Open Access Open Access  Restricted Access Subscription Access

A CONDITIONAL MARKOV REGIME SWITCHING MODEL TO STUDY MARGINS: APPLICATION TO THE FRENCH FUEL RETAIL MARKETS

RAPHAËL HOMAYOUN BOROUMAND, STÉPHANE GOUTTE, SIMON PORCHER, THOMAS PORCHER

Abstract


This paper uses a regime-switching model that is built on mean-reverting and local volatility processes combined with two Markov regime-switching processes to understand the market structure of the French fuel retail market over the period 1990-2013. The volatility structure of these models depends on a first exogenous Markov chain, whereas the drift structure depends on a conditional Markov chain with respect to the first one. Our model allows us to identify mean reverting and switches in the volatility regimes of the margins. In the standard model of cartel coordination, volatility can increase competition. We find that cartelization is even stronger in phases of high volatility. Our best explanation is that consumers consider volatility in prices to be a change in market structure and are therefore less likely to search for lower-priced retailers, thus increasing the market power of the oligopoly. Our findings provide a better understanding of the behavior of oligopolies.


Keywords


Regime switching; Markov chain; Cartels; Margins.

Full Text:

PDF

References


REFERENCES

Ang, A. and Bekaert, G. (2002), Regime Switching in Interest Rates. Journal of Business and Economic Statistics 20 (2), 163-182.

Baele, L. (2005), Volatility Spillover Effects in European Equity Markets. Journal of Financial and Quantitative Analysis, Vol. 40, No. 2.

Bai, W. and Wang, P. (2011), Conditional Markov chain and its application in economic time series analysis. Journal of applied econometrics, 26, 715-734.

Borenstein S., Cameron, A.C. and Gilbert, R. (1997). Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes ?. The Quarterly Journal of Economics, 112(1), 305-39.

Borenstein, S. and A. Shepard (1996). Dynamic Pricing in Retail Gasoline Markets, The Rand Journal of Economics, 27(3), 429-451.

Boroumand, R.H. (2015) Electricity markets and oligopolistic behaviors: the impact of a multimarket structure. Res. Int. Bus. Finance 33, 319-333

Boroumand, R.H., Goutte, S. and Porcher, T. (2015). 20 idées reçues sur l'énergie. Ed. De Boeck. ISBN-10: 280419020X

Boroumand, R.H., Goutte, S., Porcher, S. and Porcher, T. (2015), Asymmetric evidence in gasoline price responses in France: a Markov switching approach. Economic Modelling. Forthcoming.

Cai (1994), A Markov model of switching-regime ARCH’. Journal of Business & Economic Statistics, 12, 309-316.

Clarke, R. (1983), Collusion and the Incentives for Information Sharing. Bell Journal of Economics, 14, 383-394.

Elliott, R.J., Aggoun, L. and Moore, J.B. (1994). Hidden Markov Models: estimation and control. Springer-Verlag, Berlin-Heidelberg- New York.

Goutte, S. (2014). Conditional Markov regime switching model applied to economic modelling. Economic Modelling, 38, 258-269.

Goutte, S. and Zou, B (2013), Continuous Time Regime Switching Model Applied to Foreign Exchange Rate. Math. Financ. Lett. 2013, 2013:8.

Hamilton J. (1989), A new approach to the economic analysis of non stationary time series and the business cycle. Econometrica, 57 (2), 357- 384.

Hamilton J., Susmel R. (1994), Autoregressive Conditional Heteroskedasticity and Changes in Regime. Journal of Econometrics, 64(1-2), 307-33.

Haltiwanger J. and Harrington,J.J. (1991), The Impact of Cyclical Demand Movement on Collusive Behavior, The Rand Journal of Economics, 22(2), 89-116.

Porcher, S. (2014), Efficiency and Equity in Two-Part Tariffs: the Case of Residential Water Rates. Applied Economics, 46(5), 539-555.

Porcher, S. and Porcher, T. (2014), The Determinants of Margins in French Retail Gasoline Markets. Applied Economics Letters, 21(15), 1050-1053.

Radchenko, S., (2005) Oil Price Volatility and the Asymmetric Response of Gasoline Prices to Oil Price Increases and Decreases. Energy Economics, 27(5), 708-730.

Rotemberg, J.J. and Saloner,G., (1986) A Supergame-Theoretic Model of Price Wars During Booms. The American Economic Review, 76(3), 390-407.

Smith, J. L., (2009). World oil: Market or mayhem? Journal of Economic Perspectives 23 (3), 145-164.




DOI: http://dx.doi.org/10.15173/esr.v21i2.2771