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Do Edgeworth price cycles lead to higher or lower prices?

Michael D. Noel

International Journal of Industrial Organization, 2015, vol. 42, issue C, 81-93

Abstract: A recent literature seeks to understand the causes of the high-frequency, asymmetric retail price cycles observed in many retail gasoline markets. However, much less attention has been given to the effects of the cycles, in particular, whether the cycles lead to higher or lower prices and margins. The leading theory for the underlying cause of the price cycles, Edgeworth price cycles, is silent on the issue. The challenge in addressing this most important question has been the difficulty in isolating cycle effects from other confounding factors, especially market structure. In this article, I exploit a unique natural experiment to isolate the effect of cycles — a refinery fire that, in a matter of days, halted cycles that had previously persisted for decades. I find that Edgeworth price cycles lead to lower prices and lower margins. I conclude with implications for competition policy.

Keywords: Edgeworth price cycles; Retail gasoline; Price effects; Margin effects; Natural experiment; Competition policy (search for similar items in EconPapers)
JEL-codes: L11 L31 L81 L91 K21 Q41 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:indorg:v:42:y:2015:i:c:p:81-93