Vertical Control and Horizontal Coordination in Dynamic Oligopoly Pricing: Empirical Evidence from a Natural Supergame Experiment in Gasoline Markets

This paper examines empirically the players’ intrabrand vertical price control, interbrand horizontal pricing coordination, and their learning process to equilibrium in a rare natural experiment of supergame where a well defined simultaneous-move price setting stage game is repeated every 24 hours. The experiment occurred in Western Australia where a state law forces all gasoline service stations to report to the government, by 2:00 pm each day, their next-day retail prices. With a dataset that includes the daily price of virtually every retail outlet in a metropolitan area for 34 months, this paper shows that various forms of vertical price restraints are used by the upstream firms to control and synchronize intrabrand price, price leadership and short-term commitment are used to enable the upstream firms to effectively set prices sequentially, and punishment of short-duration and trial-and-error are used to get onto the nonsynchronization equilibrium