Asymmetric Cost Pass-Through in Gasoline Markets: Do Station Size, -Location and -Service Level Matter?

Estimating non-linear autoregressive distributed lag models, we establish that short-run cost pass-through in the Swedish retail gasoline market depends on station heterogeneity. Our findings reveal a slower correction of the disequilibrium error in volume-adjusted prices compared to average pump prices. We also show that high volume stations possess longer price asymmetry. Our findings thus support that oil companies are more focused on pricing on days and at stations with higher sales, suggesting that earlier studies of pass-through using average prices underestimate the price asymmetry. Further, gasoline stations less exposed to local competition impose more prolonged price asymmetry. This is also true for full-service stations as compared to automated self-service stations. We show that the asymmetry, despite indicating only roughly three percent rise in consumer prices, accounts for nearly 40% of firms’ gross margins, carrying significant implications for market regulation and business strategies.