Price Leadership and Uncertainty About Future Costs*

Abstract

Does uncertainty about future wholesale prices facilitate coordination among firms? To address this question, we exploit a policy intervention (Mepco) that limited the week‐to‐week variation in wholesale prices in the Chilean retail gasoline industry. We show that Mepco caused a decrease in retail gasoline margins in Chile. Further, using price leadership intensity as a proxy for the strength of market coordination, we show that margins decreased more in markets with higher leadership intensity. We rationalize these findings through a repeated‐game framework.

Coordination and Price Leadership in an Unregulated Environment

“…Price leadership also seems to be more effective when large firms lead price increases, resulting in more frequent and more successful price jumps. The results correspond with Lemus & Luco (2019), who find that markets in Chile with a persistent price leader have higher margins and more price matching.…”

Missing Price Information and Its Impact on Equilibrium Price Dispersion: Evidence From Gasoline Signboards*

“…We reestimate the model with circle markets of different radii, from one to six miles instead of two, and with rectangular disjoint markets where each station is assigned to exactly one market in a complete grid, and in each case find very similar results. We also reestimate the model using a more sophisticated network model, a hierarchical clustering model similar to that used by Lemus and Luco [2021], which creates multiple levels of clusters based on stations' geographic proximity to one another. At the bottom level, stations are paired into small local clusters, and at the next higher level those clusters are themselves grouped into larger clusters (i.e., clusters of clusters) based on the relative proximity of the centerpoints of the clusters below it.…”

Price effects of calling out market power: A study of the COVID‐19 oil price shock

“…Finally, we contribute to empirical research on the retail gasoline industry. Within this literature, we most closely connect to previous studies on price coordination and tacit collusion (Byrne & de Roos, 2019;Lemus & Luco, 2021;Lewis, 2012;Wang, 2009), and cost passthrough and market structure (Bachmeier & Griffin, 2003;Borenstein & Shepard, 2002;Byrne, 2019;Deltas, 2008;Lewis & Noel, 2011;Verlinda, 2008).…”