Austrian-style gasoline price regulation: How it may backfire

Abstract

In January 2011, a price regulation was established in the Austrian gasoline market which prohibits firms from raising their prices more than once per day. Similar restrictions have been discussed in New York State and Germany. Despite their intuitive appeal, this article argues that Austrian-type policies may actually harm consumers. In a two-period duopoly model with consumer search, I show that in face of the regulation, firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged. This implies that, as some consumers find it optimal to delay their purchase due to expected price savings, but find it inconvenient to do so, a friction is introduced that decreases net consumer surplus in the market.

Price Effects of the Austrian Fuel Price Fixing Act: A Synthetic Control Study

“…In terms of long-run effects, we find that gasoline and diesel prices are reduced by 7.5% and 5.4%, respectively. We can partially confirm the empirical findings of Dewenter et al (2017) that Austria's fuel price regulation does not lead to higher retail fuel price levels, and thereby contradict existing theoretical and lab-experimental studies (Berninghaus et al, 2012;Haucap and Müller, 2012;Obradovits, 2014;Angerer, 2019).…”

“…These heterogeneous results for gasoline and diesel are in contrast to the findings of Dewenter et al (2017), who predict both fuel prices to equally decrease by 2 to 4 Euro cents. However, both empirical studies agree that Austria's fuel price regulation does not necessarily lead to higher retail fuel prices, a prediction made by several theoretical and lab-experimental studies (Berninghaus et al, 2012;Haucap and Müller, 2012;Obradovits, 2014;Angerer, 2019).…”

“…Byrne and De Roos (2019) study the tacit communication of retailers in the Australian fuel market and find that the clear price leadership of the largest retailer can lead to a margin-enhancing pricing structure. Moreover, it can be expected that retailers adjust to the new requirements and charge higher initial prices (Obradovits, 2014). Consequently, it is unclear a priori how the Austrian fuel price regulation affects fuel price levels.…”

“…However, studies focusing on the case of Austria are rare. Except for Dewenter et al (2017), existing studies use theoretical and experimental designs to identify price effects (see, e.g., Berninghaus et al, 2012;Haucap and Müller, 2012;Obradovits, 2014). Following the arguments of Pennerstorfer et al (2020), increased transparency should intensify competition and thereby directly lower the overall price level.…”

Information and Price Dispersion: Theory and Evidence

“…This includes Australia(Byrne and de Roos, 2017), Austria(Obradovits, 2014), and Canada(Carranza et al, 2015).3 This includes Australia (Byrne and de Roos, 2017), Chile(Luco, 2019), Germany(Dewenter et al, 2017), and Italy(Rossi and Chintagunta, 2018).4 Varian's (1980) model corresponds to a special case ofStahl's (1989) model without search. 5 For instance,Albaek et al (1997) andLuco (2019) show that prices actually increased after the introduction of a transparency regime.…”