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Price Dispersion and Wholesale Costs Shocks in the Colombian Retail Gasoline Markets

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  • Alex Perez

    (Banco de la República de Colombia)

  • Sebastian Velez-Velasquez

    (Banco de la República de Colombia)

Abstract

Price dispersion is a prevalent feature even in markets where, arguably, homogeneous goods are traded. At the heart of the causes of price dispersion lie the firms’ strategic interactions with their customers and rivals. Consumers’ eagerness to search for lower prices tends to reduce dispersion because it enhances competition. On the other hand, the firm’s inability to sustain tacit collusion increases price dispersion. Wholesale cost shock can impact both. We use data on retail gasoline markets from Colombia to assess whether changes in price dispersion following wholesale cost shocks are explained by consumers searching or by firms breaking away from collusive equilibria. We also use a forced divestiture case to explore the role of market structure on the extent of price dispersion. Our findings suggest that changes in price dispersion following wholesale cost shocks are driven by consumers searching more intensely for lower prices. We also find a positive relationship between the number of brands in a market and how dispersed prices are.

Suggested Citation

  • Alex Perez & Sebastian Velez-Velasquez, 2024. "Price Dispersion and Wholesale Costs Shocks in the Colombian Retail Gasoline Markets," Journal of Industry, Competition and Trade, Springer, vol. 24(1), pages 1-19, December.
  • Handle: RePEc:kap:jincot:v:24:y:2024:i:1:d:10.1007_s10842-024-00434-5
    DOI: 10.1007/s10842-024-00434-5
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    More about this item

    Keywords

    Price dispersion; Gasoline markets; Wholesale costs; Retail prices;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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