Vertical Control and Price Cycles in Gasoline Retailing

Abstract

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.

Fuel Prices and Station Heterogeneity on Retail Gasoline Markets

“…On a European level, fewer empirical studies are available. For the Norwegian market, Foros and Steen (2013), for instance, use a (consumer-submitted or self-observed) unbalanced panel data set of gasoline prices at Norwegian stations to estimate a fixed-effect model. Controlling for regional, brand, and weekday effects, among others, the model supports their observation of implicit price control mechanisms at the headquarters of leading companies.…”

The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing

“…(see e.g. Wang, 2009, andForos andSteen, 2013). In the current application, as shown by Foros & Steen (2013), retail chains symmetrically increase prices to the recommended prices on Mondays, and as shown in the present paper, now also on Thursdays.…”

“…Wang, 2009, andForos andSteen, 2013). In the current application, as shown by Foros & Steen (2013), retail chains symmetrically increase prices to the recommended prices on Mondays, and as shown in the present paper, now also on Thursdays. The undercutting phase might be consistent with the predictions from the Edgeworth cycle theory, while the price increases depend on time (day(s) of the week) rather than on a war-of-attrition game when further undercutting becomes too costly.…”

“…5 Topography leads to geographical isolated local monopolies in some parts of the country. In these locations, we observe that retail prices equal the recommended price throughout the week (Foros & Steen, 2013). As such, we define the recommended price as the monopoly price (Bresnahan & Reiss, 1991).…”

“…Symmetric cycles are hence a result of the upstream firms simultaneously deciding to disengage the price support on Mondays, and after 2008 also on Thursdays each week. Retailers are then effectively forced to set their price equal to the recommended price in order to avoid negative margins (Foros & Steen, 2013). A more thorough description is given in Appendix D.…”