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The pricing of gasoline grades and the third law of demand

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Author Info

  • R. Morris Coats

    (Nicholls State University)

  • Gary M. Pecquet

    (Shenandoah University)

  • Leon Taylor

    (Tulane University)

Abstract

Alchian and Allen’s “third law of demand” states that as a fixed cost increases by the same amount for low- and high-quality goods, the ratio of the prices of high- to low-quality goods will fall and the quantity demanded of high quality goods relative to low quality goods will increase. We examine the more general hypothesis by estimating the ratio of the quantities of sales of premium to regular grade gasoline using the ratio of premium to regular prices, controlling for supply and demand factors. We find moderate evidence for the more general hypothesis.

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File URL: http://128.118.178.162/eps/mic/papers/0506/0506006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0506006.

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Length: 17 pages
Date of creation: 18 Jun 2005
Date of revision:
Handle: RePEc:wpa:wuwpmi:0506006

Note: Type of Document - pdf; pages: 17
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Web page: http://128.118.178.162

Related research

Keywords: Third Law of Demand; Price Ratios; Gasoline Grades;

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  1. Borcherding, Thomas E & Silberberg, Eugene, 1978. "Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 131-38, February.
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  3. James, Jennifer S. & Alston, Julian M., 2002. "Taxes and quality: A market-level analysis," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 46(3), September.
  4. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-97, December.
  5. Gould, John P & Segall, Joel, 1969. "The Substitution Effects of Transportation Costs," Journal of Political Economy, University of Chicago Press, vol. 77(1), pages 130-37, Jan./Feb..
  6. Cowen, Tyler & Tabarrok, Alexander, 1995. "Good Grapes and Bad Lobsters: Applying the Alchian and Allen Theorem," Economic Inquiry, Western Economic Association International, vol. 33(2), pages 253-56, April.
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