No, nothing about the election here. Instead something about the Georgian retail gasoline market, which according to some is not so competitive. Case in point is this article on an opposition (soon government) leaning news outlet that alleges price fixing in the Georgian retail gasoline market. The article is based on a recent study by Transparency Georgia. A study with some interesting data, but apparently it was all too much for a clueless (or partisan) journalist. But let’s discuss the study itself.
Transparency Georgia finds that:
- The retail gasoline market in Georgia is dominated by five companies, and industry concentration has increased since the Rose Revolution
- There are significant discrepancies between the gasoline imports reported by the Georgian revenue service, and the gasoline exports reported by Georgia’s trade partners.
- There are little to no price differences across companies, and retail gasoline prices change more or less simultaneously.
- The price transmission mechanism is asymmetric. Price increases on the world market lead to price increases in Georgia. Vice versa, price decreases on the world market do not lead to price decreases in Georgia.*
- Between 2006 and 2011 retail gasoline prices in Georgia increased significantly.
All this is seen by Transparency Georgia as evidence in support of the hypothesis that firms in the Georgian retail gasoline market are cooperating and fixing prices. And indeed it looks and sounds fishy. Or maybe not:
- A small number of firms (an oligopoly) indeed raises the probability of cartel formation. But at the same time a small number of firms is also perfectly compatible with competitive market outcomes. This is in particular true for a market in a homogenous good with transparent prices and small to non-existent search costs for consumers. The small number of firms tells us little to nothing about the likelihood of price fixing in Georgia. Similarly, the consolidation of the industry since the Rose Revolution is at least as consistent with competition driving out unprofitable companies as it is with the existence of a cartel. In particular as a small number of firms seem to be the usual market outcome. For example, Georgia has as many major companies in the retail gasoline market as has Germany (Aral, Esso), despite the German market being larger by magnitudes.
- Discrepancies in trade statistics are nothing new, and in fact to be expected for a country that is also a transit hub.
- This is exactly what we would expect in a competitive market of a homogenous good with little to no search costs to consumers: Firms charge the same price for the homogenous good and change their price almost simultaneously in response to changes in costs.
- That prices rise faster than they fall is observed on many different markets, and in particular in the retail gasoline market. But this observation has little to say about the likelihood of a cartel, as these asymmetries can be explained by switching costs and the local market power of gas stations, or inventory adjustments.
- I have difficulties understanding why the Transparency Georgia study associates the price increases over the 2006-2011 with the consolidation of the industry but fails to even mention the evolution of world oil prices. Which perfectly explain the movement of gasoline prices in Georgia.
It might well be the case that prices on the Georgian retail gasoline market are fixed or that a cartel exists. But the data presented in the study is not evidence for it, if not against it. It’s thus puzzling to see Transparency Georgia calling for an investigation and intervention by authorities, and for this study to be cited as if it is serious evidence in various news outlets. Hopefully no antitrust and competition policies will be based on it.
* I have doubts about this result. The time series is rather short and nothing in the study suggests that this result is based on a rigorous analysis of the price transmission mechanism or a statistical test for asymmetry.