On the Effects of Suggested Prices in Gasoline Markets

• DOI: http://doi.org/10.1111/sjoe.12289
• Published date: 01 April 2019
• Author: Riemer P. Faber,Maarten C. W. Janssen
• Date: 01 April 2019

Scand. J. of Economics 121(2), 676–705, 2019

DOI: 10.1111/sjoe.12289

On the Effects of Suggested Prices in

Gasoline Markets*

Riemer P. Faber

Charles River Associates, London EC2M 7EA, UK

rfaber@crai.com

Maarten C. W. Janssen†

University of Vienna, A-1090 Vienna,Austria

maarten.janssen@univie.ac.at

Abstract

There is a widespread suspicion that suggested prices act as a focal point for individual firms

when setting their prices. Oil companies announce suggested prices for gasoline stations in the

Dutch retail market. Weshow that, compared to the gasoline spot market price, suggested prices

contain additional information that explains retail price changes. We conclude that suggested

prices have a horizontal coordinating effectin the sense that retail prices react to infor mation that

suggested prices contain and that is unrelated to firms’ costs (i.e., the information that firms use

under normal competitive conditions).

Keywords: Coordination; gasoline markets; price setting; suggested prices

JEL classification:L11; L42; L81

I. Introduction

The boundary between price setting under normal competitive conditions

and price coordination is often not clear. This issue is particularly prominent

regarding the interpretation of suggested prices (Buehler and G¨artner, 2013;

Lubensky, 2017). Suggested prices are prices that are announced with the

recommendation for firms to follow them. Suggested prices are not binding

in any legal way, and firms are free to deviate and charge higher or lower

prices as they wish.

There is a widespread suspicion that suggested prices distort the

normal functioning of markets as they may act as a focal point (e.g.,

*We thank Rikkert Nachtegaal for help with data collection. We thank Christiaan Heij, Heleen

Hofmans, Emiel Maasland, Dirk van den Berg, Dick van Dijk, and the anonymous referees for

helpful comments. Maarten Janssen acknowledges financial support from the Austrian Science

Fund FWF, under project number P 27995-G27.The views expressed are those of the authors

and do not necessarily reflect the official positions of Charles RiverAssociates.

†Also affiliated with the Higher School of Economics in Moscow and CEPR.

C

The editors of The Scandinavian Journal of Economics 2018.

R. P. Faber and M. C. W. Janssen 677

K¨uhn, 2001; Motta, 2004; Buccirossi, 2008). A suggested price stands out

among all possible prices that a firm can choose and therefore relatively

many firms may choose it. As a result, suggested prices may have a

coordinating effect on prices set by individual firms. The evidence for this

hypothesis is either anecdotal or experimental (e.g., Holt, 1995; Cason,

2008).1

In this paper, we empirically study the effects of suggested prices, using

data from the Dutch gasoline market.2In many countries, such as the

Netherlands, Norway, Sweden, Austria, Spain, and Italy, large oil companies

provide stations that use their brand with a suggested price for gasoline

on a daily basis.3Often these oil companies are both wholesalers and

retailers as they own a substantial number of the stations that use their

brand.

Despite the little empirical evidence on the effects of suggested prices,

there are quite a few cases where different competition authorities have

argued that by setting suggested prices, firms or professional organizations

have violated competition law. For example, the Dutch competition authority

(ACM) decided that several professional organizations for psychologists and

psychiatrists were guilty of violating competition law as they advised their

members via their website how much to charge per hour given the costs

members typically would encounter.4What, according to the organizations,

was meant as an aid to their members, was judged by the ACM as a way to

coordinate pricing decisions of individual entrepreneurs above competitive

levels. The ACM argued that suggested prices helped to considerably

reduce the uncertainty concerning competitors’ price-setting behavior.5A

1Knittel and Stango (2003) quantify the impact of focal points on price setting via a study on

government-imposed nonbinding price ceilings in the US credit card market. See also Albæk

et al. (1997), Marshall et al. (2008), and Sen et al. (2011).

2Foros and Steen (2013b) is the closest to our paper and below we extensively discuss the

differences and similarities with that study. De los Santos et al. (2013) study the effects of

suggested prices in South Korean retail markets. Other empirical studies that use suggested

prices include Gripsrud (1982), Hofstetter and Tovar (2010), and Foros and Steen (2013a).

3Oil companies often also publish their suggested price on their websites (e.g., BP in the

Netherlands, Statoil in Norway and Sweden, and OMV in Austria). The Spanish government

prohibited suggested prices for gasoline in 2013 and oil companies in Italy stopped publishing

suggested prices after an investigation of the competition authority (CNC, 2012; Bolet´ınOficial

del Estado, No. 47, Sec. I, p. 15226, 2013; AGCM press releases 5/2007 and 92/2007).

4See ACM (formerly NMa) decision case 3309/NIP, LVE, NVP, and NVVP, 2004. The court of

appeal canceled the decision on the basis that it was not clear that the price was a decisivefactor

in the decision process of consumers while choosing a psychologist (CBb, decision case AWB

06/667, ECLI:NL:CBB:2008:BF8820, 2008).

5TheACM reiterated its concerns in a case involving nonbinding public announcements of future

price strategies of telecom firms (decision case 13.0612.53, 2014).

C

The editors of The Scandinavian Journal of Economics 2018.