The Internet, Search, and Asymmetric Pricing: A Natural Experiment in Retail Gasoline

Abstract

How does the Internet effect retail pricing? In contrast to previous empirical research that focuses on price dispersion and static margins, this paper examines how the Internet and web-based price clearing houses effect dynamic asymmetric pricing adjustment (e.g., "rockets and feathers"). We exploit a unique policy intervention in the context of the retail gasoline market that introduced a price clearinghouse in some markets but not others. We find stark evidence that the policy eliminated asymmetric price adjustment and increase the rate of passthrough of falling costs to retail prices. These results support search-based explanations for asymmetric price adjustment.

Keywords: Internet, price clearinghouse, search, asymmetric price adjustment, error correction model, retail gasoline

JEL Classification: L11, L9, D22