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Temporary Wholesale Gasoline Price Spikes Have Long-Lasting Retail Effects: The Aftermath of Hurricane Rita

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  • Matthew S. Lewis

Abstract

I study U.S. gasoline prices following Hurricane Rita to show that short-lived geographical differences in the severity of wholesale gasoline price spikes are associated with long-lasting geographical differences in retail prices. In most U.S. cities, wholesale prices spiked significantly for roughly 2 weeks following the hurricane. However, in cities where this spike was particularly large, retail margins remained higher than in other cities for nearly 2 months. High retail margins dissipated more quickly after the hurricane in cities where competition between stations tends to generate cyclical retail price fluctuations independent of wholesale cost movements. I discuss why prices may have fallen faster in cities exhibiting retail price cycles and present additional results identifying differences in market characteristics between cities with and without price cycles. I find that cycling cities tend to have higher population density and have independent (nonrefinery brand) stations that are more highly concentrated into large retail chains. (c) 2009 by The University of Chicago. All rights reserved.

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  • Matthew S. Lewis, 2009. "Temporary Wholesale Gasoline Price Spikes Have Long-Lasting Retail Effects: The Aftermath of Hurricane Rita," Journal of Law and Economics, University of Chicago Press, vol. 52(3), pages 581-605, August.
  • Handle: RePEc:ucp:jlawec:v:52:y:2009:i:3:p:581-605
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    1. Andrew Eckert & Douglas S. West, 2004. "A tale of two cities: Price uniformity and price volatility in gasoline retailing," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 38(1), pages 25-46, March.
    2. Castanias, Rick & Johnson, Herb, 1993. "Gas Wars: Retail Gasoline Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 171-174, February.
    3. Jeremy A. Verlinda, 2008. "DO ROCKETS RISE FASTER AND FEATHERS FALL SLOWER IN AN ATMOSPHERE OF LOCAL MARKET POWER? EVIDENCE FROM THE RETAIL GASOLINE MARKET -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 581-612, September.
    4. George Deltas, 2008. "RETAIL GASOLINE PRICE DYNAMICS AND LOCAL MARKET POWER -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 613-628, September.
    5. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-599, May.
    6. Eckert, Andrew, 2003. "Retail price cycles and the presence of small firms," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 151-170, February.
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