Vancouver's Gasoline-Price Wars: An Empirical Exercise in Uncovering Supergame Strategies

This paper uses a unique data set to determine which dynamic model of tacit collusion best describes behaviour in a particular industry. The area investigated is a region of the Vancouver, British Columbia retail-gasoline market. Players are service-station managers who compete daily. Firms choose price in each period using strategies that depend on prices chosen in the previous period. Periodically, unanticipated demand shocks precipitate price wars. When shocks occur, the firms in the market must determine the new demand conditions and adjust their strategies. From an econometric point of view, slopes of intertemporal reaction functions are latent variables. The resulting system of equations with time-varying parameters is estimated via the Kalman filter. Different repeated-game oligopoly models correspond to different transition matrices for the latent variables. The models can thus be assessed in terms of their power to explain firm behaviour in this market.