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What do one hundred million transactions tell us about demand elasticity of gasoline?

Author

Listed:
  • Mohammad Vesal

    (Sharif University of Technology)

  • Amir Hossein Tavakoli

    (Sharif University of Technology)

  • Mohammad H. Rahmati

    (Sharif University of Technology)

Abstract

The price elasticity of gasoline demand is a key parameter in evaluation of various policies. However, most of the literature uses aggregate data to identify this elasticity. Temporal and spatial aggregation make such elasticity estimates biased. We employ a unique dataset of all gasoline transactions in Iran during a 4-month period around an unexpected exogenous price change to identify that price elasticity. We also identify a significant withholding behavior by consumers in response to anticipated price changes. The consumers reduce or postpone their purchases when they expect a decrease in prices. Controlling for date fixed effects would eliminate homogeneous withholding responses. However, heterogeneous responses to this anticipated price change would lead to an overestimation of price elasticity. After controlling for date, individual, and location fixed effects as well as the withholding behavior, we estimate a robust significant price elasticity of − 0.085. Aggregation of the same data by week, month, and city yields an estimate of − 0.3, indicating a significant bias in earlier studies.

Suggested Citation

  • Mohammad Vesal & Amir Hossein Tavakoli & Mohammad H. Rahmati, 2022. "What do one hundred million transactions tell us about demand elasticity of gasoline?," Empirical Economics, Springer, vol. 62(6), pages 2693-2711, June.
    • Handle: RePEc:spr:empeco:v:62:y:2022:i:6:d:10.1007_s00181-021-02122-3
    DOI: 10.1007/s00181-021-02122-3
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    More about this item

    Keywords

    Gasoline demand elasticity; Transaction-level data; Withholding behavior; Subsidy;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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