Friday, September 22, 2017
The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing
Foros, Øystein (Dept. of Business and Management Science, Norwegian School of Economics) ; Nguyen, Mai Thi (Dept. of Business and Management Science, Norwegian School of Economics) ; Steen, Frode (Dept. of Economics, Norwegian School of Economics) study The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing.
ABSTRACT: First, we analyze how regular days off from competition and a time-dependent price pattern affect firm performance. Second, we examine the effects on firms' profitability from consumers’ changing search- and timing behavior. We use microdata from gasoline retailing in Norway. Since 2004, firms have practiced an industry-wide day off from competition, starting on Mondays at noon, by increasing prices to a common level given by the recommended prices (decided and published in advance). Hence, firms know when and to what level to raise their price. In areas without local competition, retail prices are always equal to the recommended prices. Hinged on this, we regard recommended prices as the monopoly price level. In turn, a foreseeable low-price window is open before every restoration. During the data period, we observe an additional weekly restoration on Thursdays at noon. We show that an additional day off from competition increases firm performance. As expected, a conventional price search of where to buy reduces firms’ profitability. In contrast, consumers who are aware of the cycle and spend effort on when to buy have a positive impact on firms’ profitability. If consumers spend effort on when to buy rather than where to buy, price competition might be softened even in the low-price windows.