Working Paper: CEPR ID: DP12477
Authors: Ystein Foros; Mai Nguyenones; Frode Steen
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). 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. The 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, they attempt to tank during low price windows. By its very nature, this shrink consumers’ ability to compare prices at several outlets. Consequently, more attention to when to buy may soften price competition.
Keywords: pricing cycles; firm performance; gasoline markets
JEL Codes: D22; L25; L42; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of additional day off from competition on Thursdays (Z28) | firms' profitability (L21) |
| increasing the share of consumers searching for the cheapest outlet by 1% (D16) | firms' profits (L21) |
| increasing the share of consumers who adapt their purchasing behavior to the timing of price cycles (D16) | firms' profitability (L21) |
| introduction of Thursday restoration day (Y20) | competitive time window (C41) |
| competitive time window (C41) | firms' profitability (L21) |
| overall trend in profitability (L25) | average gross margins from 2004 to 2015 (L25) |