Seminarios Académicos

Abstract: "An important source of market power is collusion, and the impact of higher prices resulting from such conduct on welfare is well understood. This paper investigates whether collusion can also harm society by misallocating sales to less efficient players and providing an umbrella under which inefficient firms can survive. The effect of collusion on the misallocation of production has been studied in wholesale/manufacturing markets, where the extent of misallocation depends on the attribution of production quotas. This project will provide the first analysis of misallocation caused by a retail market cartel.

Unlike with manufacturing cartels, in retail markets, firms cannot control where consumers choose to shop, and these choices, which depend on preferences and prices firms set, determine the allocation of production. Because collusive retail arrangements often rely on simple pricing rules, such as uniform pricing, production inefficiencies arise. Under uniform pricing, market shares are determined only by consumer preferences. In contrast, under competitive pricing, more efficient firms set lower prices and may attract larger market shares. The extent of this contemporaneous misallocation will depend on the correlation between consumer preferences for products/stores and their relative efficiency.

In addition, collusive pricing may also affect the set of firms that operate in the market, creating a dynamic production inefficiency. Collusion raises industry profits, facilitating the entry of new firms, but if potential entrants believe they will not be able to disrupt the cartel by undercutting prices and gaining market share, then it is more likely that entry will be by relatively inefficient firms. Collusive pricing also weakens incumbent firms’ incentives to reduce operational costs. Under uniform pricing, firms are unable to lower prices to increase market share following a cost reduction, and so the benefit accruing to firms from cost reductions is limited relative to a competitive setting, reducing the incentive to invest.

This paper examines contemporaneous and dynamic production inefficiencies caused by uniform prices in the context of a possible collusive arrangement in Quebec City's retail gasoline market, for which we have access to detailed data on prices, market shares, and station characteristics. Our empirical analysis contains four parts. First, using data on prices, we document a sudden move to high margins and near-uniform pricing in 2001 that persisted for several years and coincided with shifts in nearby markets investigated by the Competition Bureau. Second, we build and estimate a structural model of demand and supply of retail gasoline using station-level price and quantity data to recover marginal costs and consumer preferences. With the model estimates, we perform counterfactual analysis to examine two dimensions of the contemporaneous misallocation effects generated by the uniform pricing behavior: (i) the correlation between sales and costs and (ii) the correlation between costs and investment decisions. Finally, we study dynamic effects that may result from increased profits flowing to high-cost firms, allowing them to survive."