Essays on the effects of market regulation

Margot, Diego

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Description

Title

Essays on the effects of market regulation

Author(s)

Margot, Diego

Issue Date

2015-04-13

Director of Research (if dissertation) or Advisor (if thesis)

Deltas, George

Doctoral Committee Chair(s)

Deltas, George

Committee Member(s)

• Hong, Seung H
• Bernhardt, Mark D
• Dias, Daniel

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• price regulation
• gasoline prices
• firm exit

Abstract

This dissertation studies the effects of price regulation on the entry, exit and pricing decision of firms. I concentrate on the retail gasoline industry in Argentina. I study how the price regulation in place from 2004 to 2007 has affected the number of gas stations in the market and the price level after the regulation was eliminated. I approach the problem in two steps: firstly I study how the price regulation affects the entry and exit decision of firms, and secondly I study if the entry and exit decisions affect the price level once the regulation is removed. In the first chapter I discuss a topic rarely present in regulation analysis: the effects of price regulation on the exit rate of different types of firms. Regulation studies usually focus on the efficiency and welfare consequences of regulation, but rarely on the consequences on individual types of firms. Using a discrete time survival model with time dependent covariates, unobserved heterogeneity at the firm level and a flexible proportional hazard I show that the price regulation had a non-neutral effect on the exit rate of different type of firms. Smaller firms were more likely to exit because of the price regulation. Those gas stations that belong to vertically integrated companies were more likely to survive. The exit likelihood was on average three times higher for independent gas stations and gas stations that belong to small, non-vertically integrated chains than for gas stations affiliated to vertically integrated chains. Smaller players compete mostly through prices, rather than quality or other non-price variables, so their exit may have effects on the degree of price competition and the price level in the market. I study this question in the second chapter. I analyze the pricing decision of gas stations in Argentina using a dynamic price panel to model the retail prices under two different settings. During the first part of the sample period, firms were constrained by a maximum price imposed by the government. During the last half of my analysis firms were free to set their own prices. I find that during the regulated period prices and margins were, not surprisingly, very stable. Margins were low and there was a net exit of gas stations, particularly independent, non-vertically integrated ones. After the regulation was eliminated prices and margins increased, which is consistent with fewer firms in the market, reflecting possibly local market power. This result may help explain why bigger firms were not opposed to the regulation when it was established, they may have anticipated the exit of smaller players and the lower degree of price competition when the regulation would be eliminated.

Graduation Semester

2015-5

Type of Resource

text

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Copyright and License Information

Copyright 2015 Diego Margot

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