Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets

Severin Borenstein and Andrea Shepard

No 5468, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present and test an explanation for lags in the adjustment of wholesale gasoline prices to changes in crude oil prices. Our simple model with costly adjustment of production and inventories implies that output prices will respond with a lag to cost shocks even in the absence of menu costs, imperfect information, and long-term buyer/seller relationships. The model predicts that futures prices for gasoline will adjust incompletely to crude oil price shocks occurring close to the expiration date of the futures contract. We test and confirm this implication. The model also predicts that firms with market power will choose a different price adjustment path than would perfectly competitive firms. We examine the responses of prices in 188 local wholesale gasoline markets and find evidence that greater market power leads to slower output price adjustment.

JEL-codes: E32 L1 (search for similar items in EconPapers)
Date: 1996-02
Note: IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Severin Borenstein & Andrea Shepard, 2002. "Sticky Prices, Inventories, and Market Power in Wholesale Gasoline Markets," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 116-139, Spring.

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