Gas pump transforming into a field of sugarcane, symbolizing the connection between fuel and agriculture.

Ethanol's Market Muscle: Decoding Concentration and Power at the Pump

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Beau Callahan in Business & Economy April 2025 • 4 min read.

"Is Brazil's ethanol distribution sector truly competitive? An in-depth look at market dynamics and power structures using economic analysis."


Brazil's fuel market has seen a notable shift with the rise of ethanol, prompting questions about market power within the distribution sector. The increasing demand for ethanol, driven by both hydrated and anhydrous forms, has created new business opportunities and reshaped the competitive landscape. A close examination of this sector is crucial to understand its efficiency and potential impacts on consumers.

The dynamics of concentration in the fuel distribution market are complex. As new investments emerge and market players consolidate, concerns arise about the potential exercise of market power. This article delves into the Brazilian ethanol distribution sector, focusing on the state of São Paulo, a major producer and consumer of ethanol, to analyze the presence and extent of market power.

This analysis employs tools from the New Empirical Industrial Organization (NEIO) to assess market conduct and identify the ability of distributors to influence prices. By examining indicators of market concentration and applying econometric models, we aim to determine whether the ethanol distribution sector operates under competitive conditions or exhibits signs of market dominance.

Decoding Market Concentration: What the Numbers Reveal

Gas pump transforming into a field of sugarcane, symbolizing the connection between fuel and agriculture.

Market concentration indices provide a snapshot of the competitive landscape. The CR4, representing the market share of the four largest distributors, and the Herfindahl-Hirschman Index (HHI), which considers the distribution across all firms, are key metrics. Examining these indicators over time reveals trends in market dominance and potential shifts in power.

While the number of distributors in Brazil has fluctuated, a clear trend towards increasing concentration is evident. The CR4 reached a peak in 2002, driven by the largest distributor's increased market share. Although the HHI suggests relatively low concentration overall, the recent increase in CR4 indicates a growing dominance by the top players. In 2009, the top four distributors controlled approximately 57% of the market.
  • CR4 (Concentration Ratio of Top 4): Measures the combined market share of the four largest firms. Higher CR4 values suggest greater market concentration.
  • HHI (Herfindahl-Hirschman Index): Calculated by summing the squares of the market shares of all firms in the market. Provides a comprehensive view of market concentration, taking into account the entire distribution of market shares.
  • Equivalent Number: Represents the number of equally sized firms that would result in the same HHI value. A lower equivalent number indicates higher market concentration.
This concentration raises concerns about the potential for market power, where a few dominant firms can influence prices and reduce consumer welfare. While a market with ten equally sized competitors can foster strong competition, the increasing dominance of the top four distributors warrants careful scrutiny. This is particularly relevant in the context of Brazil's growing ethanol market, where demand is on the rise.

Drawing Conclusions: Is the Ethanol Market Competitive?

This analysis, employing the New Empirical Industrial Organization (NEIO) framework, sought to determine the existence and extent of market power in Brazil's ethanol distribution sector. By examining cost structures, demand elasticities, and market conduct parameters, the study concludes that while the market exhibits some concentration, distributors do not effectively exercise significant market power. The estimated conduct parameters suggest behavior closer to perfect competition than to monopoly, offering reassurance about the current state of the ethanol market.

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