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Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets

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  • Severin Borenstein
  • Andrea Shepard

Abstract

We present and test an explanation for lags in the adjustment of wholesale gasoline prices to changes in crude oil prices. Our simple model with costly adjustment of production and inventories implies that output prices will respond with a lag to cost shocks even in the absence of menu costs, imperfect information, and long- term buyer/seller relationships. The model predicts that futures prices for gasoline will adjust incompletely to crude oil price shocks occurring close to the expiration date of the futures contract. We test and confirm this implication. The model also predicts that firms with market power will choose a different price adjustment path than would perfectly competitive firms. We examine the responses of prices in 188 local wholesale gasoline markets and find evidence that greater market power leads to slower output price adjustment.

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Paper provided by University of California at Berkeley, Haas School of Business in its series Working Papers with number _001.

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Date of creation: Feb 1996
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Handle: RePEc:wop:calbha:_001

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  1. Jeffrey D. Karrenbrock, 1991. "The behavior of retail gasoline prices: symmetric or not?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 19-29.
  2. Bacon, Robert W., 1991. "Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes," Energy Economics, Elsevier, Elsevier, vol. 13(3), pages 211-218, July.
  3. Pindyck, Robert S., 1990. "Inventories and the short-run dynamics of commodity prices," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 3133-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
  5. Laurence Ball & N. Gregory Mankiw, 1994. "A sticky-price manifesto," Proceedings, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Apr.
  6. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  7. Carlton, Dennis W, 1991. "The Theory of Allocation and Its Implications for Marketing and Industrial Structure: Why Rationing Is Efficient," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 34(2), pages 231-62, October.
  8. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, Elsevier, vol. 13(3), pages 203-210, July.
  9. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(2), pages 529-38, May.
  10. Robert S. Pindyck, 1992. "The Present Value Model of Rational Commodity Pricing," NBER Working Papers 4083, National Bureau of Economic Research, Inc.
  11. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
  12. Benabou, Roland & Gertner, Robert, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 69-94, January.
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