Center for Effective Global Action

The success of market deregulation in low- and middle-income countries depends on the strength of price and non-price competition between firms. In this paper, we study the recently deregulated retail gasoline market in Mexico. During our sample period, nearly 650 new gasoline stations entered the market. We estimate the causal effect of entry on the prices and quality of incumbent firms. We find that the entry of a nearby station decreases markups by nearly 4% for regular gasoline and about 2% for premium gasoline and diesel. We validate these results using the structure of ownership in the market, showing near zero impacts when the incumbent and entrant have the same owner. In addition, we show that the effect of competition on markups attenuates with distance and driving time. We find no evidence that entry affects the quality of existing stations, as measured by online ratings and regulatory inspections.