Price Leadership and Uncertainty about Future Costs
53 Pages Posted: 13 Jun 2018 Last revised: 8 Jun 2020
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: Suggested Citation