When price ceilings become price targets

Michael Giberson

From the most recent American Law and Economics Review, “Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada.” The authors find statistical support for the conclusion that “the enactment of [price ceiling] regulation is correlated with a 1–1.2 cents per liter rise in self-service retail gasoline prices, controlling for all else.” They suggest that the price ceilings may serve a coordinating “focal point” function for competitors, making it easier for them to cooperate to secure higher returns.

The authors said, “While we cannot confirm collusion due to the necessity of firm-level data, our results demonstrate that the actual results of price ceilings in Canada are contrary to the probable public interest objective of such regulation.”

FULL ABSTRACT:

We evaluate the efficacy of price ceiling legislation by employing weekly data on retail gasoline prices for eight cities in Eastern Canada between 1999 and 2007. The use of these data allows us to pool “treatment” cities in the Atlantic provinces with “control” cities in Ontario and Quebec. Ordinary least squares and instrumental variables estimates demonstrate that the enactment of such regulation is significantly correlated with higher prices. A potential explanation for these results is that price ceilings act as “focal points” enabling firms to set higher prices, thus suggesting the possibility of regulatory capture.

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