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 Québec 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."> 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 Québec 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."> 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 con">
Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/bla/jindec/v63y2015i1p152-198.html
   My bibliography  Save this article

Price Controls and Market Structure: Evidence from Gasoline Retail Markets

Author

Listed:
  • Juan Esteban Carranza
  • Robert Clark
  • Jean-François Houde
Abstract
type="main"> 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 Québec 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.

Suggested Citation

  • Juan Esteban Carranza & Robert Clark & Jean-François Houde, 2015. "Price Controls and Market Structure: Evidence from Gasoline Retail Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 63(1), pages 152-198, March.
    • Handle: RePEc:bla:jindec:v:63:y:2015:i:1:p:152-198
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1111/joie.12071
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert Clark & Jean-Fran?ois Houde, 2013. "Collusion with Asymmetric Retailers: Evidence from a Gasoline Price-Fixing Case," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 97-123, August.
    2. C. Robert Clark, 2007. "Advertising Restrictions and Competition in the Children’s Breakfast Cereal Industry," Journal of Law and Economics, University of Chicago Press, vol. 50(4), pages 757-780.
    3. James J. Heckman & Hidehiko Ichimura & Petra E. Todd, 1997. "Matching As An Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(4), pages 605-654.
    4. Robert Gagné & Simon van Norden & Bruno Versaevel, 2003. "Testing Optimal Punishment Mechanisms Under Price Regulation: the Case of the Retail Market for Gasoline," CIRANO Working Papers 2003s-57, CIRANO.
    5. Brown, Jennifer & Hastings, Justine & Mansur, Erin T. & Villas-Boas, Sofia B., 2008. "Reformulating competition Gasoline content regulation and wholesale gasoline prices," Journal of Environmental Economics and Management, Elsevier, vol. 55(1), pages 1-19, January.
    6. Pierre Biscourp & Xavier Boutin & Thibaud Vergé, 2013. "The Effects of Retail Regulations on Prices: Evidence from the Loi Galland," Economic Journal, Royal Economic Society, vol. 123(12), pages 1279-1312, December.
    7. Joel Waldfogel & Jeffrey Milyo, 1999. "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," American Economic Review, American Economic Association, vol. 89(5), pages 1081-1096, December.
    8. Robert Clark & Jean-François Houde, 2014. "The Effect of Explicit Communication on pricing: Evidence from the Collapse of a Gasoline Cartel," Journal of Industrial Economics, Wiley Blackwell, vol. 62(2), pages 191-228, June.
    9. Alberto Abadie & David Drukker & Jane Leber Herr & Guido W. Imbens, 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LP, vol. 4(3), pages 290-311, September.
    10. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
    11. Michael D. Noel, 2007. "Edgeworth Price Cycles, Cost-Based Pricing, and Sticky Pricing in Retail Gasoline Markets," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 324-334, May.
    12. Jean-Francois Houde, 2012. "Spatial Differentiation and Vertical Mergers in Retail Markets for Gasoline," American Economic Review, American Economic Association, vol. 102(5), pages 2147-2182, August.
    13. Robert H. Porter, 1983. "A Study of Cartel Stability: The Joint Executive Committee, 1880-1886," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 301-314, Autumn.
    14. Meghan R. Busse & Nathaniel O. Keohane, 2007. "Market effects of environmental regulation: coal, railroads, and the 1990 Clean Air Act," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1159-1179, December.
    15. John Asker & Heski Bar-Isaac, 2010. "Exclusionary Minimum Resale Price Maintenance," NBER Working Papers 16564, National Bureau of Economic Research, Inc.
    16. Castanias, Rick & Johnson, Herb, 1993. "Gas Wars: Retail Gasoline Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 171-174, February.
    17. Pierre Biscourp & Xavier Boutin & Thibaud Vergé, 2013. "The Effects of Retail Regulations on Prices: Evidence from the Loi Galland," Economic Journal, Royal Economic Society, vol. 123(12), pages 1279-1312, December.
    18. Thomas J. Holmes, 2011. "The Diffusion of Wal‐Mart and Economies of Density," Econometrica, Econometric Society, vol. 79(1), pages 253-302, January.
    19. Stephen P. Ryan, 2012. "The Costs of Environmental Regulation in a Concentrated Industry," Econometrica, Econometric Society, vol. 80(3), pages 1019-1061, May.
    20. Ronald N. Johnson & Charles J. Romeo, 2000. "The Impact Of Self-Service Bans In The Retail Gasoline Market," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 625-633, November.
    21. Panle Jia, 2008. "What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry," Econometrica, Econometric Society, vol. 76(6), pages 1263-1316, November.
    22. Skidmore, Mark & Peltier, James & Alm, James, 2005. "Do state motor fuel sales-below-cost laws lower prices?," Journal of Urban Economics, Elsevier, vol. 57(1), pages 189-211, January.
    23. Lucia Foster & John Haltiwanger & C. J. Krizan, 2006. "Market Selection, Reallocation, and Restructuring in the U.S. Retail Trade Sector in the 1990s," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 748-758, November.
    24. Rod Anderson & Ronald Johnson, 1999. "Antitrust and Sales-Below-Cost Laws: The Case of Retail Gasoline," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(3), pages 189-204, May.
    25. Andrew Eckert, 2002. "Retail price cycles and response asymmetry," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 52-77, February.
    26. Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, vol. 74(1), pages 235-267, January.
    27. Wei Tan, 2006. "The Effects of Taxes and Advertising Restrictions on the Market Structure of the U.S. Cigarette Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(3), pages 231-251, May.
    28. Arbatskaya, Maria, 2001. "Can low-price guarantees deter entry?," International Journal of Industrial Organization, Elsevier, vol. 19(9), pages 1387-1406, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Valeria Bernardo, 2018. "The effect of entry restrictions on price: evidence from the retail gasoline market," Journal of Regulatory Economics, Springer, vol. 53(1), pages 75-99, February.
    2. Haucap, Justus & Heimeshoff, Ulrich & Siekmann, Manuel, 2015. "Price dispersion and station heterogeneity on German retail gasoline markets," DICE Discussion Papers 171, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Soetevent, Adriaan R. & Bružikas, Tadas, 2018. "The impact of process innovation on prices: Evidence from automated fuel retailing in The Netherlands," European Economic Review, Elsevier, vol. 110(C), pages 181-196.
    4. Hernández, Carlos Eduardo & Cantillo-Cleves, Santiago, 2024. "A toolkit for setting and evaluating price floors," Journal of Public Economics, Elsevier, vol. 232(C).
    5. Montag, Felix & Sagimuldina, Alina & Winter, Christoph, 2024. "When does mandatory price disclosure lower prices? Evidence from the German fuel market," Working Papers 344, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    6. Dieter Pennerstorfer & Philipp Schmidt‐Dengler & Nicolas Schutz & Christoph Weiss & Biliana Yontcheva, 2020. "Information And Price Dispersion: Theory And Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 871-899, May.
    7. Justus Haucap & Ulrich Heimeshoff & Manuel Siekmann, 2017. "Fuel Prices and Station Heterogeneity on Retail Gasoline Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    8. Christos Genakos & Mario Pagliero, 2022. "Competition and Pass-Through: Evidence from Isolated Markets," American Economic Journal: Applied Economics, American Economic Association, vol. 14(4), pages 35-57, October.
    9. Nikolic, Adriana & Weiss, Christoph, 2014. "Spatial interactions in location decisions: Empirical evidence from a Bayesian spatial probit model," Department of Economics Working Paper Series 177, WU Vienna University of Economics and Business.
    10. Andrew Eckert & Heather Eckert, 2014. "Regional Patterns in Gasoline Station Rationalization in Canada," Journal of Industry, Competition and Trade, Springer, vol. 14(1), pages 99-122, March.
    11. Fotis, Panagiotis & Polemis, Michael, 2018. "The impact of market deregulation on milk price: A dynamic panel data approach," MPRA Paper 86542, University Library of Munich, Germany.
    12. Felix Montag & Robin Mamrak & Alina Sagimuldina & Monika Schnitzer, 2023. "Imperfect Price Information, Market Power, and Tax Pass-Through," Rationality and Competition Discussion Paper Series 414, CRC TRR 190 Rationality and Competition.
    13. Noriaki Matsushima & Akira Miyaoka, 2013. "Who benefits from resale-below-cost laws?," ISER Discussion Paper 0875, Institute of Social and Economic Research, Osaka University.
    14. Becker, Maike & Pfeifer, Gregor & Schweikert, Karsten, 2021. "Price Effects of the Austrian Fuel Price Fixing Act: A Synthetic Control Study," Energy Economics, Elsevier, vol. 97(C).
    15. Julio César Arteaga & Daniel Flores, 2022. "Price Regulation and Fraud—with Special Emphasis on Gasoline Retailing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 60(2), pages 175-192, March.
    16. Haucap, Justus & Heimeshoff, Ulrich & Siekmann, Manuel, 2016. "Selling gasoline as a by-product: The impact of market structure on local prices," DICE Discussion Papers 240, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    17. Horvath, Marco, 2019. "Germany's market transparency unit for fuels: Fostering collusion or competition?," Ruhr Economic Papers 836, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    18. Zhang, Xiao-Bing & Fei, Yinxin & Zheng, Ying & Zhang, Lei, 2020. "Price ceilings as focal points to reach price uniformity: Evidence from a Chinese gasoline market," Energy Economics, Elsevier, vol. 92(C).
    19. Jorge Lemus & Fernando Luco, 2021. "Price Leadership and Uncertainty About Future Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 69(2), pages 305-337, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    2. David P. Byrne, Gordon W. Leslie, and Roger Ware, 2015. "How do Consumers Respond to Gasoline Price Cycles?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    3. repec:dgr:rugsom:14027-eef is not listed on IDEAS
    4. Robert Clark & Jean-François Houde, 2014. "The Effect of Explicit Communication on pricing: Evidence from the Collapse of a Gasoline Cartel," Journal of Industrial Economics, Wiley Blackwell, vol. 62(2), pages 191-228, June.
    5. Aljoscha Janssen, 2022. "Price dynamics of Swedish pharmaceuticals," Quantitative Marketing and Economics (QME), Springer, vol. 20(4), pages 313-351, December.
    6. Bruzikas, Tadas & Soetevent, Adriaan, 2014. "Detailed data and changes in market structure," Research Report 14027-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    7. Mariano Tappata & Jing Yan, 2017. "Competition in Retail Petrol Markets," Australian Economic Papers, Wiley Blackwell, vol. 56(3), pages 201-218, September.
    8. Victor Aguirregabiria & Gustavo Vicentini, 2016. "Dynamic Spatial Competition Between Multi-Store Retailers," Journal of Industrial Economics, Wiley Blackwell, vol. 64(4), pages 710-754, December.
    9. Tadas Bruzikas & Adriaan R. Soetevent, 2014. "Detailed Data and Changes in Market Structure: The Move to Unmanned Gasoline Service Stations," Tinbergen Institute Discussion Papers 14-123/VII, Tinbergen Institute.
    10. David P. Byrne, 2019. "Gasoline Pricing in the Country and the City," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(2), pages 209-235, September.
    11. Suguru Otani, 2024. "Industry Dynamics with Cartels: The Case of the Container Shipping Industry," Discussion Paper Series DP2024-28, Research Institute for Economics & Business Administration, Kobe University.
    12. Gerhard Clemenz & Klaus Gugler, 2009. "Locational choice and price competition: some empirical results for the austrian retail gasoline market," Studies in Empirical Economics, in: Giuseppe Arbia & Badi H. Baltagi (ed.), Spatial Econometrics, pages 223-244, Springer.
    13. Fatema, Naureen, 2019. "Can land title reduce low-intensity interhousehold conflict incidences and associated damages in eastern DRC?," World Development, Elsevier, vol. 123(C), pages 1-1.
    14. Mitsukuni Nishida, 2015. "Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa," Marketing Science, INFORMS, vol. 34(1), pages 20-38, January.
    15. Perdiguero, Jordi & Jiménez, Juan Luis, 2021. "Price coordination in the Spanish oil market: The monday effect," Energy Policy, Elsevier, vol. 149(C).
    16. Andreoli-Versbach, Patrick & Franck, Jens-Uwe, 2015. "Endogenous price commitment, sticky and leadership pricing: Evidence from the Italian petrol market," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 32-48.
    17. Szulc, Adam, 2009. "A matching estimator of household equivalence scales," Economics Letters, Elsevier, vol. 103(2), pages 81-83, May.
    18. Gabriela Simonet & Julie Subervie & Driss Ezzine-De-Blas & Marina Cromberg & Amy Duchelle, 2015. "Paying smallholders not to cut down the amazon forest: impact evaluation of a REDD+ pilot project," Working Papers 1514, Chaire Economie du climat.
    19. David McKenzie & Steven Stillman & John Gibson, 2010. "How Important is Selection? Experimental VS. Non‐Experimental Measures of the Income Gains from Migration," Journal of the European Economic Association, European Economic Association, vol. 8(4), pages 913-945, June.
    20. Tommaso Nannicini, 2007. "Simulation-based sensitivity analysis for matching estimators," Stata Journal, StataCorp LP, vol. 7(3), pages 334-350, September.
    21. Noel, Michael D., 2015. "Do Edgeworth price cycles lead to higher or lower prices?," International Journal of Industrial Organization, Elsevier, vol. 42(C), pages 81-93.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jindec:v:63:y:2015:i:1:p:152-198. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-1821 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.