Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market

Matthew S. Lewis

Industrial Organization from EconWPA

Abstract: It has been documented that retail gasoline prices respond more quickly to increases in wholesale price than to decreases. However, there is very little theoretical or empirical evidence identifying the market characteristics responsible for this behavior. This paper presents a new theoretical model of asymmetric adjustment that empirically matches observed retail gasoline price behavior better than previously suggested explanations. I develop a "reference price" consumer search model that assumes consumers' expectations of prices are based on prices observed during previous purchases. The model predicts that consumers search less when prices are falling. This reduced search results in higher profit margins and therefore causes a slower price response to cost decreases than to cost increases. I then develop testable implications that distinguish my model from two alternative explanations of asymmetric adjustment. The first is a model in which firms temporarily collude using past prices as a focal price. The second theory suggests that increases in wholesale cost volatility reduce consumer search behavior. Using a panel of gas station prices, I estimate the response pattern of prices to a change in costs. Estimates are consistent with the predictions of the reference price search model and contradict the previously suggested explanations of asymmetric price adjustment.

JEL-codes: L10 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2004-07-21
Note: 55 pages, Adobe.pdf
View list of references View citations in EconPapers

Downloads: (external link)
http://129.3.20.41/eps/io/papers/0407/0407010.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0407010

Access Statistics for this paper

More papers in Industrial Organization from EconWPA
Series data maintained by EconWPA ().