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Testing the Alchian-Allen Theorem: A Study of Consumer Behavior in the Gasoline Market

Author

Listed:
  • Robert Lawson

    () (Capital University)

  • Lauren Raymer

    () (University of North Carolina)

Abstract

This paper uses a data set of daily sales at a single gasoline station over a seven year period to determine if consumers respond to relative price changes among the three grades of gasoline. Based on the reasoning of Alchian and Allen (1964) and Barzel (1976), market shares of higher quality gasoline should increase at the expense of regular grade gasoline when overall gasoline prices increase. The empirical results do not conform to this expectation. We find instead that the consumers in this sample responded to higher gasoline prices by switching to mid grade gasoline from premium grade gasoline leaving the market share of regular gasoline unchanged.

Suggested Citation

  • Robert Lawson & Lauren Raymer, 2006. "Testing the Alchian-Allen Theorem: A Study of Consumer Behavior in the Gasoline Market," Economics Bulletin, AccessEcon, vol. 4(35), pages 1-6.
  • Handle: RePEc:ebl:ecbull:eb-06d00021
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    References listed on IDEAS

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    1. Sobel, Russell S & Garrett, Thomas A, 1997. "Taxation and Product Quality: New Evidence from Generic Cigarettes," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 880-887, August.
    2. Sumner, Michael T & Ward, Robert, 1981. "Tax Changes and Cigarette Prices [An Alternative Approach to the Analysis of Taxation]," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1261-1265, December.
    3. Barzel, Yoram, 1976. "An Alternative Approach to the Analysis of Taxation," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1177-1197, December.
    4. Bertonazzi, Eric P & Maloney, Michael T & McCormick, Robert E, 1993. "Some Evidence on the Alchian and Allen Theorem: The Third Law of Demand?," Economic Inquiry, Western Economic Association International, vol. 31(3), pages 383-393, July.
    5. Johnson, Terry R, 1978. "Additional Evidence on the Effects of Alternative Taxes on Cigarette Prices," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 325-328, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Minagawa, Junichi, 2012. "On Giffen-like goods," Economics Letters, Elsevier, vol. 115(2), pages 282-285.
    2. Charlotte Emlinger & Viola Lamani, 2017. "International Trade, Quality Sorting and Trade Costs: The Case of Cognac," Working Papers 2017-18, CEPII research center.
    3. Philip DeCicca & Donald Kenkel & Feng Liu, 2015. "Reservation Prices: An Economic Analysis of Cigarette Purchases on Indian Reservations," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 93-118, March.
    4. Junichi Minagawa & Thorsten Upmann, 2012. "The Generalized Alchian-Allen Theorem," CESifo Working Paper Series 3969, CESifo Group Munich.
    5. repec:oup:jeurec:v:15:y:2017:i:3:p:626-653. is not listed on IDEAS
    6. Markus Dertwinkel-Kalt & Katrin Köhler & Mirjam R. J. Lange & Tobias Wenzel, 2017. "Demand Shifts Due to Salience Effects: Experimental Evidence," Journal of the European Economic Association, European Economic Association, vol. 15(3), pages 626-653.
    7. Charlotte Emlinger & Viola Lamani, 2018. "International Trade, Quality Sorting and Trade Costs: The Case of Cognac," Cahiers du GREThA 2018-05, Groupe de Recherche en Economie Théorique et Appliquée.
    8. Justine Hastings & Jesse M. Shapiro, 2012. "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," NBER Working Papers 18248, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Alchian-Allen Theorem;

    JEL classification:

    • D0 - Microeconomics - - General

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