Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market
Matthew S. Lewis
Clemson University - John E. Walker Department of Economics
Journal of Economics & Management Strategy, Vol. 20, Issue 2, pp. 409-449, 2011
This article proposes a new explanation for why retail prices respond more quickly to cost increases than cost decreases. I develop a search model that assumes consumers’ expectations of prices are based on prices observed during previous purchases. This model predicts that consumers search less when prices are falling, which results in higher profit margins and a slower price response to cost changes. I then empirically examine patterns of retail gasoline price response and price dispersion to show that this model predicts observed price behavior better than previously suggested explanations.
Number of Pages in PDF File: 41
Date posted: April 21, 2011