Passing through the supply chain: Implications for market power

Carolina Melo, Rodrigo Moita and Stefanie Sunao

International Journal of Industrial Organization, 2021, vol. 79, issue C

Abstract: In this paper, we study the connection between pass-through and market power in the Brazilian Liquefied Petroleum Gas (LPG) industry. We use a state tax shock and apply a difference-in-differences strategy to estimate pass-through – at different levels of the supply chain – and an instrumented difference-in-differences strategy to estimate demand, and then feed a theoretical model to make inferences about a conduct parameter – that measures market power. We find an incomplete pass-through at the distribution level and for the supply chain as a whole, and a more-than-complete one at the retail level. Furthermore, we estimate price-elasticity of demand to be greater than one. When we feed a theoretical model of pass-through under imperfect competition with these estimates, we obtain a high conduct parameter at the whole supply chain level and an even higher one at the retail level alone. These results show that considering only the whole supply chain pass-through may lead to hasty conclusions about market power. Besides contributing to the empirical literature that connects pass-through with market power, we contribute to on-going national discussions regarding competitiveness in the LPG industry.

Keywords: Pass-through; Market power; Conduct parameter; Supply chain; Gas industry; Difference-in-differences (search for similar items in EconPapers)
JEL-codes: H22 L13 L95 Q41 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:79:y:2021:i:c:s0167718721000886

DOI: 10.1016/j.ijindorg.2021.102796

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