Flex Cars and Competition in Fuel Retail Markets

This research paper examines how the adoption of flex-fuel vehicles (bi-fuel cars) influenced price competition between ethanol and gasoline retail markets in the state of Rio de Janeiro, Brazil, between 2002 and 2008. Using a theoretical model and panel data from fuel stations, the authors find that increased flex-fuel penetration reduced retail prices and margins for both fuels, though the effect was more pronounced for ethanol. The study concludes that innovations increasing consumer choice can benefit all consumers, including those who do not adopt the new technology.

• The penetration of flex-fuel vehicles increased competition among fuel stations, leading to a reduction in retail prices and margins for both ethanol and gasoline.
• The negative impact of flex-fuel vehicle adoption on prices and margins was significantly stronger for ethanol than for gasoline, which the authors attribute to ethanol's smaller overall market share in Brazil.
• Contrary to some expectations, the increase in flex-fuel vehicle penetration did not lead to a decrease in the price spread between gasoline and ethanol; instead, the spread increased.
• Increased flex-fuel penetration led to a higher correlation between gasoline and ethanol prices, suggesting that fuel stations make pricing decisions for both fuels jointly.
• Structural estimation of the model indicates that the pass-through from wholesale costs to retail prices in the fuel market is approximately 0.5, aligning with oligopoly theory for constant marginal costs.
• The study finds that demand for fuel is generally inelastic, with gasoline and ethanol-only car owners being less responsive to price fluctuations across stations within a market compared to flex-fuel owners.
• The authors estimate that the reduction in fuel prices resulting from flex-fuel adoption saved consumers in the state of Rio de Janeiro approximately 70 million Reais in 2007.

APA

Assunção, J., Pessoa, J. P., & Rezende, L. (2016). Flex Cars and Competition in Fuel Retail Markets. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2017/08/WorkingPaper-Flex_Cars_and_Competition.pdf

Chicago

Assunção, Juliano, João Paulo Pessoa, and Leonardo Rezende. Flex Cars and Competition in Fuel Retail Markets. Climate Policy Initiative, 2016. https://www.climatepolicyinitiative.org/wp-content/uploads/2017/08/WorkingPaper-Flex_Cars_and_Competition.pdf.

Wikipedia

{{cite report |last1=Assunção |first1=Juliano |last2=Pessoa |first2=João Paulo |last3=Rezende |first3=Leonardo |title=Flex Cars and Competition in Fuel Retail Markets |publisher=Climate Policy Initiative |date=December 2016 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2017/08/WorkingPaper-Flex_Cars_and_Competition.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{assuno2016flex, author = {Assunção, Juliano and Pessoa, João Paulo and Rezende, Leonardo}, title = {{Flex Cars and Competition in Fuel Retail Markets}}, institution = {Climate Policy Initiative}, year = {2016}, month = dec, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2017/08/WorkingPaper-Flex_Cars_and_Competition.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }