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The demand for transportation fuels: Imperfect price-reversibility?

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  • Dargay, Joyce
  • Gately, Dermot

Abstract

This paper examines the price-reversibility of fuel demand for road transport. The analysis is based on an econometric model which utilizes price-decomposition techniques to measure separately the effects of different types of price increases and decreases. The methods proposed allow empirical testing of irreversibility and certain forms of hysteresis in demand relationships. The results lend strong support to the notion that consumers do not necessarily respond in the same fashion to rising and falling prices, nor equivalently to sudden and substantial price rises as to minor price fluctuations: demand is not necessarily reversible to price changes. This finding severely challenges the equilibrium basis of the traditional, reversible demand model. In the particular example used, the results indicate that consumers have reacted more strongly to the price rises of the seventies, than to other price rises, and that the resulting fuel reductions will not be totally reversed as prices return to lower levels. The results also show that, if irreversibilities do exist, the use of reversible, symmetric models will produce biased elasticity estimates, not only for prices, but for other variables as well. The methods used in this analysis should be applicable to more detailed analysis of travel behaviour, where asymmetry of response or persistence of effect may be relevant. The existence of price asymmetries will have important implications for fuel use in transport, as well as for traffic growth, and particularly for evaluating the impact of price-related transport policy. It will also affect the possibility of estimating price elasticities and forecasting demand on the basis of historic data.

Suggested Citation

  • Dargay, Joyce & Gately, Dermot, 1997. "The demand for transportation fuels: Imperfect price-reversibility?," Transportation Research Part B: Methodological, Elsevier, vol. 31(1), pages 71-82, February.
  • Handle: RePEc:eee:transb:v:31:y:1997:i:1:p:71-82
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    1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
    2. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, pages 773-785.
    3. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, pages 288-295.
    4. P.B. Goodwin, 1977. "Habit and Hysteresis in Mode Choice," Urban Studies, Urban Studies Journal Limited, pages 95-98.
    5. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, pages 635-654.
    6. Dermot Gately, 1993. "The Imperfect Price-Reversibility of World Oil Demand," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 163-182.
    7. Richard Baldwin & Paul Krugman, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, Oxford University Press, pages 635-654.
    8. Dargay, Joyce & Gately, Dermot, 1995. "The imperfect price reversibility of non-transport oil demand in the OECD," Energy Economics, Elsevier, pages 59-71.
    9. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, pages 773-785.
    10. Dermot Gately, 1992. "Imperfect Price-Reversibility of U.S. Gasoline Demand: Asymmetric Responses to Price Increases and Declines," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 179-208.
    11. Gately, Dermot, 1993. "Oil demand in the US and Japan: why the demand reductions caused by the price increases of the 1970's won't be reversed by the price declines of the 1980's," Japan and the World Economy, Elsevier, pages 295-320.
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