Price controls and market structure: Evidence from gasoline retail markets

Author:

Juan Esteban Carranza   Robert Clark   Jean-Francois Houde  

Issue Date:

2011

Abstract(summary):

In this paper we study the effect of price floor regulations on the organization and per- formance of markets. The textbook evaluation 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. The goal of this paper is to demonstrate that price floor regulations can have important unintended consequences on prices and productivity in the longer run by distorting the structure of markets. We argue in particular that these policies crowd markets and create an endogenous barrier to entry for low- cost retailers. Taken together, these factors can lower prices and productivity. We test this in the context of an actual regulation imposed in the retail gasoline market in the Canadian province of Quebec and show that the policy led to more competition, lower prices for consumers, and lower productivity.

Page:

36