Price Leadership and Uncertainty About Future Costs

Does uncertainty about future wholesale prices facilitate coordination among firms? To address this question, we exploit a policy intervention (Mepco) that limited the week-to-week variation in wholesale prices in the Chilean retail gasoline industry. We show that Mepco caused a decrease in retail gasoline margins in Chile. Further, using price leadership intensity as a proxy for the strength of market coordination, we show that margins decreased more in markets with higher leadership intensity. We rationalize these findings through a repeated-game framework.