The Effects of Gasoline Price Regulations: Experimental Evidence

Abstract

Petrol prices tend to be subject to regular changes, often changing more than once a day in many countries, and the number of changes appears to increase. For example, a recent sector inquiry by Germany’s competition authority has found that the number of price changes has almost tripled between 2007 and 2010. At the same time, economic theory suggests that gasoline retail markets are prone to collusive behavior. Oligopoly market structures prevail, market interactions occur frequently, prices are highly transparent, and demand is rather inelastic. As a result, a public debate has emerged whether or not to adopt regulatory pricing rules for gas stations similar to those implemented in Austria, parts of Australia, Luxembourg or parts of Canada. In order to increase consumer welfare these rules either restrict the number of price changes per day or they limit the mark-up for gasoline retail prices. As theoretical predictions about the impact of these measures are mixed and empirical studies rare, we analyze the effects, using an experimental gasoline market in the lab. Our results reveal that two of the suggested rules rather decrease consumer welfare: The Austrian rule which only allows one price increase per day (while price cuts are always possible) and the Luxembourg rule which introduces a maximum markup for retailers. While no rule tends to induce lower retail prices, the Western Australian rule which allows at most one daily price change (no matter whether up or down) does at least not harm consumers.