Price regulation and relative price convergence : Evidence from the retail gasoline market in Canada

This paper explores price regulation and relative price convergence in the Canadian retail gasoline market. We use monthly data (2000-2010) on retail gasoline prices in 60 Canadian cities to investigate (i) whether the retail gasoline market in Canada has experienced a relative price convergence to the mean, which is expected, given the increased economic integration across Canadian provinces; and (ii) whether the introduction of price regulation mechanisms in New Brunswick and Nova Scotia in July 2006 had any impact on the price convergence in these provinces. We use a nonlinear panel unit root test and find solid evidence that Canadian retail gasoline markets are well integrated across locales; however, the share of converging cities reveals a significant decline since July of 2006. The impact of price regulation on price convergence is mixed; our results indicate that since the enactment of the regulation in all New Brunswick cities (9) included in the dataset, gasoline prices converge to the national mean. Volatility of price is also significantly reduced. In contrast, in the wake f price regulation in Nova Scotia, all 6 cities of the province are nonconvergent to the mean with increased volatility and overall price level.