine both the timing and the lagged marginal effects of a change in retail petrol prices in response to a change in the oil price we find evidence of asymmetries in both the timing and magnitude of retail petrol prices to a change in the oil price specifically we find that while price falls are slowly and symmetrically passed onto consumers price increases are more delayed but higher in intensity over time depending on the capital city when retailers eventually do increase petrol prices in response to an oil price rise with delay the price rise is between 2 1 and 3 4 times more than when retailers reduce petrol prices in response to a fall in the price of oil this finding is consistent with retailers delaying substantial petrol price rises in order to mask the existence of uncompetitive practices

new evidence on asymmetric gasoline price responses in a 1997 paper borenstein cameron and gilbert bcg claim that gasoline prices rise quickly following an increase in the price of crude oil but fall slowly following a decrease this note estimates an error correction model with daily spot gasoline and crude oil price data over the period 1985 1998 and finds no evidence of asymmetry in wholesale gasoline prices the sources of the difference in results are twofold first we use the standard engle granger two step estimation procedure whereas bcg used a nonstandard estimation methodology second even using bcg s nonstandard specification the use of daily rather than weekly data yields little evidence of price asymmetry

retail gasoline price cycles across spatially dispersed gasoline stations abstract studies of volatility in retail gasoline prices have used either weekly averages of the prices at a small subset of stations in a city or daily observations on prices at a small number of stations this paper uses daily observations on station specific prices within a large canadian metropolitan area to address whether weekly average prices or prices for a small number of stations provide an accurate description of pricing in a market with volatility this paper considers whether researchers using restricted data can draw meaningful conclusions about the appropriate theoretical model and the policy response to allegations of anticompetitive behavior

do retail gasoline prices respond asymmetrically to cost shocks the influence of edgeworth cycles asymmetric price cycles similar to edgeworth cycles are appearing in increasingly many retail gasoline markets in the united states and worldwide the asymmetry in the cycles can give rise to a finding of asymmetric price responses to cost shocks asymmetric passthrough this article estimates asymmetric passthrough for the market of toronto which exhibits cycles and decomposes it into two components that part explainable by the cycles and that part driven by other unknown sources significant asymmetric passthrough is found with increases passed through more quickly than decreases a significant cause of the finding is the presence of the cycles themselves

regulated and unregulated substitutes aversion effects of an ethanol mandate i introduction regulation is a tool policymakers can use to steer markets away from private outcomes deemed to be socially suboptimal or inefficient regulations work either by altering market incentives or changing consumers choice sets as they attempt to reshape or restrict private market equilibria they can sometimes lead to unexpected consumer reactions and unanticipated consequences such as higher consumer costs or reduced effectiveness in meeting goals the extent to which a regulation can have adverse and unanticipated consequences depends on the nature and design of the regulation in this article we highlight a case where the design of an unpopular and hurried regulation led to especially adverse consequences the case is that of the recent ethanol mandate in the state of new south wales nsw australia ethanol mandates have become popular with legislators over the past decade and currently 62 countries have some form of one grfa 2014 a typical mandate requires producers to blend a certain percentage or certain volume of ethanol into the overall supply of gasoline the u s mandate for example requires 18 2 billion gallons of renewable fuels primarily ethanol be blended into the gasoline supply in 2014 up from 16 6 billion in 2013 epa 2013 the european union mandate requires 5 75 renewable fuels in gasoline by 2010 and 10 by 2020 eu 2003 2009 ethanol mandates have been controversial however griffin 2013 grafton kompas and van long 2012 rodriguez et al 2009 serra and zilberman 2013 westbrook et al 2014 and others proponents argue they help slow greenhouse gas accumulation promote renewable energy and reduce dependence on foreign oil they also point out benefits to the domestic farming and ethanol production industries which is sometimes a goal in itself critics on the other hand question their environmental value the need for fossil fuel replacement the lower energy yield and potential for food price inflation when crops grown for food are converted to ethanol use carter rausser and smith 2013 1 they also point out that ethanol blends tend to be more expensive for consumers on an energy adjusted basis than unblended gasoline mandates tend to be on net unpopular with consumers 2 an important consideration when transitioning to a new ethanol mandate or a higher ethanol blend under an existing mandate is ensuring compatibility with the vehicle fleet ethanol is an alcohol and in higher concentrations can be corrosive to engine valves seals and gaskets in older vehicles not designed with ethanol s properties in mind an option many jurisdictions have used in implementing ethanol mandates is to limit the ethanol blend to a level tested and widely believed to be compatible with the vast majority of vehicles on the road in the united states and canada for example a 10 blend has been implemented almost universally while a 5 blend has been used universally in many european countries if regulators instead deem that higher blends are desirable another option is to mandate that newly built vehicles be compatible with the new higher blend and then implement the fuel mandate once the vehicle fleet has largely turned over however vehicle turnover can take decades and this approach has not been as popular with regulators a third option that has found some favor is to introduce a higher ethanol blend that a majority of vehicles can use while still making the previous possibly ethanol free blend available as long as there are those who still need it in principle this dual blend approach promises to accommodate more aggressive ethanol mandates and lead to more ethanol in the fuel supply more quickly however we show that this kind of dual blend or selective mandate in its efforts to hurry ethanol blending beyond the capabilities of the vehicle fleet as a whole or beyond the confidence of consumers in its safety can have severe negative consequences

vertical control and price cycles in gasoline retailing we examine norwegian gasoline pump prices using daily station specific observations from 2003 to 2006 the four big gasoline companies use a vertical restraint that is adopted industry wide labeled price support this moves price control from the hands of independent retailers into the hands of the headquarters retail gasoline prices follow a fixed weekly pattern where we observe de facto simultaneous decision making by the headquarters without knowledge of their rivals prices when every monday around noon they decide to increase pump prices to the same level the price level on mondays corresponds to the recommended prices published by the headquarters of the gasoline companies

demand dynamics with socially evolving preferences in this work we first identify a few stylized facts concerning microconsumption acts second building on them we develop a simple model of boundedly rational consumers who endogenously evolve their preferences via both innovation and social imitation third we explore some statistical properties of the demand patterns generated by the model which despite its simplicity are surprisingly in line with the empirical evidence these results we suggest bring encouraging support to microfoundations of demand theory based on cognitive and behavioral foundations more in tune with the psychological and sociological evidence based on heterogeneous agents who are much less rational and much more social than in standard theory and who collectively discover along the way what they like within a growing universe of available commodities

market structure and innovation a survey economics we all recite deals with allocation of limited resources towards satisfaction of unlimited wants resources are typically identified as land labor and capital plus a technology that determines their transformation into consumer goods disparity between the available goods and services and the desired gives rise to scarcity and the question of what how and for whom to produce the focus then shifts to description and evaluation of alternative resource allocation mechanisms for making the choices the pareto criterion by which an allocation of resources is deemed efficient if any reallocation improving the position of some individual worsens the position of others is a commonly employed gauge of a mechanism s performance in the absence of externalities increasing returns to scale and uncertainty a perfectly competitive market system yields a pareto optimal allocation of resources this underlies the view that individual self interest is compatible with society s interest the further conclusion that pareto optimality may not be achieved via the market system in the presence of monopoly elements provides an economic rationale for antitrust laws the objective of a resource allocation mechanism appears to be according to the analysis described above to make the best of available resources the alternative objective of relaxing constraints through expanding the resource base or developing new technology seems to be beyond its scope thus until rather recently technical advance had been regarded in the mainstream of economic theory as unmotivated by the quest for profits and substantially unaffected by resource allocation instead as j schmookler observed technology had been viewed as a parameter like the weather affecting the outcome of resource allocations but itself unaffected by them 84 1965 evidence that technological progress has significantly contributed to growth in productivity together with a substantial increase in research and development activity largely financed by government and carried out by industry see f machlup 51 1962 may have spurred reconsideration of this view once technical advance is regarded as an economic variable it is natural to in

price leadership and unequal market sharing collusion in experimental markets abstract we consider experimental markets of repeated homogeneous price setting duopolies we investigate the effect on collusion of sequential versus simultaneous price setting we also examine the effect on collusion of changes in the size of each subject s market share in case both subjects set the same price our results show that sequential price setting compared with simultaneous price setting facilitates collusion if subjects have equal market shares or if the follower has the larger market share with sequential price setting we find more collusion if subjects have equal market shares rather than unequal market shares we observe more collusion if the follower has the larger market share than if the follower has the smaller market share

endogenous price commitment sticky and leadership pricing evidence from the italian petrol market this article studies dynamic pricing strategies in the italian gasoline market before and after the market leader unilaterally announced its commitment to adopt a sticky pricing policy using daily italian firm level prices and weekly average eu prices we show that the effect of the new policy was twofold first it facilitated price alignment and coordination on price changes after the policy change the observed pricing pattern shifted from cost based to sticky leadership pricing second using a dif in dif estimation and a synthetic control group we show that the causal effect of the new policy was to significantly increase prices through sticky leadership pricing our paper highlights the importance of price commitment by a large firm in order to sustain tacit collusion

price leadership and coordination in retail gasoline markets with price cycles abstract this study examines the coordination mechanism used by gasoline stations in the midwestern united states where prices exhibit highly cyclical fluctuations known as edgeworth cycles stations in these markets repeatedly coordinate large marketwide price increases following periods of aggressive price undercutting by studying these periodic price jumps both over time and across cities i find that a particular retail chain in each city acts as a price leader initiating each price restoration the leader signals the new price level to competitors by simultaneously jumping prices at all its stations to a single price competitors follow quickly with a large majority of stations jumping to the exact same price within a 24 hour period the characteristics of the leading firms and the nature of observed price coordination suggest that successful price jumps may be facilitated by the existence of a retailer controlling the prices of a significant number of stations in a city identifying the important role of these firms in the market contributes to a broader understanding of price leadership and coordination and highlights another potential reason why price cycles exist in some in retail gasoline markets and not others

a theory of endogenous commitment commitment is typically modelled by assigning to one of the players the ability to take an initial binding action the weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed as it is assumed this paper presents a framework in which commitment power arises endogenously from the fundamentals of the model we construct a finite dynamic game in which players are given the option to change their minds as often as they wish but pay a switching cost if they do so we show that for games with two players and two actions there is a unique subgame perfect equilibrium with a simple structure this equilibrium is independent of the order and timing of moves and is robust to other protocol specifications moreover despite the perfect information nature of the model and the costly switches strategic delays may arise in equilibrium the flexibility of the model allows us to apply it to various environments in particular we study an entry deterrence situation its equilibrium is intuitive and illustrative of how commitment power is endogenously determined copyright 2008 wiley blackwell

centrality and pricing in spatially differentiated markets the case of gasoline we highlight the importance of centrality for pricing firms characterized by a more central position in a spatial network are more powerful in terms of having a stronger impact on their competitors prices and on equilibrium prices these propositions are derived from a simple theoretical model and investigated empirically for the retail gasoline market of vienna austria we compute a measure of network centrality based on the locations of gasoline stations in the road network results from a spatial autoregressive model show that prices of gasoline stations are more strongly correlated with prices of central competitors

hidden regimes and the demand for carbon dioxide from motor gasoline abstract perhaps the most tactile source of anthropogenic carbon dioxide co2 emissions stem from vehicle use because consumers are well aware of their price and quantity decisions it is likely that consumer demand for co2 emissions from motor gasoline are quite responsive to the overall state of the economy using a structurally identified markov switching demand model i find that co2 emissions respond asymmetrically to changes in income and the price of gasoline in expansionary and contracting states of the economy the findings of this paper indicate that flexible policy instruments have the potential to mitigate undue burden on consumers and producers compared to their static counterparts

an alternative semiparametric approach to the modelling of asymmetric gasoline price adjustment in this paper we revisit the wholesale and retail gasoline price adjustments to fluctuations in the input cost prices for a monthly panel dataset of 48 us states over the period 1994 to 2011 in doing so we employ for the first time in the empirical literature nonlinear semiparametric models with local generalized method of moments gmm estimators our findings indicate that wholesale and retail gasoline prices adjust more rapidly in an upward than a downward direction confirming the rockets and feathers hypothesis

edgeworth cycles revisited some gasoline markets exhibit remarkable price cycles where price spikes are followed by a series of small price declines a pattern consistent with a model of edgeworth cycles described by maskin and tirole we extend the model and empirically test its predictions with a new dataset of daily station level prices in 115 us cities consistent with the theory and often in contrast with previous empirical work we find the least and most concentrated markets are much less likely to exhibit cycling behavior both within and across cities areas with more independent convenience store gas stations are also more likely to cycle

investigating income effects in scanner data do gasoline prices affect grocery purchases there is much discussion in the popular press about how consumers adjust their purchase decisions for items from lattes and restaurant meals to which type of meat to purchase for dinner during times of rising fuel prices 1 while analysts ascribe declines in retail sector profits when fuel prices rise to changes in demand elasticity most empirical analysis of consumer choice for such daily items abstracts from inter temporal income effects instead fuel prices are used in demand estimation as exogenous shifters of production costs and therefore valid instruments for identifying demand parameters though introspection and popular press suggest that sharp changes in fuel costs may shift price sensitivity in nonfuel purchases through an income effect little empirical work has been done to estimate or quantify this effect 2

dealing temporary price cuts by seller as a buyer discrimination mechanism this paper is concerned with temporary price cuts deals sales and specials as a mechanism for the seller to price discriminate between buyers with different intensities of demand we analyze why a seller offers such price cuts which buyers take advantage of them and what the parameters are that determine the amount and frequency of the discount offered in the remainder of this section we briefly review the literature on price deals 1 in section ii simple models of buyer and seller behavior are developed and we show why and how a seller adopts a dealing strategy section iii summarizes the key implications of the model and indicates how the price discrimination hypothesis could be tested in practice section iv suggests possible extensions of the model finally section v gives our conclusions in the marketing literature the issue of who is deal prone has been extensively researched an explanation for temporary price cuts usually called deals sales or specials is provided we hypothesize that they are a mechanism that discriminates between more intense and less intense demanders we further hypothesize a positive relationship between demand elasticity and holding costs buyers with more intense demand with high holding costs are those who will be buying the product at its regular price the low holdingcost buyers take advantage of deals by forward buying the model is applicable to three relationships 1 manufacturer reseller where the reseller may be a wholesaler or a retailer 2 resellerreseller for example wholesaler retailer and 3 retailer consumer we are grateful to michael mussa and albert madansky for their comments we also benefited from comments made by the marketing faculty of the wharton school at a seminar where an earlier version of this paper was presented neil beckwith in particular is acknowledged 1 for a more detailed review of deals and similar pricecutting mechanisms e g mail in rebates cents off labels coupons etc see narsimhan 1982 chan 2 journal of business 1985 vol 58 no 3 1985 by the university of chicago all rights reserved 0021 9398185 5803 0004 01 50

do gasoline prices respond asymmetrically to crude oil price changes the authors test and confirm that retail gasoline prices respond more quickly to increases than to decreases in crude oil prices among the possible sources of this asymmetry are production inventory adjustment lags and market power of some sellers by analyzing price transmission at different points in the distribution chain the authors attempt to shed light on these theories spot prices for generic gasoline show asymmetry in responding to crude oil price changes which may reflect inventory adjustment effects asymmetry also appears in the response of retail prices to wholesale price changes possibly indicating short run market power among retailers