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Price transmission in the presence of a vertically integrated dominant firm: Evidence from the gasoline market

Farkas, Richárd, Yontcheva, Biliana
Energy policy 2019 v.126 pp. 223-237
asymmetry, foreclosure, gasoline, market power, markets, prices, wholesale marketing, Hungary
The present paper provides an empirical examination of cost pass-through on a market with a vertically integrated firm which has substantial market power in wholesale and faces competition in retail. Our investigation focuses on gasoline pricing in Hungary, where a court-case against the dominant firm on the market provides us with detailed evidence regarding the price-setting behavior of the vertically integrated agent. We find that when market power is stronger at the wholesale level, the company is likely to raise prices in response to cost increases faster than it adjusts them downwards in case of cost decreases on the wholesale market. This process is known as “asymmetric cost pass-through”. Our findings suggest that regulatory efforts on the market should not only encompass differences in firm mark-ups between franchisees of the firm and competitors in order to prevent foreclosure, but should also seek to evaluate the wholesale price margins applied to all firms. We supplement our results with an analysis of the behavior of the firm after an investigation into its pricing behavior and find that pass-through asymmetry decreases substantially on the wholesale level in the period after the investigation.