learning to coordinate: a study in retail gasoline · pdf filelearning to coordinate: a 1study...

Learning to Coordinate: A Study in Retail Gasoline1

David P. Byrne Nicolas de Roos U. Melbourne U. Sydney

FTC Microeconomics Conference November 4, 2016

1The views and opinions expressed in our paper and in this talk are strictly those of the authors, and do not necessarily reflect those of the ACCC nor the Western Australian Government.

� Green and Porter (1984):

“It is logically possible for this agreement to be a tacit one

which arises spontaneously. Nevertheless, in view of the

relative complexity of the conduct to be specified by this

particular equilibrium and of the need for close coordination

among its participants, it seems natural to assume here that

the equilibrium arises from an explicit agreement.”

� Green, Marshall and Marx (2015), Ivaldi et al. (2003):� the implementation of collusive agreements, both tacit and

explicit, has been explored extensively� the issue of how collusion is initiated has largely been

abstracted from, or presumed to be explicit

Research question

� How is collusion initiated?

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Green, Marshall and Marx (2015), Ivaldi et al. (2003):� the implementation of collusive agreements, both tacit and

explicit, has been explored extensively� the issue of how collusion is initiated has largely been


�

�

�

Research question

How is collusion initiated?

Green and Porter (1984): “It is logically possible for this agreement to be a tacit one






2 / 29

�

�

�

Research question


Green and Porter (1984): “It is logically possible for this agreement to be a tacit one






Green, Marshall and Marx (2015), Ivaldi et al. (2003): � the implementation of collusive agreements, both tacit and

explicit, has been explored extensively � the issue of how collusion is initiated has largely been


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�

�

�

This paper

We empirically study the tacit initiation of a collusive pricing structure

Context and data: urban retail gasoline market where we have the universe of daily station-level retail prices for 15 years

Our analysis of the evolution of pricing and conduct reveals 3 interconnected mechanisms for initiating collusion tacitly:

� price leadership � focal points � experimentation

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�

�

�

Related literature

Ex-post case studies of known cartels and explicit collusion � Clark and Houde (2013), Asker (2010), Wang (2008), Genesove and

Mullin (2001), Roller and Steen (2006), Levenstein and Suslow (2006), Pesendorfer (2000), Ellison (1994), Porter and Zona (1993), Porter (1983)

Empirical studies of tacit collusion and coordinated effects � Miller and Weinberg (2016) (mergers), Lewis (2015) and Knittel

and Stango (focal points), Lewis (2012) and Wang (2009) (price leadership), Ciliberto and Williams (2014) and Busse (2000) (multi-market contact), Borenstein and Shepard (1996) and Slade (1992) (demand fluctuations, price wars)

Learning and coordination dynamics in oligopoly � lab: Huck et al. (1999), Offerman et al. (2002), Apesteguia et al.

(2007), Friedman et. al (2015) � field: Doraszelski, Lewis and Pakes (2016), Yang (2016)

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Roadmap

1. Overview of the context and data

2. 15 years of retail pricing � 2001-2009: (comparatively) competitive pricing � 2010-today: tacit collusion

3. Mechanisms for initiating tacit collusion � price leadership, focal points, experimentation

4. Collusive outcomes � price-cost margins, price stability, conflict resolution

5. Summary, policy implications

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�

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Context and Data Context

Retail gasoline market of Perth, Australia � 1.7 million people, 472 gasoline stations � 4 major retailers: BP, Caltex, Coles, Woolworths

� station shares: 22%, 16%, 16%, 13% � prices centrally set by the major retailers

shares stable from 2004-2015

Price transparency policy - Fuelwatch � price reporting website

24-hour rule

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In sum, the data and environment are characterized by� simultaneous price setting� perfect monitoring of rivals’ current and past actions� common daily cost shocks

Context aligns well with standard repeated games frameworkfor collusion (Friedman 1977)

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Context and Data Data

Universe of station-level daily prices for 15 years � 3 January 2001 - 31 December 2015 � ≈1.8 million station-date observations

Marginal cost: terminal gate price (TGP)

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�

�

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Context and Data Data

Universe of station-level daily prices for 15 years � 3 January 2001 - 31 December 2015 � ≈1.8 million station-date observations

Marginal cost: terminal gate price (TGP)

In sum, the data and environment are characterized by � simultaneous price setting � perfect monitoring of rivals’ current and past actions � common daily cost shocks

Context aligns well with standard repeated games framework for collusion (Friedman 1977)

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Context and Data Retail pricing

120

130

140

150

Ret

ail P

rice

(cpl

)

01jan2011 01feb2011 01mar2011 01apr2011Month

BP Caltex Woolworths Coles TGP

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Context and Data Monthly average prices, costs and margins

ColesEntry

Hurricanes

Crude oilshock

BP-Caltexprice war

8010

012

014

016

0

2002m1 2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2016m1

BP Caltex Woolworths Coles Marginal Cost (TGP) Cycle Breakdown

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�

15 Years of Retail Pricing

To study the evolution of pricing, it is helpful breakdown price cycles into two components

� price jumps � price cuts

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120

130

140

150

Ret

ail P

rice

(cpl

)



Price jumps, cycle restarts“Day 1 of the cycle”

15 Years of Retail Pricing Defining price jumps, cuts and cycle length

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120

130

140

150

Ret

ail P

rice

(cpl

)



Price cuts“Days 2,3,4,… of the cycle”

15 Years of Retail Pricing Defining price jumps, cuts and cycle length

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0.10

0.08

0.06

0.04

0.02

0.00 15 10 5

Price change (cpl)

15 Years of Retail Pricing Distribution of price changes: 2001-2003

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0.10

0.08

0.06

0.04

0.02

0.00 15 10 5

Price change (cpl)


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15 Years of Retail Pricing Inter-temporal variation in price cuts

-7-6

-5-4

-3-2

-10

12

34

5M

ean

Pric

e C

hang

e

01jan2000 01jan2005 01jan2010 01jan2015Date

Cycle Day 2 Cycle Day 3 Cycle Day 4 Cycle Day 5 Cycle Day 6 Cycle Day 7

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15 Years of Retail Pricing Day of the week when price jumps occur

12

34

56

7D

ay o

f the

Wee

k - M

on==

1

01jan2000 01jan2005 01jan2010 01jan2015Date

Mon Tue Wed Thu Fri Sat Sun

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15 Years of Retail Pricing Inter-temporal variation in cycle length

05

1015

2025

Ret

ail P

rice

(cpl

)

2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2016m1Month

BP Caltex Woolworths Coles

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�

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15 Years of Retail Pricing Summary

In summary, starting in 2010 we observe � Emergence of 2 focal points

� 2 cpl daily price cuts � Thursday price jumps

� ≈ 75% increase in profit margins

This tacitly collusive pricing structure took a long time to emerge - 10 years!

� despite perfect observability/monitoring of own and rivals’ daily prices and price history

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�

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Initiating Tacit Price Coordination Overview

How was tacit collusion initiated?

Analysis consists of 4 parts 1. Aggregate shocks and price leadership (2004, 2006, 2009) 2. Price war (2009-10) 3. Price leadership and experimentation used to establish the

focal points (2009-12) 4. Collusive outcomes: price-cost margins, price stability, conflict

resolution

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Aggregate Shocks and Price Leadership Global Crude Oil Price Shock

010

2030

4050

6070

Num

ber o

f Sta

tions

Lea

ding

Pric

e Ju

mps

8010

012

014

016

0Av

g. R

etai

l Pric

e Ac

ross

Sta

tions

, TG

P

01jan2008 01apr2008 01jul2008 01oct2008 01jan2009 01apr2009Date

BP Price BP Leaders Caltex Price Caltex Leaders Woolworths Price Woolworths Leaders Coles Price Coles Leaders Marginal Cost (TGP) Global Crude Price Shock

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Price War Pre-cursor to the new pricing structure

100

120

140

Pric

es/T

GP

(CPL

)

01apr2009 01may2009 01jun2009 01jul2009Date

BP Caltex Marginal Cost (TGP)

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Caltex first defectson price jumps

BP-Caltex Price war starts10

012

014

0Pr

ices

/TG

P (C

PL)

01jul2009 01aug2009 01sep2009 01oct2009Date


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Price cycle becomes unstable10

012

014

0Pr

ices

/TG

P (C

PL)

01oct2009 01nov2009 01dec2009 01jan2010Date


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BP-Caltex price war ends,Stable price cycle re-established

100

120

140

Pric

es/T

GP

(CPL

)

01jan2010 01feb2010 01mar2010 01apr2010Date


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Focal point #1: Thursday price jumps 2011: BP price leadership with price jumps

010

2030

4050

Num

ber o

f Sta

tions

with

Pric

e Ju

mps

(dp>

6 cp

l)

01jan2011 08jan2011 15jan2011 22jan2011 29jan2011Date

BP Caltex Woolworths Coles BP Price Leadership

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Focal point #1: Thursday price jumps 2013: No price leadership with price jumps

010

2030

4050

Num

ber o

f Sta

tions

with

Pric

e Ju

mps

(dp>

6 cp

l)


BP Caltex Woolworths Coles

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Focal point #1: Thursday price jumps Stations’ propensities to engage in Thursday Price jumps (BP)

BP re-initiates cycleafter 2008-09 collapse

BP stops leadingcycles on Weds

0.2

.4.6

.81

% o

f Sta

tions

Eng

agin

g in

Pric

e Ju

mp

2000m1 2005m1 2010m1 2015m1Date


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Focal point #1: Thursday price jumps Stations’ propensities to engage in Thursday Price jumps (Caltex)

0.2

.4.6

.81

% o

f Sta

tions

Eng

agin

g in

Pric

e Ju

mp

2000m1 2005m1 2010m1 2015m1Date


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Focal point #1: Thursday price jumps Stations’ propensities to engage in Thursday Price jumps (Woolworths)

0.2

.4.6

.81

% o

f Sta

tions

Eng

agin

g in

Pric

e Ju

mp

2000m1 2005m1 2010m1 2015m1Date


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Focal point #1: Thursday price jumps Stations’ propensities to engage in Thursday Price jumps (Coles)

0.2

.4.6

.81

% o

f Sta

tions

Eng

agin

g in

Pric

e Ju

mp

2004m1 2006m1 2008m1 2010m1 2012m1 2014m1 2016m1Date


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Focal point #1: Thursday price jumps Stations’ propensities to engage in Thursday Price jumps (Gull)

0.2

.4.6

.81

% o

f Sta

tions

Eng

agin

g in

Pric

e Ju

mp

2000m1 2005m1 2010m1 2015m1Date


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Focal point #1: Thursday price jumps Zoomed in: Wednesday price jumps, all firms, start of 2010

Gap 1

Gap 2

010

2030

4050

Num

ber o

f Sta

tions

with

Wed

Pric

e Ju

mp

2009w13 2009w40 2010w13 2010w40Date

BP Caltex Woolworths Coles BP Leadership BP Experiment BP-Caltex Conflict Period

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Focal point #1: Thursday price jumps Zoomed in: Thursday price jumps, all firms, start of 2010

Gap 1 Gap 2

010

2030

4050

Num

ber o

f Sta

tions

with

Thu

r Pric

e Ju

mp

2009w13 2009w40 2010w13 2010w40Date

BP Caltex Woolworths Coles BP Leadership BP Experiment BP-Caltex Conflict Period

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Focal point #1: Thursday price jumps BP price leadership and experiments

Gap 1Gap 2

BP Price Leadership Ends0

1020

3040

50N

umbe

r of S

tatio

ns L

eadi

ng P

rice

Jum

p


BP Caltex Woolworths Coles BP Leadership BP Experiment

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Focal point #2: 2 cpl price cuts Stations’ propensities to set 2 cpl price cuts

0.2

.4.6

.81

Frac

tion

of S

tatio

ns w

ith P

rice

Cut

of 2

CPL

2009m1 2010m1 2011m1 2012m1 2013m1 2014m1 2015m1Month

BP Caltex Woolworths Coles Gull BP-Caltex Conflict Period

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Focal point #2: 2 cpl price cuts Testing the focal point

0.2

.4.6

.81

Frac

tion

of S

tatio

ns w

ith P

rice

Cut

of 2

CPL

2009m1 2010m1 2011m1 2012m1 2013m1 2014m1 2015m1Month

BP Caltex Woolworths Coles Gull BP-Caltex Conflict Period BP Experiment

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Summary


We found price leaders can establish focal points that facilitate tacit price coordination

Evidence points to experimentation is an important mechanism for initiating tacit collusion

� testing firms’ willingness to coordinate on focal pricing rules � communicating intentions to coordinate � creating common knowledge regarding collusive pricing

strategy

Price leadership and experimentation, not punishment, was used to resolved conflict

Collusive outcomes: enhanced margins, price stability, improved conflict resolution

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Discussion Academic relevance

Empirics speak to earlier (e.g., pre-repeated games) theories of tacit collusion

� price leadership: Bain (1968) � focal points: Schelling (1960), Scherer (1967)

Findings point to recent theories of communication, experimentation, and learning in games as frameworks for collusion initiation (Crawford 2016; Fudenberg and Levine 2016)

Despite perfect monitoring of rivals’ behavior... � a relatively simple tacitly collusive pricing structure was

implemented � and it took 10 years for the pricing structure to emerge

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Discussion Policy implications

Results point to 2 aspects of market structure that can potentially facilitate coordinated effects

� firm size asymmetry � price transparency policies

Using rich price data (e.g., long panel data at high frequency) to detect collusion at the initiation stage

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learning to coordinate: a study in retail gasoline · pdf filelearning to coordinate: a 1study...

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