Spatial competition and retail pricing in the newly-deregulated Mexican gasoline market

• Environmental and Energy Economics Workshop

Date and Location

Wednesday, October 30, 2019, 3:40 PM - 5:00 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

We examine how the presence of nearby competitors affects prices and quantities for retailers selling an identical product. Our research setting is the retail gasoline market in Mexico, which was deregulated at the end of November 2017. Since deregulation, station owners have been able to switch to alternative franchises (instead of the former government monopoly brand PEMEX) and all stations can set their own prices. The post-regulation period has seen the entry of 70 new brands and the construction of more than 500 new gasoline stations. These rapid changes in market structure provide an ideal environment to study the relationship between entry, competition, and prices. We make use of rich data for the universe of gasoline stations in Mexico, including daily observations of station-level prices and volumes.

Our empirical strategy exploits the within-station variation in competition induced by the construction of new stations. We define the local market for each station based on travel times along the road network. The entry of a new competitor into the local market of a station reduces its price margin by US 1 cent per gallon. This is equivalent to 10 percent of the total increase in retail margins since deregulation. Station-level volumes decline at the time of entry of a new competitor. Using confidential data on station ownership, we show that an additional station owned by the same firm leads to higher, not lower, margins. The results highlight the importance of removing barriers to entry in deregulated markets and the anti-competitive effects of cross-ownership in local retail markets.

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