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

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  • Severin Borenstein
  • Andrea Shepard

Abstract

A model with costly adjustment of production and costly inventories implies that wholesale gasoline prices will respond with a lag to crude oil cost shocks. Unlike explanations that rely upon menu costs, imperfect information, or long-term buyer/seller relationships, this model predicts that futures prices for gasoline will adjust incompletely to crude oil price shocks that occur close to the expiration date of the futures contract. We test and confirm this implication. Examining wholesale price responses in 188 gasoline markets, we also find that firms with market power adjust prices more slowly than do competitive firms, consistent with the model.

Suggested Citation

  • Severin Borenstein & Andrea Shepard, 2002. "Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 116-139, Spring.
    • Handle: RePEc:rje:randje:v:33:y:2002:i:spring:p:116-139
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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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