Gasoline Price Cycles Under Discrete Time Pricing
19 Pages Posted: 19 Jun 2013
Date Written: June 2013
We characterise petrol pricing dynamics in an unusual policy environment. A timing restriction in the Western Australian market imposes discrete time pricing on petrol retailers, enabling us to observe the exact timing of price changes. We employ a Markov‐switching regression model, finding the existence of Edgeworth price cycles of a similar nature to those recently observed in some other retail petrol markets. Cycles are frequent, asymmetric and of substantial amplitude. Importantly, firms change prices almost every period, limiting the relevance of the leading theory of Edgeworth cycles due to Maskin and Tirole (1988). We also discuss episodes of disruption and evolution of the price cycle.
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