Edgeworth Price Cycles in Gasoline: Evidence from the U.S.

Abstract

Studies of gasoline prices in multiple countries have found a repeated sequence of asymmetric cycles where a sharp price increase is followed by gradual decreases. This price pattern is linked to Maskin & Tirole’s (1988) theoretical duopoly pricing game that produces a similar pattern, Edgeworth price cycles. We examine data on average daily city-level retail gasoline and diesel prices for 355 cities in the U.S. from 2001-2007 using multiple methods to identify price cycles. We show that a relatively small number of U.S. cities concentrated in a number of contiguous upper Midwestern states evidence Edgeworth cycle-like pricing behavior. Within our data set cities tend to either cycle in all years or they do not cycle at all. We examine prices in cycling and non-cycling cites controlling for other factors and find consumers are no worse off, and likely better off, on average, in cycling than non-cycling cities. Finally, unlike previous studies, we find that some vertically integrated (branded) retail gasoline stations are themselves potentially important drivers of the scale and scope of cycling in retail gasoline prices.

REVISED: May 2011

Keywords: Retailing, Petroleum industry, Pricing, Gasoline, Dynamic oligopoly, Edgeworth price cycles

JEL Classification: D4, L44, L81