Pricing Coordination in a Spatial Context: Evidence from the Retail Vehicular Natural Gas Market of Peru

Abstract

This paper aims to assess the degree of market power in the Peruvian retail market for Vehicular Natural Gas (VNG) using a generalized spatial competition model proposed by Capozza and Van Order (1978). This model nests Loschian, Hotelling-Smithies, and Greenhut-Ohta models through a single coefficient, so-called the spatial conjectural variation parameter. This paper exploits the fact that the marginal cost of natural gas is known and constant for all VNG stations due to the regulatory treatment in Peru, which ensures the proper identification of the conjectural variation parameter and gives information about the behavior of pricing coordination among firms. Our database contains information on retail VNG prices, sold VNG quantities, and other characteristics of 34 counties in Metropolitan Lima and Callao in Peru from 2011 to 2015. The results suggest the existence of some degree of coordination in prices associated with spatial collusion. This result is consistent with the Peruvian Antitrust Authority verdict that determined the existence of a case of price collusion in this retail market in 2019.