Endogenous price commitment, sticky and leadership pricing: Evidence from the Italian petrol market

This paper analyses dynamic pricing strategies in the Italian wholesale gasoline market and highlights the importance of endogenous price commitment. Using daily firm level prices over 5 years I show how the commitment of the market leader to keep prices fix for a long time period while costs were rising led to a market outcome with sticky and leadership pricing. To show this I evaluate the consequences of two shocks: first the publicly announced price policy change by the market leader, ENI, who started changing its retail price less frequently but in bigger and less predictable amounts. Second, the investigation of the Antitrust Authority after a buyer’s complaint of high and aligned prices. The effect of the announced price policy change was twofold: first, competitors adopted the same sticky pricing as the leader and second, they changed prices after the leader did. This pricing mechanism was then broken after the Antitrust Authority announced its investigation, which significantly decreased margins and increased price variance. Once the investigation ended the companies adopted cost-based pricing with very small and frequent price changes and margins rose again. Sticky pricing and coordination through price leadership facilitated price alignment and helped maintain higher margins as mean of conscious parallel behavior.