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Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?

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  • Severin Borenstein
  • A. Colin Cameron

Abstract

Our empirical investigation confirms the common belief that retail gasoline prices react more quickly to increases in crude oil prices than to decreases. Nearly all of the response to a crude oil price increase shows up in the pump price within 4 weeks, while decreases are passed along gradually over 8 weeks. The asymmetry could indicate market power of some producers or distributors, or it could result from inventory adjustment costs. By analyzing price transmission at different points in the distribution chain we investigate these theories. We find that some asymmetry occurs at the level of the competitive spot market for gasoline, perhaps reflecting inventory costs. Wholesale gasoline prices, however, exhibit no asymmetry in responding to crude oil price changes, indicating that refiners who set wholesale prices are not the source of the asymmetry. The most significant asymmetry appears in the response of retail prices to wholesale price changes. We argue that this probably reflects short run market power among retail gasoline sellers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4138.

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Date of creation: Aug 1992
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Publication status: published as Quarterly Journal of Economics, February 1997, vol.112, no.1, pp.305-339.
Handle: RePEc:nbr:nberwo:4138

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  1. West, Kenneth D, 1988. "Asymptotic Normality, When Regressors Have a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1397-1417, November.
  2. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 30-53, February.
  3. Severin Borenstein, 1991. "Selling Costs and Switching Costs: Explaining Retail Gasoline Margins," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 354-369, Autumn.
  4. Reagan, Patricia B. & Weitzman, Martin L., 1982. "Asymmetries in price and quantity adjustments by the competitive firm," Journal of Economic Theory, Elsevier, Elsevier, vol. 27(2), pages 410-420, August.
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  1. Competition in the Georgian Retail Gasoline Market
    by Michael Fuenfzig in The ISET Economist on 2012-10-05 10:14:58
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