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Abstract:

cover
CEP Discussion Paper
Flex Cars and Competition in Ethanol and Gasoline Retail Markets
Juliano Assuncao, Joao Paulo Pessoa and Leonardo Rezende
December 2013
Paper No' CEPDP1251:
Full Paper (pdf)

JEL Classification: L11; L13; L62; L71


Tags: flex-fuel vehicles; gasoline; ethanol; price competition; spatial competition; discrete equilibrium price dispersion

In Brazil, gasoline and ethanol coexist as automotive fuels and are becoming closer substitutes as flex cars become more widely adopted. We employ this source of variation in a large panel of weekly prices at the station level to show that fuel prices 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. We also propose a model of price competition in this market and use it to estimate demand from price response functions.