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Flex cars and competition in fuel retail markets

João Paulo Pessoa, Leonardo Rezende and Juliano Assunção

International Journal of Industrial Organization, 2019, vol. 63, issue C, 145-184

Abstract: We study how the diffusion of flex (bi-fuel) cars affected competition on ethanol and gasoline retail markets. We propose a model of price competition in which the two fuels become closer substitutes as flex cars penetration grows. We use a large panel of weekly prices at the station level to show that fuel prices and margins have fallen in response to this change. This finding is evidence of market power in fuel retail and indicates that innovations that increase consumer choice benefit even those who choose not to adopt them.

Keywords: Flex-fuel vehicles; Gasoline; Ethanol; Price competition; Spatial competition; Discrete equilibrium price dispersion (search for similar items in EconPapers)
JEL-codes: L11 L13 L62 L71 (search for similar items in EconPapers)
Date: 2019
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