Working Paper: NBER ID: w4138
Authors: Severin Borenstein; A. Cohn Cameron; Richard Gilbert
Abstract: Our empirical investigation confirms the common belief that retail gasoline prices react more quickly to increases in crude oil prices than to decreases. Nearly all of the response to a crude oil price increase shows up in the pump price within 4 weeks, while decreases are passed along gradually over 8 weeks. The asymmetry could indicate market power of some producers or distributors, or it could result from inventory adjustment costs. By analyzing price transmission at different points in the distribution chain we investigate these theories. We find that some asymmetry occurs at the level of the competitive spot market for gasoline, perhaps reflecting inventory costs. Wholesale gasoline prices, however, exhibit no asymmetry in responding to crude oil price changes, indicating that refiners who set wholesale prices are not the source of the asymmetry. The most significant asymmetry appears in the response of retail prices to wholesale price changes. We argue that this probably reflects short run market power among retail gasoline sellers.
Keywords: Gasoline Prices; Crude Oil Prices; Price Asymmetry; Market Power
JEL Codes: L11; L13; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Crude oil price increase (Q31) | Retail gasoline price increase (Q31) |
| Crude oil price decrease (Q31) | Retail gasoline price decrease (Q31) |
| Wholesale gasoline price increase (L97) | Retail gasoline price increase (Q31) |
| Wholesale gasoline price decrease (L97) | Retail gasoline price decrease (Q31) |