What do one hundred million transactions tell us about demand elasticity of gasoline?

Mohammad Vesal, Amir Hossein Tavakoli () and Mohammad H. Rahmati ()
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Amir Hossein Tavakoli: Sharif University of Technology
Mohammad H. Rahmati: Sharif University of Technology

Empirical Economics, 2022, vol. 62, issue 6, No 3, 2693-2711

Abstract: Abstract The price elasticity of gasoline demand is a key parameter in evaluation of various policies. However, most of the literature uses aggregate data to identify this elasticity. Temporal and spatial aggregation make such elasticity estimates biased. We employ a unique dataset of all gasoline transactions in Iran during a 4-month period around an unexpected exogenous price change to identify that price elasticity. We also identify a significant withholding behavior by consumers in response to anticipated price changes. The consumers reduce or postpone their purchases when they expect a decrease in prices. Controlling for date fixed effects would eliminate homogeneous withholding responses. However, heterogeneous responses to this anticipated price change would lead to an overestimation of price elasticity. After controlling for date, individual, and location fixed effects as well as the withholding behavior, we estimate a robust significant price elasticity of − 0.085. Aggregation of the same data by week, month, and city yields an estimate of − 0.3, indicating a significant bias in earlier studies.

Keywords: Gasoline demand elasticity; Transaction-level data; Withholding behavior; Subsidy (search for similar items in EconPapers)
JEL-codes: C55 D12 Q31 (search for similar items in EconPapers)
Date: 2022
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Working Paper: What do one hundred million transactions tell us about demand elasticity of gasoline? (2019)
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DOI: 10.1007/s00181-021-02122-3

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