Price Leadership and Uncertainty about Future Costs

53 Pages Posted: 13 Jun 2018 Last revised: 8 Jun 2020

See all articles by Jorge Lemus

Jorge Lemus

University Of Illinois Urbana Champaign

Fernando Luco

Texas A&M University

Date Written: June 6, 2020

Abstract

Does uncertainty about future wholesale prices facilitate coordination? We address this question in the context of the Chilean retail-gasoline industry, where a policy intervention (Mepco) limited the week-to-week variation of wholesale prices. First, we show that Mepco caused a decrease in retail-gasoline margins in Chile. Second, using price leadership intensity as a proxy for the strength of coordination in a market, we show that margins decreased more in markets with higher leadership intensity. We rationalize these findings in a repeated-game framework, showing that a reduction in uncertainty about future wholesale prices hinders price coordination incentives, and has a greater impact in more coordinated markets.

Keywords: Price leadership, wholesale price uncertainty, tacit coordination, retail gasoline

JEL Classification: D22, D43, D83, L12, L41

Suggested Citation

Lemus, Jorge and Luco, Fernando, Price Leadership and Uncertainty about Future Costs (June 6, 2020). Available at SSRN: https://ssrn.com/abstract=3186144 or http://dx.doi.org/10.2139/ssrn.3186144

Jorge Lemus

University Of Illinois Urbana Champaign ( email )

1407 Gregory Drive, DKH 214
Urbana, IL 61801
United States

HOME PAGE: http://sites.google.com/site/jorgelemuswebsite/

Fernando Luco (Contact Author)

Texas A&M University ( email )

4228 TAMU
College Station, TX 77843
United States

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