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Petrol Price Cycles

  • David P. Byrne

I never owned a car as a student. If I had to go somewhere, I walked or took public transport. I paid little attention to petrol prices because they did not affect my weekly budget. However, if you talk to someone who owns a car or drives to work, you will likely find they pay attention to prices at the pump.They may tell you which are the cheap petrol stations in their market, what the cheap day of the week for buying petrol is, or express concern that petrol prices rise around weekends and holidays.Consumers’ interest in petrol prices is likely driven by three facts: (1) petrol prices are displayed on large signs, making them highly visible; (2) in the short-run, consumers are unable to substitute from petrol to other fuels or modes of transportation when petrol prices rise; and (3) consumers spend a large share of their income on petrol. In 2009, the average Australian spent $51.02 per week on petrol, or 4.1% of their total weekly expenditures (ACCC 2011). Moreover, petrol is a relatively homogeneous good, which leaves consumers questioning why its price varies so much over time and across stations. Given the impact petrol costs have on consumers’ budgets, the Australian Competition and Consumer Commission (ACCC) monitors competition in Australian petrol markets. In fact, the ACCC has an entire branch solely dedicated to petrol markets! A striking finding the ACCC has documented for at least the past five years is that petrol price cycles exist in Australian cities. Figure 1, taken from an ACCC (2010) monitoring report, illustrates petrol price cycles for Adelaide, Brisbane, Melbourne, Perth, and Sydney. In these cities, the average daily petrol price drastically increases once a week (“price restorations”), followed by a sequence of daily price decreases (the “undercutting phase”), until the next price restoration occurs.1 To the extent that drivers purchase petrol from different stations at different parts of the cycle, petrol price cycles may explain why consumers form opinions about cheaper stations, cheap days for buying petrol, and petrol price hikes around weekends and holidays. This article provides an overview of the burgeoning academic literature on petrol price dynamics and cycles. I first discuss the empirical literature on price cycles in petrol markets. In light of the empirics, I then present theories of competition and consumer demand in petrol markets that help us understand the many facets of petrol price cycles. Developing such an understanding is important for antitrust policy. Policymakers require benchmark economic models that predict how prices should behave if stations set prices competitively, given market and supply conditions. With such a model in hand, authorities can effectively monitor the conduct of petrol stations, identify collusive behaviour, and design policies that help to ensure consumers pay fair prices. It is my hope that this article sheds light on the economics behind petrol price cycles, informs the development of such benchmark models, and piques readers’ interest in petrol industry research.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1159.

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Length: 11 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:mlb:wpaper:1159
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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  1. Eckert, Andrew & West, Douglas S, 2004. "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 245-73, April.
  2. Kenneth A. Small & Kurt Van Dender, 2007. "Fuel Efficiency and Motor Vehicle Travel: The Declining Rebound Effect," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 25-52.
  3. 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, 08.
  4. Zhongmin Wang, 2009. "(Mixed) Strategy in Oligopoly Pricing: Evidence from Gasoline Price Cycles Before and Under a Timing Regulation," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 987-1030, December.
  5. Lewis, Matthew S., 2012. "Price leadership and coordination in retail gasoline markets with price cycles," International Journal of Industrial Organization, Elsevier, vol. 30(4), pages 342-351.
  6. Foros, Øystein & Steen, Frode, 2008. "Gasoline prices jump up on Mondays: An outcome of aggressive competition?," CEPR Discussion Papers 6783, C.E.P.R. Discussion Papers.
  7. 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.
  8. Castanias, Rick & Johnson, Herb, 1993. "Gas Wars: Retail Gasoline Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 171-74, February.
  9. Ambarish Chandra & Mariano Tappata, 2011. "Consumer search and dynamic price dispersion: an application to gasoline markets," RAND Journal of Economics, RAND Corporation, vol. 42(4), pages 681-704, December.
  10. Michael D. Noel, 2008. "Edgeworth Price Cycles and Focal Prices: Computational Dynamic Markov Equilibria," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(2), pages 345-377, 06.
  11. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, vol. 29(1), pages 113-134.
  12. 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, vol. 38(1), pages 25-46, 03.
  13. Eckert, Andrew & West, Douglas S., 2005. "Price uniformity and competition in a retail gasoline market," Journal of Economic Behavior & Organization, Elsevier, vol. 56(2), pages 219-237, February.
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