Wednesday, March 26, 2014
Juliano Assuncao, Pontificia Universidade Catolica do Rio de Janeiro, Joao Paulo Pessoa, LSE and Leonardo Rezende, Pontificia Universidade Catolica do Rio de Janeiro discuss Flex Cars and Competition in Ethanol and Gasoline Retail Markets.
ABSTRACT: In Brazil, gasoline and ethanol coexist as automotive fuels and are becoming closer substitutes as flex cars become more widely adopted. We employ this source of variation in a large panel of weekly prices at the station level to show that fuel prices have fallen in response to this change. This finding is evidence of market power in fuel retail and indicates that innovations that increase consumer choice benefit even those who choose not to adopt them. We also propose a model of price competition in this market and use it to estimate demand from price response functions.