Deregulation and strategic complements: Japanese gasoline market

Abstract

The purpose of this article is to provide an explanation for the success of deregulation implemented in the Japanese oil industry by investigating the economic norm in Japanese gasoline market, namely, how a firm expects its rivals to react when the firm changes its output decisions. Using the conjectural opponent's reaction, this article investigates whether the economic norm in Japanese gasoline market is strategic complements or strategic substitutes. It is found that the economic norm in the Japanese gasoline market over the period 1992 to 2003 is strategic complements, that is, ‘Do it, since everyone else is doing it’. It is suggested that some of the fall in gasoline prices said to result from successful deregulation should really be attributed to the production expansion derived from this strategic complementarity.

Acknowledgements

This research is supported by a Grant-in-aid for Scientific Research, Category (C) (No. 17530186) awarded by the Japan Society for the Promotion of Science.

Notes

¹ The concept of conjectural variation has been used to derive the FOC for each firm. Many previous studies, for example, Appelbaum (1982), Bresnahan (1982) and Wolfram (1999), have employed the conjectural variation approach to identify the market structure for a particular good. This article is interested in how the firm expects its opponents to react to its own actions, and has little interest per se in the identification of the market structure.

² There are several papers that analyse the cost structure of the oil industry. In most cases, multi-product trans–log total cost functions are estimated (e.g. Goto, 2005). In this article, in order to estimate the ‘marginal’ cost function and to reduce the number of coefficients to be estimated, a simple marginal cost function that should be treated as a linear approximation of a nonlinear cost function is assumed (Besanko et al., 1998).

³ The motivation for adopting the perceived demand approach is that it is more realistic in many situations than the alternative objective demand approach. Negishi (1972), Rey and Stiglitz (1995) and Dehez et al. (2003) employed the perceived demand function which expresses the expectation of a firm as to the relationship between the price it charges and the quantity of output the market will buy.

⁴ This division of the firms is also suggested when a cluster analysis, based on each firm's volume of gasoline sales, is used to divide the firms into two groups.