Do Gasoline Prices Respond Asymmetrically to Cost Shocks? The Confounding Effect of Edgeworth Cycles

43 Pages Posted: 20 Jun 2007

Date Written: June 5, 2007

Abstract

Asymmetric price cycles which look similar to Edgeworth Cycles are appearing in increasingly many retail gasoline markets in the U.S. and worldwide. The cycles can give the appearance of asymmetric price responses to cost shocks under traditional methodologies. This article shows how to remove the confounding effect of the cycles and test for any true underlying asymmetry in price responses. Designing the correct counterfactual is key. The methodology is demonstrated for one strongly cycling market and some asymmetry to cost shocks is found. Covert collusion is unlikely, but the ability to coordinate cyclical price increases may play a role. Consumers can still reduce expenditures on gasoline up to 7.7% with simple timing rules of thumb.

Keywords: rockets, feathers, asymmetric passthrough, cumulative response

JEL Classification: L13, L41, L81

Suggested Citation

Noel, Michael D., Do Gasoline Prices Respond Asymmetrically to Cost Shocks? The Confounding Effect of Edgeworth Cycles (June 5, 2007). Available at SSRN: https://ssrn.com/abstract=995031 or http://dx.doi.org/10.2139/ssrn.995031

Michael D. Noel (Contact Author)

Texas Tech University ( email )

237 Holden Hall
Box 41014
Lubbock, TX 79407
United States

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