Do Gasoline Prices Respond Asymmetrically to Cost Shocks? The Confounding Effect of Edgeworth Cycles

Abstract

Asymmetric price cycles which look similar to Edgeworth Cycles are appearing in increasingly many retail gasoline markets in the U.S. and worldwide. The cycles can give the appearance of asymmetric price responses to cost shocks under traditional methodologies. This article shows how to remove the confounding effect of the cycles and test for any true underlying asymmetry in price responses. Designing the correct counterfactual is key. The methodology is demonstrated for one strongly cycling market and some asymmetry to cost shocks is found. Covert collusion is unlikely, but the ability to coordinate cyclical price increases may play a role. Consumers can still reduce expenditures on gasoline up to 7.7% with simple timing rules of thumb.

Keywords: rockets, feathers, asymmetric passthrough, cumulative response

JEL Classification: L13, L41, L81