Measuring market power with a regional competitive fringe
This paper estimates significant and geographically heterogeneous market power in Argentina's wholesale liquid fuels market (2016–2019), demonstrating that local competitive conditions and geographic isolation, rather than national concentration, are the primary determinants of markups, thereby challenging the assumption that price liberalization alone ensures competitive outcomes.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Fuel is the lifeblood of a modern economy, yet the price you pay at the pump is determined long before the car ever reaches the station. Deep in the supply chain, between the oil refinery and the retail pump, lies a wholesale market where large distributors sell fuel to gas stations. For decades in Argentina, the government set the prices for this fuel, acting as a strict referee to keep costs stable. But in 2017, the rules changed. The government stepped back, removing price controls and allowing companies to set their own rates based on supply and demand. This sudden shift created a unique moment to watch how businesses behave when the leash is removed. Economists have long known that when a few large companies dominate a market, they can often charge more than the true cost of the product, a gap known as a markup. However, measuring this power is difficult, especially when companies do not publicly reveal their costs. The question researchers faced was simple yet profound: once the government stopped setting prices, how much power did these fuel distributors actually hold, and did that power look the same in the bustling capital as it did in the remote corners of the country?
A team of researchers set out to answer this by looking at the years between 2016 and 2019, a period that saw the removal of price controls, the bankruptcy of a major independent distributor, and the merger of two others. They gathered a massive amount of data, tracking exactly how much fuel was sold, at what price, by which company, and in which province. Instead of trying to guess the hidden costs of refining oil—a complex task because one barrel of oil produces many different products—they focused on the choices made by the gas stations themselves. They treated each gas station owner as a customer choosing between different fuel suppliers, much like a shopper choosing between brands of cereal. By analyzing how sensitive these station owners were to price changes, the researchers could work backward to calculate how much extra money the fuel companies were charging above their costs. This method allowed them to map the invisible hand of market power across the entire nation.
The results revealed a landscape of power that was far more complex than a simple national average could show. The largest company, a state-controlled giant known as YPF, consistently charged the highest markups across the country, leveraging its massive size and dominant position. However, the study uncovered a surprising twist: smaller companies operating in remote, sparsely populated regions were often able to charge even higher markups than their larger rivals in the cities. In the vast, isolated stretches of Patagonia and the Northeast, where gas stations are few and far between, the local distributor holds a unique advantage. Because a station in a remote town has very few other options for fuel, it cannot easily switch suppliers if the price gets too high. This geographic isolation weakens the station's bargaining power, allowing the local supplier to maintain high prices without fear of losing business. It is a reminder that in a country as large as Argentina, where the distance from north to south exceeds 3,700 kilometers, geography can be just as powerful as market share.
The researchers also tested what happens when more competitors enter a local market. They found that for every additional wholesale supplier available in a region, the markup charged by all companies dropped by roughly three percentage points. This suggests that the number of rivals in a specific area is the most important factor in keeping prices competitive, far more so than the total concentration of the industry across the whole nation. Conversely, when a company owns a dense network of its own gas stations, it can raise prices because it controls the outlets that need the fuel. The study also noted that the deregulation period did not automatically lead to fair competition everywhere. While prices became more flexible, the structural barriers of distance and infrastructure meant that customers in remote areas remained vulnerable to high prices, a reality that national averages often hide.
Ultimately, the study concludes that simply removing price controls is not enough to ensure a competitive market in a geographically diverse country. The power of a fuel distributor depends heavily on where it operates. In the dense, well-connected regions, competition keeps prices in check, but in the isolated corners of the map, the lack of alternatives allows even small firms to exercise significant power. This finding offers a clear lesson for regulators: energy policies cannot be one-size-fits-all. To truly protect consumers, rules must account for the specific conditions of each region, recognizing that a remote station faces a very different market reality than one in the heart of the capital. The work provides a detailed map of how market power flows through the fuel supply chain, showing that in the world of energy, location is everything.
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