Do LPG prices react to the entry of natural gas? Implications for competition policy

Abstract

In developing countries, the penetration of Liquefied Petroleum Gas (LPG) is still high, and hence the entry of Natural Gas (NG) networks coexists with the use of LPG by an important fraction of households. Thus, a relevant policy question is whether the number and degree of horizontal integration among NG and LPG providers has an influence on the level of retail prices. Using selfreported LPG retail prices of the largest LPG provider in Chile for the period 2013-2014, we estimate that the presence of a competing NG network generates an average decrease of LPG retail prices within the range [-2,-4%] depending on the econometric specification. Thus, since the presence of an additional competing provider (i.e., an NG retailer) has an influence on the level of prices, LPG and NG may be indeed considered as imperfect substitutes. The main policy implication of this result is that the degree of horizontal integration between both types of providers should matter and there would be room for regulatory intervention aimed at proposing remedies in order to mitigate any potential anticompetitive effect