Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market

41 Pages Posted: 21 Apr 2011  

Matthew S. Lewis

Clemson University - John E. Walker Department of Economics

Date Written: Summer 2011

Abstract

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.

Suggested Citation

Lewis, Matthew S., Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market (Summer 2011). Journal of Economics & Management Strategy, Vol. 20, Issue 2, pp. 409-449, 2011. Available at SSRN: https://ssrn.com/abstract=1817172 or http://dx.doi.org/10.1111/j.1530-9134.2011.00293.x

Matthew S. Lewis (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

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