Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market
AbstractIt has been documented that retail gasoline prices respond more quickly to increases in wholesale price than to decreases. However, there is very little theoretical or empirical evidence identifying the market characteristics responsible for this behavior. This paper presents a new theoretical model of asymmetric adjustment that empirically matches observed retail gasoline price behavior better than previously suggested explanations. I develop a â€œreference priceâ€ consumer search model that assumes consumersâ€™ expectations of prices are based on prices observed during previous purchases. The model predicts that consumers search less when prices are falling. This reduced search results in higher profit margins and a slower price response to cost changes than when margins are low and prices are increasing. Following the predictions of the theory, I use a panel of gas station prices to estimate the response pattern of prices to a change in costs. Unlike previous empirical studies I focus on how profit margins (in addition to the direction of the cost change) affect the speed of price response. Estimates are consistent with the predictions of the reference price search model, and appear to contradict previously suggested explanations of asymmetric adjustment.
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Bibliographic InfoPaper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt9pv2d9fn.
Date of creation: 01 Sep 2004
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Asymmetric; Consumer Search; Gasoline; Price; Asymmetric Adjustment; Cointegration; Error Correction; Dynamic; Response;
Other versions of this item:
- Matthew S. Lewis, 2011. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 409-449, 06.
- Matt Lewis, 2004. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Industrial Organization 0407010, EconWPA.
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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