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.

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1 March 2019

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International Journal of Industrial Organization 63, pp.145-184, 2019

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DOI: 10.1016/j.ijindorg.2018.07.005

https://www.sciencedirect.com/science/article/pii/S0167718717301704

This Journal article is published under the centre's Growth programme.