Price Pass-Through Dependence on the Source of Cost Increases: Evidence from the European Gasoline Market

George Deltas () and Michael Polemis ()
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George Deltas: University of Illinois

Review of Industrial Organization, 2024, vol. 65, issue 2, No 8, 595-626

Abstract: Abstract We investigate whether the cost pass-through in the European retail gasoline market is the same regardless of whether cost changes are driven by exchange rate fluctuations or driven by fluctuations in the dollar spot price of gasoline. We find that the two cost pass-through rates are not the same: we find that the latter exceeds the former. The effect is quantitatively small, but robust and statistically significant. This pattern is not due to a lower persistence of exchange rate changes, refinery supply contracts, or economic fluctuations. The lower variability of exchange rates relative to that of oil prices explains a portion of the response gap. A possible explanation for the remaining gap is that consumers draw a direct link between the crude oil and retail gasoline prices, which affects their price expectations and their search intensity, and thus the retailers’ pass-through. Because pass-through is sometimes used to assess market competitiveness and contributes to the forecast of the Consumer Price Index, it is important to recognize that the source of variation in the underlying costs may have an effect on the assessment of market conduct and inflation.

Keywords: Price pass-through; Gasoline pricing; Price adjustment; Exchange rate pass-through; Inflation (search for similar items in EconPapers)
JEL-codes: F31 L11 L16 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11151-024-09954-0

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