Testing Oil Refiners' Conduct in Korea: A Differentiated Product Approach

Abstract

This paper investigates oil refiners' conduct in the Korean gasoline market. Specifically, I examine which of two modes of conduct, Bertrand-Nash competition or collusion, better fits the data. Unlike previous literature, this paper employs a differentiated product approach to address the stylized discrepancy in refiners' brands' prices: stable stratification of prices among refiners, but an unlikely equilibrium outcome in the homogenous goods market. Correct understanding of refiners' conduct is important because appropriate policy responses to collusion differ significantly from appropriate responses to competition-driven outcomes. The results of this paper support the hypothesis that Bertrand-Nash competition better explains refiners' conduct.