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Why are gasoline prices sticky? A test of alternative models of price adjustment

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  • Christopher Douglas

    (Department of Economics, University of Michigan-Flint, Flint, MI, USA)

  • Ana Mar�a Herrera

    (Department of Economics, Wayne State University, Detroit, MI, USA)

Abstract

Macroeconomic models of business cycles rely on the assumption that firms adjust prices infrequently to generate the short-run non-neutrality of money documented by the monetary transmission literature. They posit different mechanisms to generate price stickiness, with correspondingly different implications for inflation dynamics. Using an autoregressive conditional binomial model, we test which mechanism is most consistent with the pattern of price adjustment found in daily wholesale gasoline price data. Our results lead us to reject menu costs and information-processing delays but suggest that strategic considerations related to the idea of 'fair pricing' play an important role in accounting for price stickiness. Copyright © 2009 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 25 (2010)
Issue (Month): 6 ()
Pages: 903-928

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Handle: RePEc:jae:japmet:v:25:y:2010:i:6:p:903-928

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References

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  1. Matt Lewis, 2004. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Industrial Organization 0407010, EconWPA.
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Cited by:
  1. Venditti, Fabrizio, 2013. "From oil to consumer energy prices: How much asymmetry along the way?," Energy Economics, Elsevier, vol. 40(C), pages 468-473.
  2. Gautier, E. & Le Saout, R., 2012. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Working papers 375, Banque de France.
  3. Valadkhani, Abbas, 2013. "Do petrol prices rise faster than they fall when the market shows significant disequilibria?," Energy Economics, Elsevier, vol. 39(C), pages 66-80.
  4. Douglas, Christopher C. & Herrera, Ana María, 2014. "Dynamic pricing and asymmetries in retail gasoline markets: What can they tell us about price stickiness?," Economics Letters, Elsevier, vol. 122(2), pages 247-252.
  5. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  6. Abbas Valadkhani & Martin O'Brien & Amir Arjomandi, 2013. "Examining the nature of the relationship between Tapis crude oil and Singapore petrol prices," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 36(1), pages 27-41.

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