Price Leadership and Uncertainty about Future Costs

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.